Financial Management for Business – ACFI205

 

JANUARY EXAMINATIONS 2019

Financial management for Business

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TIME ALLOWED:        Two Hours

 

INSTRUCTIONS TO CANDIDATES

 

  1. ANSWER ONE QUESTION FROM SECTION I
  2. ANSWER TWO QUESTION FROM SECTION II
  3. ANSWER THREE QUESTIONS IN TOTAL

 

 

Note: Financial time value tables are attached.

 

 

Financial Management for Business – ACFI205

 

January Examinations 2019

 

Section I – Answer ONE question from this section.

 

Question 1

 

Atlantic Ltd manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2017 and 2018 are as follows:

Income statements for the year ended 30 June (£000)

2017                                 2018

 

Revenue                           1,180                                1,200

Cost of sales                     (680)                                (750)

Gross profit                       500                                  450

Operating expenses          (200)                                (208)

Depreciation                        (66)                                  (75)

Operating profit                   234                                   167

Interest                                (-)                                    (8)

Profit before taxation           234                                 159

Taxation                             (80)                                (48)

Profit for the year                154                                 111

 

Statement of financial position as at 30 June (£000)

 

2017             2018

ASSETS

Non-current assets

Property, plant and equipment                         702               687

Current assets

Inventories                                                      148               236

Trade receivables                                            102               156

Cash                                                                  3                  4

253               396

Total assets                                                   955             1,083

EQUITY AND LIABILITIES

Equity

Ordinary share capital (£1 shares, fully paid)    500               500

Retained earnings                                           256               295

756               795

Non-current liabilities                                  

Borrowings and bank loan                                   –                  50

Current liabilities

Trade payables                                                 60                76

Other payables and accruals                              18                16

Taxation                                                           40                24

Short-term borrowings (all bank overdraft)          81              122

199               238

Total equity and liabilities                             955             1,083

 

Dividends are paid on ordinary shares of £70,000 and £72,000 in respect of 2017 and 2018, respectively. The cost of sales amount can be used instead of credit purchase (which is not given above).

 

 

Required:

 

  1. Calculate the following financial ratios for both 2017 and 2018 (using year-end figures for the statement of financial position items):

 

  1. Return on capital employed
  2. Operating profit margin
  3. Gross profit margin
  4. Current ratio
  5. Acid test ratio
  6. Settlement period for trade receivables
  7. Settlement period for trade payables
  8. Inventories turnover period             

(16 marks)

 

  1. Comment on the performance of Atlantic Limited from viewpoint of a business considering supplying a substantial amount of goods to Atlantic Limited on usual trade credit terms.

(10 marks)

 

  1. Outline and briefly discuss the limitations of ratio analysis.

(8 marks)

 

[Total: 34 marks]

 

 

Question 2

 

  1. Describe the following and explain your answers by using examples:

 

  • Payback period
  • Profitability Index
  • Scenario analysis

(9 marks)

 

 

  1. Progress Chemicals plc has recently received an invitation to produce a new chemical for supply to a textile manufacturer. The invitation is to produce 16,000 kg each year for the next three years at a price of £45 per kg. The following information has been collected which will help the directors to reach a decision on whether to accept the invitation or not:

 

  • New plant costing £250,000 will need to be bought and paid for at the start of production. This will have a residual value of £10,000 at the end of the third year. If the plant is acquired, the business will follow its normal practice of depreciating it on a straight line basis in the annual financial accounts over the three year life of the New Plant.

 

 

  • Ten new workers will be taken on for the duration of production. Recruitment costs, payable at the start of the production period will total £28,000. The workers will be paid compensation for being made redundant at the rate of £4,000 per worker, payable at the end of the production period. During the production period the workers will be paid £225,000 in total each year.

 

  • Production of the new chemical will be charged with a share of the business overheads totalling £48,000 in each of the three years. It is estimated that the production of the new chemical will give rise to an increase of £18,000 in overheads in each of the three years.

 

  • Production will require the use of an ingredient, known as R16K, at the rate of 6,000 kg each year. The business already has a stock of 4,000 kg. This was originally bought for £16 per kg. This was bought for a previous contract that had to be abandoned. If the stock of R16K is not used in production of the new chemical there is no other use for it and it will be disposed of immediately. It will cost £2 per kg to dispose of the R16K. The cost of new R16K is £20 per kg.

 

  • Production will also require the use of 9,000 kg each year of another ingredient, known as T23W. The business already has 9,000 kg in stock, which cost £25 per kg. Recently the buying price has dropped to £20 per kg. The business could sell its stock of T23W for £15 per kg. T23K is used in large quantities on a number of the business’s current products.

 

  • Assessing the investment in the plant is to be undertaken on the basis of a finance cost of 10% each year.

 

  • The above data were discovered by a consultant who is to be paid a total of £4,000 for the work. Treat cash flows relating to revenue, overheads, stock purchases and labour as occurring at the end of the relevant year.

 

Required:

 

Applying the net present value principles, determine whether or not the new chemical should be produced. Clearly present all your calculations and conclusion. Ignore taxes.

(15 marks)

 

  1. Describe the treatment of the following practical points with reference to investment appraisal:

 

  • Past costs
  • Common future costs
  • Opportunity costs
  • Taxation
  • Cash flows and profit flows

(10 marks)

 

[Total: 34 marks]

 

 

 

 

Section II – Answer TWO questions from this section.

 

Question 3

 

  1. Identify and explain three external sources of long-term finance available to a business.

(11 marks)

 

  1. Identify and explain three internal sources of short-term finance available to a business.

 (11 marks)

 

  1. Identify and explain three advantages and three disadvantages of listing a company at the Stock Exchange.

(11 marks)

 

[Total: 33 marks]

 

 

 

Question 4

 

Jubilee Plc and Omega Plc are similar businesses and have generated identical profits before interest and tax (PBIT) for Year 1 of £80 million. The long-term capital structure of each business is as follows:

 

  Jubilee Plc Omega Plc
  £m £m
£1 ordinary shares 200 340
12% preference shares 100 50
10% loan stock 100 10
  400 400

 

Required:

 

  1. Explain what is meant by ‘financial gearing’ and its impacts on the level of risk to shareholders.

(13 marks)

 

  1. Using the information provided in the table, calculate financial gearing ratios for Jubilee Plc and Omega Plc.

(10 marks)

 

  1. Using the information provided in the table, calculate the effect of financial gearing on the returns to ordinary shareholders in both companies. Assume a tax rate of 30%.

(10 marks)

 

[Total 33 marks]

 

 

 

 

 

Question 5

 

The following three factors are considered to play significant roles in determining the level of dividends. Describe each of these factors.

 

  1. Investment opportunities

(11 marks)

  1. Financing opportunities

(11 marks)

  1. Market expectations

(11 marks)

                   

[Total: 33 marks]

 

Question 6

 

  1. Describe and compare Shareholder Value Analysis (SVA) and Economic Value Added (EVA).

(16 marks)

 

  1. Outline and discuss wealth-enhancing and other motives for mergers.

(17 marks)

 

[Total: 33 marks]

 

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