ACCT11059 Accounting , Learning &Online Communication

ASSIGNMENT STAGE 2 (ASS#2)

Step 7 –step 10

Jing SunS0158281

Step 7

Galliford Try is a leading UK construction and housebuilding company. It has three (3) different

major businesses: Linden Homes, Partnerships and regeneration, and construction. In this part of

the assignment I am going to choose three (3) products from Linden Homes and use them as

examples to demonstrate my knowledge and understanding about costing margins.

Linden Homes provides high-quality homes on main sites, targets the mid-market area, and

works with public sectors to offer affordable homes to their consumers. Therefore, Linden

Homes has provide affordable land, buildings and design services to their customers.

After researching, I was unable to obtain the average selling price for a piece of land in the UK.

So I have to estimate the selling price and variable costs for my three products. Here are my

examples:

Search 1: Design service averagely will cost of £1500 for a 3 bedroom semi-detached house in

UK.

Search 2.The developer usually buying a big plot and subdivided to small piece of land for sale.

(The cost margin usually is 20 %), here I am going to use 20% as cost margin for land product.

Search 3. Linden Homes Current price on the Market in this area. £290,000

All the information gathered from research, shown above, depends on the specific area and

current market price in UK.

Desing service Margin: Contribution Margin=SP-VC

Products Fixed cost

(Assumed

figures)

Selling price Variable cost Contribution

Margin

Design service 10% margin £2000 £ 1800

(Variable margin

90%)

£2000-£1800

=£200

Land ( usually the

company

purchase a big

plot and divided

into many lands)

20% margin £ 75000 (each) £60000

(Variable margin

80%)

£750,00-

£60000=

£15000

Build a house (3

bedroom house

depends on costs

of 200 square

meters for

35% margin £ 290,000 £188500

(Variable margin

65%)

£290,000-

£188500=

£101500

project)

Discuss why the contribution margins for each of your firm’s three products/services might

differ or be similar.

The reason that Linden Homes has set up contribution margin really low for design service, it is

because most businesses like to offer their customers an added value to their purchase. The low

margin or free of cost offers is good way to attract new customers, and to identify any services

the business offer which the competitor doesn’t. At the same time, to successfully run a sale

without marking a loss, the business has already set up the high margin from land and building

products. Consequently Linden homes could take the cost of design service to add onto the Land

or building contribution margin, which to ensure no loss for this business strategy to keep the

price low to make the product easier to sell, and to offer excellent service to customers. This

allows the business to keep prices competitive and sell a large volume of goods. Compare with

those 3 different products, the margins are quite different, however they are similar in the way

that they all contribute to the company’s overall profit. As a result of this, the Linden Homes has

focused on the Market Mix strategy to mix high margin products and low margin products

together to control the costs, create an effective sale strategy, and to frequently maintain the cash

flow projection which will promote a healthy, stable and growing business.

Why might your firm produce a range of products/ services with different contribution

margins? Why not only produce the product/service with the highest contribution margin?

To provide different product to satisfy the market needs is essential. However, on average, the

business can rely on its product mix in the short term, and have a better understanding on how its

sales needs will benefit for business’ costs, inventory levels, and sales margin. In the real world,

if the company only focused on highest contribution margins, it does not mean the company will

definitely make a profit from those highest margin products, due to the high costs and smaller

consumer reach. In contrast, low margin products can be the perfect method on business sales

floor, sometimes it is easier to sell several low margin products than one high margin product.

By satisfying the business customers’ needs and maintaining their experiences, this can be very

useful to increase the businesses profit.

Identify (or make up) one or more resource constraints your firm may face, and also

perhaps any market constraints you feel may impinge on your firm.

Macro-economic environment.

Legal constraints

Economic constraints will directly impact on Linden Homes’ business activities, such as cash

flow through the supply chain. Therefore, the business needs to have a vast customer range, with

different requirements and different sources of financing, and to generate cash from their

customers, while using cash to invest in land and developments. This way the business doesn’t

have to rely on any one person in the market. They also do not have to purse low margin revenue

when the market is in a downturn.

Legal constraints is a common issue of business ventures, these issues include: employment law,

health and safety requirements, planning and building regulation, environment requirements, and

so on.

To successfully achieve this, the business itself need to set up a range of comprehensive polices

and different departments to ensure the legislation and plans are updated on a regular basis.

