Case Study: Financial Assessment for New Horizons Corporation
You have been recently appointed as a Finance Specialist at New Horizons Corporation (NHC), a mid-sized firm headquartered in London, UK. As part of your onboarding, your first assignment is to analyse the company’s current financial challenges and provide a detailed report with recommendations based on the given requirements.
Background Information
NHC produces and distributes a wide range of small home appliances, focusing on innovative product lines. However, the company has faced a 5.3% decline in sales in recent years, resulting in concerns about long-term business sustainability. To address its challenges, the company is considering investing in one of two proposed capital projects, both aimed at expanding its successful Avalon product line. A thorough financial evaluation of these projects is essential to determine the optimal course of action.
Financial Data
|
Income Statement (in £000) |
||
|
Item |
2023 |
2024 |
|
Sales |
£57,000 |
£54,000 |
|
Cost of Goods Sold |
(37,000) |
(36,000) |
|
Gross Profit |
20,000 |
18,000 |
|
Selling & G&A Expenses |
(8,200) |
(7,800) |
|
Depreciation |
(3,400) |
(5,000) |
|
Total Operating Expenses |
(11,600) |
(12,800) |
|
Operating Profit |
8,400 |
5,200 |
|
Interest Expense |
(2,000) |
(2,750) |
|
Earnings Before Taxes |
6,400 |
2,450 |
|
Taxes |
(2,300) |
(650) |
|
Net Income |
£4,100 |
£1,800 |
Additional Information:
- Number of Shares Outstanding: 1,500,000 (for both years)
- Dividends Paid to Shareholders: £1,200,000 annually
- Market Price Per Share: £36 (2023), £18 (2024)
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|
Balance Sheet (in £000) |
||
|
Item |
2023 |
2024 |
|
Assets |
||
|
Cash |
£3000 |
£4,950 |
|
Accounts Receivable |
7000 |
9,150 |
|
Inventories |
6000 |
7,800 |
|
Other Current Assets |
1,250 |
1,600 |
|
Total Current Assets |
17,250 |
23,500 |
|
Gross Fixed Assets |
46,500 |
49,500 |
|
Accumulated Depreciation |
(17,000) |
(22,000) |
|
Net Fixed Assets |
29,500 |
27,500 |
|
Total Assets |
£46,750 |
£51,000 |
|
Liabilities & Equity |
||
|
Accounts Payable |
4,000 |
6,400 |
|
Short-Term Notes Payable |
2,500 |
3,000 |
|
Total Current Liabilities |
6,500 |
9,400 |
|
Long-Term Debt |
12,500 |
13,250 |
|
Total Liabilities |
19,000 |
22,650 |
|
Common Shares |
11,000 |
11,000 |
|
Retained Earnings |
16,750 |
17,350 |
|
Total Equity |
27,750 |
28,350 |
|
Total Liabilities & Equity |
£46,750 |
£51,000 |
|
Project Proposals |
||
|
Year |
Project A (£) |
Project B (£) |
|
Initial Outlay |
(1,100,000) |
(1,100,000) |
|
1 |
200,000 |
400,000 |
|
2 |
300,000 |
400,000 |
|
3 |
400,000 |
400,000 |
|
4 |
500,000 |
400,000 |
|
5 |
700,000 |
400,000 |
Requirements:
As part of your report, you are required to address the following tasks in sequence:
Task A: Cost of Capital Calculation
Calculate the company’s cost of capital, considering both debt and equity components, based on the following financial data:
- Bonds with an 8% coupon rate, 16 years to maturity, and a current price of £1,035, and 30% tax rate.
- Equity: The dividend in 2023 was £0.80, which is expected to grow by 6% in 2025.
- Provide commentary on the importance of cost of capital in financial decision-making.
Task B: Capital Budgeting Analysis
Using the cost of capital calculated in Task a, evaluate Projects A and B using appropriate capital budgeting techniques (e.g. Net Present Value and Profitability Index) as well as others (e.g., Internal Rate of Return and Payback period). Recommend which project New Horizons should undertake based on your findings.
Task C: Forecasted Income Statement and Balance Sheet
Prepare a 1-year forecast for 2025, using a 6% sales growth rate based on historical data and trends. Ensure that line items in the forecast reflect logical assumptions (e.g., cost ratios and depreciation trends), which is accompanied by commentary on the assumptions made in your financial forecasting.
Task D: Ratio Analysis
Perform a ratio analysis for three years: 2023, 2024 (actual), and the 2025 (forecasted). Include all categories of financial ratios in your analysis (e.g., profitability, efficiency, liquidity, etc…). Use charts and/or graphs to illustrate trends across the years and their implications for financial performance.
Task E: Final Recommendations
Summarise your findings from the tasks above and provide clear, actionable recommendations for NHC’s management to improve their financial position.
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Additional Guidance
Your report should:
- Be structured and professionally written in British English.
- Demonstrate clarity in all calculations and logical consistency.
- Include academic commentary to back claims in specific tasks and references for your recommendations.
- You should calculate at least 2 ratios under each ratio category (e.g., Liquidity: 1- current ratio 2- quick ratio).
Learning Outcomes of Finance Driven Data & Decision Making
- Understand financial reporting and critically evaluate the purpose and use of the annual report and financial statements.
- Use financial information for making operational decisions in relation to planning and control.
- Critically analyze short-term and long-term decision-making principles and techniques and make decisions on financing, investment, and distribution decisions.
- Understand different types of data in the business context and their usage.
- Develop skills in visualizing data for managerial decision-making and storytelling on a specific dataset