Introduction
Company History
Paplatine Plc has been operating in the heart of the UK for over thirty years, manufacturing
and supplying medical equipment.
In its early years as a private limited company Palpatine Ltd enjoyed growth in sales which
was reflected in the bottom line profit figures. The company had built a good working
relationship with the high street banks and successfully borrowed and repaid all of its loans.
In the mid to late 2000’s the productivity of the manufacturing sector began to flatten and
was further imploded by a rise in the value of the pound, making employment in the sector
unaffordable. During this period Palpatine Ltd struggled to make positive returns and
recognised that it was unable to keep up with the increased competition from the Asian
market.
The company demonstrated resilience and perseverance as it changed the way it serviced its
clients. Manufacturing at home was no longer an affordable option and despite good
relationships with the banks, obtaining finance was becoming more and more difficult. The
family owned business decided to take a leap of faith and closed down the manufacturing
function of the business and started importing its supplies from the Asian market. This was a
huge learning curve for the Palpatine family as they have grappled with overseas corporate
culture and style. Despite this they have managed to re-enter a growth phase and are now
working well with Asian markets that are demonstrating a rapidly changing management
culture.
Palpatine Plc floated in November 2015. There are currently four executive directors that
make up the senior management team (please see appendix I). Although in the past
Palpatine Plc has used debt capital to facilitate growth it is currently all equity financed. It
has successfully been operating as a Plc over the last four years and the shareholders have
enjoyed healthy dividend returns.
Sensitivity: Internal
Five Year Plan
The senior executive team have recently completed a draft of their proposed five year
business case, the key goals that they have identified to ensure that they remain a profitable
and reputable business are as follows:
1. To ensure the dividend payment is maintained.
2. To appraise future investments using a target 20% Accounting Rate of Return (ARR).
(measured as average annual profit after tax / initial investment)
3. To finance growth with minimal debt.
4. To reduce the carbon footprint of the company to ensure that the organisation is
environmentally friendly.
Investment Appraisal
The Accounting Rate of Return, is to be measured in the same way as Return on Capital
Employed (ROCE). Recently, the directors decided against switching from their current
distribution vehicles to using electric vehicles because the financial analysis resulted in a
ROCE of just 13.5%. The logistics manager, Rey Skywalker, was however a little frustrated as
the new electric vehicles would be ideal for its regional collections and deliveries and would
mean that the company would be moving towards a more carbon conscious state. She
expressed her concerns at the recent staff briefing:
Rey Skywalker:“…I am really not sure why we are restricted by the 13% ROCE, the move to
the vehicles will take Palpatine one step closer to meeting our environmentally friendly goal,
I just feel the financial appraisal process is restrictive”
Also in attendance at the staff briefing was Yoda who had joined the company six months
ago having completed their undergraduate degree in Accounting and Finance and now
studying for their final professional accountancy exams.
Yoda: “I can see Rey’s point, I am not sure if the company uses NPV, this may be a
better measure to appraise the financial impact of switching couriers. Or should we perhaps
lease these vehicles and that way we can keep them off the balance sheet”
Finn Trooper, the marketing manager, contributed to the discussion:

“…It seems we have considerable knowledge of our products and the import market but
with respect we do seem to be missing specialist financial knowledge at board level.
Opportunities are possibly being missed because of our lack of financial awareness. Unless
the directors change the investment, financing and dividend policies of the firm, there is no
chance of maintaining the impressive growth rates seen in the past.”
Yoda: “…According to my knowledge if we maintain a capital structure of 100% equity and
are not considering the option of debt finance, the company is missing out on the chance to
reduce its cost of capital. Other companies with Plc status are enjoying debt finance and as a
result have increased the value of their company, it seems that we have not considered this
as an option.”
Sensitivity: Internal
Directors’ reactions
The Financial director was recently suspended and although none of the directors have a
strong financial background they have been surprised by the comments from the staff, as the
staff have always seemed quite happy in the past. Following the briefing the directors met
to discuss a way forward, the Managing Director Kyle Ren acknowledged that some valid
comments were made and that he had little knowledge of things like NPV or cost of capital
and had never really thought about the balance between investing, financing and paying
dividends.
It was decided that Yoda would be presented with extracts from the financial accounts
(appendix III) and based on their up to date knowledge in Accounting and Finance should
produce a report a report for the board addressing the below requirements, to be submitted
on Friday May 15th at 11.59pm in time for the board to digest before the next staff briefing.
Requirements to be addressed in the report:
(a)
(i) Critically discuss and analyse the financial data provided in the case study and
appendix II and recommend whether Palpatine plc should purchase the new vehicles.
(40 marks)
(ii) Evaluate the option to lease the vehicles, explaining the financial and non-financial
implications of a (i) and a (ii).
(20 marks)
(b) Critically Discuss the quote below, your answer should make reference to relevant
theories.
“Other companies with Plc status are enjoying debt finance and as a result have
increased the value of their company; we don’t seem to have considered this as an
option.”
(15 marks)
(c) Explain what is meant by the following:
 Investment policy
 Financing policy
 Dividend policy
Discuss how these policies are interrelated, and explain what improvements could be
made to the Palpatine Plc’s existing policies.
(15 marks)
Presentation and structure (10 marks)
(Total 100 marks)