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Financial Analysis of Telco




Scenario

Telco is a public listed company, in an Asian Country, which has been in operation for the past 15 years. Telco is the market leader in mobile telecommunication services within the country. It is a highly reputed company and had won a number of awards for its high level of quality. The past financial statements show that company has been highly profitable and has grown rapidly over the past decade. Almost 65% of the countries mobile users obtain telecommunication services from Telco and have shown high satisfaction towards the services received.

However the past couple of years have not been perfect for Telco since a number of customers had complained about the quality of service. Regular loss of signal and regular disconnection of calls have been the most frequent complaints made by the customers. As a result of these complaints a number of customers have shifted towards other competitors in the market.

The Board of Directors of the business had voiced concern over this issue and had appointed a team to find the main cause of regular failures. The team had identified that the main cause of regular failures was the use of obsolete equipment for the transmission of signals. The equipment used by the company was initially bought in when the company was initially created and had not been replaced to date. As a result the Board of Directors of the company had decided to replace the equipment used for transmission of signals.

The replacement of equipment would cost the organization Rs.50 million, which is required to be invested immediately. As a result of the project Telco is expected to generate a net cash inflow (without depreciation) of Rs.15 million in the first year of operation. The cash flow is expected to increase by 20% in the second year. However the cash inflow is expected to increase only by 10% in year 3, from the cash flow received in year 2. There is no cash flow increase expected in the remaining years and it is expected that the year 3 cash inflow would remain constant until the end of the 8 year.

The equipment purchased are expected to be operational for an 8 year period after which it is expected to have a resale value of Rs10 million. They are depreciated using the straight line method over the expected lifetime of the assets. The company uses a cost of capital of 10% to evaluate all its projects. For calculation purposes assume that all cash outflows occur at the beginning of the year, whereas all the cash inflows are expected to occur at the end of the respective year.


Assume that you are working as a Financial Analysis at Telco.
Task 1

The Board of Directors is concerned about investing Rs. 50 million immediately on the equipment. Hence the Board feels that more analysis should be done before making the decision.

   •   Identify different partiesinvolved in the decision making process in Telco based on the situation given above. Analyze the information needs of these parties in order to make an informed decision. (P 2.3)

   •   Explain the importance of financial planning and how it contributes towards the decision making process. (P 2.2)

   •   Based on the information given in the scenario, analyze the investment in the equipment using various investment appraisal techniques. Based on your investment appraisal, justify whether the project is viable. (P3.3)

Assessment Criteria Covered under Task 1
2.2.
explain the importance of financial planning
2.3.
assess the information needs of different decision makers
3.3.
assess the viability of a project using investment appraisal techniques


Task 2

The management is considering different ways of raising capital required to purchase the equipment.

Prepare a report providing information necessary for the management to make a decision regarding the sources of finance that could be used. The report should comprise the following points:
   •   different sources of finance available to a business (P1.1)

   •   Discuss the cost associated with different sources of finance and its implications (P1.2, P2.1)

   •   Illustrate how each type of financial source would have an impact on the financial statements. (P 2.4)

   •   Narrow down the sources of finance available for the equipment replacement problem above and recommend a source of finance that is most suitable for the above situation. Justify your selection. (P1.3)
Assessment Criteria Covered under Task 2
1.1.
identify the sources of finance available to a business
1.2.
assess the implications of the different sources
1.3.
evaluate appropriate sources of finance for a business project
2.1.
analyse the costs of different sources of finance
2.4.
explain the impact of finance on the financial statements


Task 3

PTA is a manufacturing company that manufactures sports equipment. The number of units expected to be sold in year 2013 is given below.
Quarter
Sales in Units
1
10,000
2
12,000
3
8,000
4
10,000

The company is expected to spend Rs.20 million for the entire manufacturing process and PTA expects a profit markup of 25%.

It is further predicted that:
   •   A 20% of the next quarter's sales volume must be on hand before the quarter begins.
   •   A 10% increase in sales in quarter 1 of next year (2014) compared to the current year's (2013) quarter 1 sales.
   •   2,000 units are in inventory at the beginning of the year 2013.

You are required to prepare a report which contains the following:
   •   Discuss the importance of budgeting and how it contributes to decision making. (P3.1)
   •   Total units to be produced by preparing a Production Budget (P3.1)
   •   Calculate unit cost and identify unit price of the product. (P3.2)
   •   Estimate the anticipated income for the year 2013 using Sales budget. (P3.1)
   •   Based on sales and production budget, suggest what decisions must be taken. (P3.1)

Assessment Criteria Covered under Task 3
3.1.
analyse budgets and make appropriate decisions
3.2.
explain the calculation of unit costs and make pricing decisions using relevant information
Task 4

4.1   Analyse the purpose of main financial statements available. Your analysis should also include structure of those financial statements, and the differences between them. (P4.1)

4.2   Select a public limited company within Sri Lanka and write a report which includes the following:

   •   A discussion on the difference between the selected company’s business type (Public Limited Company) and other types of business organizations such as sole trader, partnership and so on. The discussion should be based on ownership, legal requirements, differences in financial statements used and other factors(P4.2)

   •   Analyze the financial performance of a selected organization based on its published Annual Reports by calculating the relevant financial ratios for the past 3 years. (P4.3)

Assessment criteria’s covered under the Task - 4
4.1.
discuss the main financial statements
4.2.
compare appropriate formats of financial statements for different types of business
4.3.
Interpret financial statements using appropriate ratios and comparisons, both internal and external.







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