Unit 3: Financing Your Strategy

Course 1: Financial Analysis

Case Study

Duran Ltd is a manufacturing company based in Australia. They manufacture and sell clean engine technologies for unmanned aerial vehicles.

Duran has been operating for 5 years and has recently listed on the stock exchange with shares trading at $1.2 each.

The company provides both the design of engines as well as the manufacture and sale.

Duran has been approached by the Australian Defence Force with a contract of $20 million to design and manufacture engines for their
unmanned drone program. Duran made only a small profit in the 2022 financial year and are concerned about their ability to meet the conditions
of the contract.

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 Unit 3: Financing Your Strategy
Course 1: Financial Analysis

You have been hired as a Management Consultant to analyse the current financial position of Duran and help them develop a budget and
recommendations in order to fulfil the contract proposed by the Australian Defence force. This contract would nearly double Duran’s revenue
stream and is an extremely important contract for them to win.

As such you will be reporting directly to the board and will be asked to provide a report that meets their requirements.

Strategic plan

Duran’s strategy is to invest $8 million in capital expenditure to setup the resources necessary to fulfil the Australian Defence Force contract.
This will be financed as a long-term loan at 4% interest rate.

Duran Board believes their strategy should be to just invest the majority of resources into the Australian Defence Force contracts.

Based on the financial position, Duran’s board would like you to review their proposed strategy and make recommendations based on your
specific financial analysis.

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 Unit 3: Financing Your Strategy
Course 1: Financial Analysis

Information for Financial Analysis

The following information was provided by the Duran Ltd Accounts department. It provides you with all of the information necessary to
complete the Analysis of the Financial Health of the company. It consists of the Balance Sheet, Income Statement and information for the break-
even analysis.

Note the financial reporting period is from January – December 2022.

Duran Ltd Balance Sheet 2022

All numbers in millions

2022 2021
Assets
Current Assets
Cash and cash equivalents $7.49 $7.49
Marketable securities $0.59 $0.59
Accounts Receivable $4.83 $4.65
Inventory $9.40 $6.70
Total Current Assets $22.31 $19.43

Non-current Assets
Property and equipment $23.11 $24.94
($16.91 ($16.43
Accumulated depreciation ) )
Intangible assets $0.90 $0.92
Total Non-Current Assets $7.10 $9.43

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 Unit 3: Financing Your Strategy
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Total Assets $29.41 $28.86

Liabilities
Current liabilities
Short-term debt $3.76 $0
Accounts Payable $4.28 $3.87
Deferred revenue $1.32 $2.91
Total Current Liabilities $9.36 $6.78

Non-current liabilities
Long-term debt $4.85 $8.28
Total Non-Current Liabilities $4.85 $8.28

Total Liabilities $14.21 $15.06

Shareholders' Equity
Common stock $31.22 $31.17
($16.02 ($17.37
Retained earnings ) )
Total equity $15.20 $13.80

Total liabilities and equity $29.41 $28.86

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 Unit 3: Financing Your Strategy
Course 1: Financial Analysis

Duran Ltd 2022 Income Statement

All values in millions

2022
Total Revenue $33.78
Cost of Goods Sold ($14.70)
Gross Profit $19.08

Expenses
Wages $7.30
Rent $1.20
Utilities $0.80
Administrative expenses $0.48
Marketing and sales expenses $6.27
Depreciation expense $0.48

Total Operating Expenses $16.53

Earnings Before Interest and Tax $2.55

Interest Expense $0.62

Earnings Before Tax $1.93

Income Tax (30%) $0.58

Net Profit $1.35

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 Unit 3: Financing Your Strategy
Course 1: Financial Analysis

Financial Information for the break-even analysis for 2023

In calculating the break-even point, the board would like to know the break-even point, not taking into account the contract with the Australian
Defence Force. All the information for the break-even analysis is provided below and in the Income Statement for Duran.

Information for break-even

analysis

Average revenue per unit sold $250,000

Variable costs per unit sold

Raw materials 80,000
Direct labour 30,000

The forecast total sales for 2023 is expected to be 7% greater than 2022, not taking into account the Australian Defence Force deal.

The forecast Cost of Goods sold for 2023 is the same percentage of total revenue as in 2022.

The expenses for the break-even analysis should be taken from the 2022 profit and loss report. The expenses section constitutes the fixed costs for
the break-even analysis. The expenses should be adjusted based on the same table from the cash flow budget section:

Expenses % Expense increase

Revenue
Wages 1%
Rent 1.5%
Utilities 0.5%
Administrative expenses 0.5%
Marketing and sales expenses 0.2%

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 Unit 3: Financing Your Strategy
Course 1: Financial Analysis

Depreciation expense 2%
The following table shows the unit sales for the last few years.

Year 2023 2022 2021

Unit sales ? 128 125

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 Unit 3: Financing Your Strategy
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Financial Information for the Cash Budget

The board has asked you to create a cash budget for the first three months of the year. This would coincide with quarter 1.

Sales Information

Here were the sales for the last two months of 2022.

Nov Dec
Sales $1,245,000 $1,332,000

The Accountant has predicted the following sales for the first three months:

Jan Feb Mar

Sales $1,183,200 $1,103,200 $1,079,000

Collections Information

Based on the terms of the contract with the Australian Defence Force the following collections schedule is predicted:

Period Percentage of collections

Collections from current month 20%
Collections from one month ago 20%
Collections from two months ago 60%

Cost of Goods Sold Information

The Cost of Goods sold rate in 2023 is the same total percentage as in 2022. You will need to get the Days Payables Outstanding value from the
previous section to determine how many days following the purchase of materials they are paid to suppliers. All supplies are purchased from
vendors at the beginning of each month.

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Expenses Information

The quarterly expenses are spread evenly over the three months. All expenses, except tax expenses, are paid in the same month.

The expenses for the cash budget should be taken from the 2022 profit and loss report with some adjustments.

Due to macroeconomic conditions the company is expecting an increase in several expenses due to inflationary pressures. The table below
shows the expected yearly increase for these expenses.

Please note, if the expense is not mentioned in the list below, the expense is forecast to be identical to the value in 2022.

Expenses % Expense increase

Revenue
Wages 1%
Rent 1.5%
Utilities 0.5%
Administrative expenses 0.5%
Marketing and sales expenses 0.2%
Depreciation expense 2%

Goods and Services Tax

Australia has a 10% Goods and Services tax which is calculated on the total sales for the periods December – February. It is payable on the 30 th
of March 2023.

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