Step 8

What is the accounting ratio? & what does the ratio figure tell me?

In all honesty, analysis ratios are not my favourite. I disliked analysis ratios because I couldn’t

understand why I needed to analyse the figures. Before starting my firm’s ratio calculations I

asked myself, what is the accounting ratio and what do the ratio figures really tell me about my

company. The following is what I’ve learnt from the accounting concept. Accounting ratio

information is used for internal companies only, and the ratio figure is used to help investors and

companies, and managers to have a better understanding of how well a business is performing

and where they can find the issue to improve. Thankfully I was given instructive advice form a

friend who strives as a professional accountant. She suggested to me that I compare the

information between my firm and other firms within the same industry. This way I can have a

better understanding as to why particular information can be observed from my firm’s figures

about how well the company’s performance is within the UK. From the table shown above, it can

be understood that my firm is within the top seven (7) of the construction index top 100 league

table for 2016. Thus meaning my firm has created a relatively high profit in comparison to other

companies and business, therefore the firm has performed well in 2016.

Granite Construction Inc GRG

The word profitability is define as a way to measure a business’s performance, which is a

company’s margins after costs have been deducted from the income within a specific period.

Importantly, the return on assets is a guide line to show how efficient management is using the

company’s assets to create profit. So far, it be observed that the figures are all positive and stable

since 2013. However, I cannot give judgement on my company’s successes or losses by only

looking at my firms’ figures. Hence my reasoning for finding information from TCI top 100

takes in UK reports (figures shown as above). After comparing with the average benchmark in

UK, the return on assets (ROA) figures are doing very well, and Galliford Try has generated a 4

cent in a dollar on 2013, 4.4 cent in 2014, 3.9 cents in 2015 and 4.4 cents in 2016.The ROA ratio

figure has also shown a positive trend from 2013 to 2016, even NPM has dropped 0.5% between

2014 and 2015. The Profitability ratios are still quite high in comparison with profitability data

from Granite Construction Inc UK.

Efficiency Ratio includes the inventory and turnover assets. Efficiency ratio is a way to measure

the capability of management using the assets at its retention to support sales. From the figure

above, it is observed that my company only holds small amounts of its inventory before selling it

between the years 2013 to 2016, which is pretty close to zero resulting in the total asset turnover

ratio being really small (not holding too much inventory in stock). Because the inventory is

carrying costs that take significant investment, a business whom holds a lower value of this ratio

are more favorable. Therefore, my company has done well compared with data in UK benchmark

during 2013 to 2016.

From research, I’ve learnt that if a current ratio is lower than 1, then the company will have

problems to meet its short term current liabilities. In Galliford Try, all of the current Ratio

figures are positive and also the current assets are and have been greater than current liabilities

every year since 2013. Thus meaning that Galliford Try have enough cash to pay off its short

term debt obligations. In other words, the liquid assets aren’t difficult to be converted into cash

in a short period to help the company solve financial situations, therefore the company did well.

I will start to analyse the current liability and equity through the formula of the debt/equity ratio

being equal to the current liability divided by equity. Thus finding out why this debt/equity ratio

figure has had significant changes from 2013 to 2014. It can be observed that the debt/ equity

ratio is increasing from 164.5% to 205.6% between 2014 and 2015. Importantly, it has

continually increased through to 2016. These high debt/equity ratios have stroked my attention as

I was wondering if the company had set up a new business strategy to increase their borrowing

capacity due to the expansion of development. In 2014, the report stated that the company set

out a new plan to grow their building and infrastructure business, following the highly

complementary acquisition of Miller Construction in July the same year. As result of this the

Galliford Try decided their investment business will continue to promote its PFI/PPP investment

capabilities to support their construction and partnerships businesses, therefore this clearly

explains why the debt/equity ratio has had significant changes from 2014. At the same time, I

notice that the high financial structure ratio does not mean the company cannot meet, or has

difficulty paying off in their financial situation due to previous analysis about total asset and total

liabilities in the financial report. Sometimes the financial distress can incur in costs related to the

situation, such as opportunity costs of projects, which explained why the Galliford Try has had to

lend more money to secure the future plan. However, the equity ratio represents the amount of

Operating assets on which shareholders have remaining claim, and it indicates its level of

financial strength and risk. I remember Maria has mention in her video, that if the equity ratio is

more than 40% we should worry about the company has too much debt. However, due to

Galliford Try being a large and well established company in construction industry (owning 3

different businesses with the profitability ratios very stable) they can push the liability

component of their balance sheet structure to higher percentages without any concern.

