Corporate Financial Decision-making
4,000 words
Briefing:
As a Financial Analyst employed by a leading FTSE 100 company, you have been requested to assess the suitability of an investment in one of two companies, In respect of their ability to create wealth for your firm’s pension fund.
To do this you should investigate buying shares in either Diageo plc or 3i Group plc, both listed on the London Stock Exchange (DGE and III). In your role as Financial Analyst, you should help in critically evaluating whether either share would be a good investment to aid in the continuing growth of your organisation’s pension fund.
Requirement:
Write a report based on:
Part A)
Critically evaluate the recent financial data (5 years) and externalities affecting the investment suitability of both organisations. (3,500 words)
Part B)
You should attempt to evaluate whether or not the current share price of both firms represents a ‘fair’ value. (500 words)
Helpful Hints:
Whilst students are encouraged to be inquisitive and innovative in their approach as to what should be included in this report, the following may be of some use in providing guidance as to what could possibly be included, although this is in no way meant to be prescriptive.
The aim of the assignment is to help you understand how key areas of finance theory are demonstrated in practice by a quoted company. This might include investigating topics from throughout the course; agency theory, market efficiency, investment appraisal, sources of finance, capital structure, dividend policy, risk, and so on. It is likely that different students will concentrate on different aspects of the course as they prepare the report.
You may have to spend a significant amount of time on the initial analysis of the information available to you e.g. Financial Statements. A review of the Financial Statements of both organisations over the last five years should help you to identify key areas that should be explored in greater detail e.g. capital structure, dividend policy and so on. This will then allow you to gather information to build a theoretical framework which can then be applied to the company.
With 4,000 words split into two sections, you do not have a lot of room for long introductions to the companies. Consequently, you can assume you are writing to a sophisticated audience who has a good knowledge of accounting practices, finance theory and the operation of the stock market.
Whilst the skills you should have previously learnt such as analysing financial statements will be of use, this piece of work should NOT have such analysis as the main focus of the work It should only be used (if at all) to provide evidence to support your findings from your other analysis of your chosen company. Finally, I would encourage you to make good use of graphs and tables to present key information and don’t forget to reference everything!
I would make the following observations. Students who reproduce lots of financial information verbatim, or who include calculations in the body of the report will not score highly. Students who produce descriptive analysis rather than insightful and critical analysis will not score highly. An example of this that we often come across is students who have included a table or graph in the body of their work and then go on to describe the table or graph in words. E.g. ‘it goes up in the first two years, before going down in the third year, and then goes back up after that. It would be far more important (and hopefully interesting) to ask the question WHY did it go down in the third year? You may not be able to come to a definitive answer, but asking the question is a good first step.
You will find lots of helpful information readily available to you on the internet at sites such as:
http://www.londonstockexchange.com
https://www.diageo.com/
https://www.3i.com
Marking Guide
Learning Outcomes:
1. Evaluate the various sources of finance available to companies and select between them
2. Investigate International financial markets
3. Critically evaluate the methods used by financial managers in achieving the strategic goals of the organisation
4. Assess the impact on management structures following takeovers, mergers and/or acquisitions
On successful completion of the module the student will have:
Knowledge
1. Examined and critically evaluated the key strategic decisions that a business may have to make and appreciated how accounting and finance can assist in making and evaluating those decisions.
2. A critical understanding of specific analytical skills in key decision areas within strategy and finance at a local and international level
3. A critical understanding of the limitations of the current state of financial theory in making strategic business decisions