From table as above, the EPS figures has grown at a slow rate of (0.00133-0.00113=0.0002) per

share, which is shows clearly how much profit the business has made for each stock share from

2013 to 2016. Whilst I did noticed that the dividends per share (DPS) has slightly increase in a

small amount, but it is not ideal by tinny changes. As an investor, dividends per share can be a

signal to the company’s performance, especially if the dividends per share have dropped. This

means that the company is not doing well financially, however, in general, a high price earnings

usually means the investors can expect get high return in the future compared with low price

earnings. However, the price ratio does not tell all the information required. Like Maria said the

reason for using a historical P/E ratio, by calculating the forward P/E, is because this ratio could

tell us how many years it will take for the investors to get their money back. The P/E price not

only measures the company’s past and future performances, but it also can give better

suggestions to the investors to get the best result for their investment within the shortest period

possible. At the same time, I can see that the shareholder has paid a very high price for its share

and the return was really small.

Net Borrowing Cost (NBC) means the company’s total debt obligation, including interest

payments and other expenses. The interest rate has dramatically increased from -2% to 15%

during 4 years, as we know, if the interested rate has continually increased it means that the

company will receive more pressure for paying off the loan.

Galliford Try’s profit margin has been driven by Operation Income and sales, recently the PM

ratios are very stable figures, in the restated financial statement, OI has improved significantly

from 58.1 (2013) to 106.3 (2016). While Comparing with Net Profit Margin, the ratios in a

positive situation, states that the company is going the right direction for its profit margin.

However, The Galliford Try had a lower ratio in 2014. When the profit margin is low, it usually

will impact the investment from investors too.

ROE: The Galliford Try has a four (4) year positive Return on Equity (ROE) figures since 2013,

and it has also grown from 10.71% to 15.85% during these four (4) years. In other words, the

ROE shows the positive percentage of a profit that the firm has generated from its shareholders

investments, compared with other companies. The Galliford Try has had a great improvement for

its performance due to the new business plan.

Return on Net Operating Assets (RNOA) captures the return on the company’s assets that are

generating revenue to create profit. Indeed, the higher figures produce the higher return. In my

case, I can see my company has done quite well during those four (4) years, and the figures have

also continued to improve from 11.64% to 17.7%, which means every £1 of NOA and the

company will return on its operating income of £0.11 in 2013, £0.15 in 2014, £0.16 in 2015 and

£0.17 in 2016.

Asset Turnover (ATO) measures how efficient the company uses its assets to create revenue.

Usually the higher total asset turnover ratio is more favorable than a lower one. As result of this,

I can see Galliford Try has a positive trend of its revenue since 2013, even the figures shown

very small. However, both the Group revenue and Net Operating Asset (NOA) presented a very

healthy growth during those four (4) years in its restated Financial Statements, which the

company is generating more revenue per dollar of assets.

Economic profit, from the figures as above, I have noticed that the economic profit figures has a

positive trend and shows the figures have dramatically changed from 8.2 to 30 between 2013 and

2014, and have continually increasing until 2016. Every year the company has produced more

economic profit than the previous. However, in our study martial it said that the key drivers of

our firm’s past economic profit are Return on Net Operating Assets( RNOA), cost of capital and

Net Operating Asset ( NOA). Due to the cost of capital has been choice in 10% each year with

no change during these four (4) years, hence I only got RNOA and NOA left to analysis the

reason why my firm’s economic is doing good.

Economic profit = (RNOA – cost of capital) × NOA

Where, RNOA = OI/NOA

Now, I am going to use my mathematical way to simplify the old Economic profit formula to

Economic profit = OI- WACCx NOA, after the simplify, it is easy to see the

Operating Income has a proportional impact on the economic profit, which means I can see from

my restate financial statement that the group revenue has a nice trend from the sale of an output

over the year, and the company also has good control operating liabilities to ensure the Net

Operating Asset also has improved in each year. Additionally, the Galliford Try having

differentiated products to improve its market power, therefore, the economic profit has shown a

positive trend in short term.

Step 9

Capital Investment Decision for Galliford Try Plc

Recently, The Galliford Try Plc has considered to invest two (2) construction projects to expand

their business in the capital city of the UK 2018. There are two options: construct a three (3)

level parking lot in a commercial area where there is a high ratio of employees wanting to park.

The three (3) story parking place will include 1000 car reserved parks in CBD, with an average

cost £160 per month per car and a total £192000 per year. The parking spaces will be up for rent

weekly to companies and employees within the CBD. This parking lot will be a smart investment

as there is a high demand for parking spots within the CBD, by allowing a reservation car park

employees will be able to rest easy knowing they will make work on time as there is a spot

reserved for them.

Second option is;

Construct a toll crossing between the London CBD to the Airport, average 130000 vehicles per

day and 1.7 pond of toll charges per vehicles, total £221,000 per day, and £80.6 million pond per

year. After the project is completed the company will try and keep both businesses for as long as

they can. However, if the company is facing a short cash flow during the economic downturn in

the future, The Galliford Try Plc may consider to resell the project to limit the losses or either

make profit, hence it is suggested that each of these projects with be given a length of eight (8)

years.

The cash flows for the car parking and toll bridge would predominantly be involved of a total of

reserved rental charges for 1000 spots per years minus operation fees, maintenance costs and tax

costs. The cash flows generated by the toll bridge would be total average 130000 vehicles’ toll

charges multiply 365 day per year less tax costs, operation fee and maintenance.

The original cost, the estimated life, residual value and estimate future cash flows of each

investment opportunity are set out in the table below. All amounts are expressed in British pond.

Assuming a rate of return/discount rate/WACC of 10%

Car park Toll bridge

Original Cost -£19.2million -£258million

Estimated Useful Life 5 years 5 years

Residual Value £3.5 million £58 million

Estimated Future Cash Flows

31 December 2018 (time period = 1 year) -£1.92 million -£47.45 million

31 December 2019 (time period = 2) £ 3.84million £ 94.9million

31 December 2020 (time period = 3) £ 5.76million £ 142.35 million

31 December 2021 (time period = 4) £ 7.68 million £ 189.8million

31 December 2022 (time period = 5) £ 9.6 million £ 237.25 million

31 December 2022 (time period = 6) £ 11.52 million £ 284.7 million

31 December 2022 (time period = 7) £ 13.44 million £ 332.15million

31 December 2022 (time period = 8) £ 15.36million £ 379.6

million

Cash flow calculations:

Daily

charges/

month

Charges

Average

quantity

Per year Convert

to Million

Reserved

rental

parking

spaces

(weekly)

£160 per

month

1000 car

spaces

only

High

demand

and fully

reserved

before 6

months

160x12x1000=£1,920,000 £1.92

(million)

Toll cross £1.00 per Average Busiest £1x130000x365=£47450000 £47.45

from

London

CBD to

Airport

vehicle

per time

130000

vehicles

go through

every day

toll cross

in London

(million)

Car park Toll bridge

NPV £19.96 £696.49

IRR% 25% 40%

PAYBACK PERIOD( Year) 4.4 years 3.36 years.

From all the data in the table as observed above, I can see both the NPV are greater than zero (0),

which both projects could increase capital gain and meet the goal for my firm. Both projects will

begin to make a profit within the allocated eight (8) years. At the same time IRR are greater than

my return, however if compare both projects, I think the Toll bridge will contribute more wealth

to the firm, due to the time frame and NPV and IRR figures. To summarize the best suited option

for my company to invest in would be dependent on whether or not the company has a strong

finical background. If the company was to have a strong finical background investing in both

projects would be an option to bring an immense amount of future profit to the firm.

Step 10

The feedback which I received for this task really helped overcome many difficulties. The

Facebook group has given me incredible opportunities to have a close discussion with other

classmate in regards to issues and questions we share on our assignment. People have given me

such positive support for my questions, especially with their explanations on how to improve

errors being made in my Spreadsheets. A big thanks must go out to all the people who have

contributed to my work.

Feedback from others

Feedback to others

Amber GrechShyneal Saunders

Charmaine Nilon

Donna Codon

Klarissa Greenwood

Overall, Step 7 to Step 9 of this assignment have taken me on a wonderful, and at times

challenging, learning journey. I am proud of the work I have accomplished, not only because I

have achieved my goals set out for my tasks but also because I feel pleased with myself for

helping others. Furthermore, I have learnt more skills during assisting others with their problems,

reading examples and watching informative videos. Thank you.