FIN420 - Financial Management (Question & Answer) PDF

Preview

Summary

FINANCIAL MANAGEMENT FIN 420 ANSWER SCHEME TEST 1 SEM: MAC JULY 2013 ( 1hr 45 min ) PART A ( 10 marks) 1. A low ( average collection period inventory turnover ) ratio can signal poor sales or high inventory levels. 2. ( Spontaneous ) items represent the balance sheet items that vary directly with sa...

Description

FINANCIAL MANAGEMENT / FIN 420 ANSWER SCHEME TEST 1 SEM: MAC - JULY 2013 / ( 1hr 45 min ) PART A ( 10 marks) 1. A low ( average collection period / inventory turnover ) ratio can signal poor sales or high inventory levels. 2. ( Spontaneous / non-spontaneous ) items represent the balance sheet items that vary directly with sales activity. 3. (Trend analysis / comparative analysis) compares the performance of the firm, whether it is improving or declining over certain period of time. 4. An increase in marketable securities in considered as ( source / use ) of fund 5. A firm’s primary goal is shareholders’ wealth maximization which refers to maximizing the firm’s common stock share price. 6. Economic Order Quantity refers to a tool that assists firms in determining the optimal order quantity which results in the lowest possible total inventory cost.

7. Briefly explain the responsibility of a financial manager with regards to capital structure: Deciding on the mix of debt and equity financing that should be used by the company

8. Summarize the performance of ABY Bhd based on the given ratios. Ratio

Debt to equity Time interest earned

Industry Average

Actual 2006

Interpretation

42% 3.5

50% 6

Debt to equity ratio indicates that the company is using higher level of borrowing in its operation as compared to the industry. However, Time interest earned ratio indicates that the firm has better ability in paying its interest obligation as compared to the industry.

1

PART B QUESTION 1 a Quick ratio = Current asset - inventory Current liability

1,000,000 – 400,000 380,000

1.5789 x

Debt ratios= Total debt Total assets

590,000 x 100 1,440,000

40.97%

Time interest earned = EBIT Interest

633,000 56,000

11.30 x

Average collection period = Acc receivables x 360 Sales

420,000 x 360 3,745,000

Inventory turnover = COGS / Inventory Return on equity = Net profit x 100 Total equity

40.37 days

2,607,000 400,000

6.51 x

343,000 x 100 850,000

40.35%

QUESTION 1 b Wira Sejati Bhd Cash flow statement for year ended 31st December 2012(RM) Cash flow from operating activities: Net income 343,000 Depreciation 35,000 Accounts receivable 20,000 Inventories (100,000) Accounts payable 10,000 Accruals 50,000 Total cash flow from operating activities

358,000

Cash flow from investment activities: Net capital expenditure (75,000) Total cash flow from investment activities

(75,000)

Cash flow from financing activities: Long term debt 30,000 Dividend (293,000) Total cash flow from financing activities

(263,000)

Net increase in cash

20,000

2

Wira Sejati Bhd Sources and uses of fund for year ended 31st December 2012 (RM) Sources Net income Depreciation Acc receivables Acc payable Accruals Long term debt Total sources

343,000 35,000 20,000 10,000 50,000 30,000 488,000

Uses Cash Inventories Net capital expenditure Dividend

20,000 100,000 75,000 273,000

Total uses

488,000

QUESTION 2 Tiffany Furniture Cash Budget for the month of November 2011 until January 2012 (RM) November December January 170,000 160,000 140,000

Sales Cash receipts: 20% cash sales 40% credit sales (1 mth after) 40% credit sales (2 mth after) Cash inflows Total cash receipts

34,000 100,000 84,000

32,000 68,000 100,000

218,000

200,000

28,000 64,000 68,000 15,000 175,000

140,000

100,000

80,000

14,000 75,000 48,000 50,000 20,000

10,000 70,000 60,000 34,000 20,000

8,000 50,000 56,000 32,000 20,000 10,000 20,000

Purchases Cash disbursements: 10% cash 50% paid 1 mth after 40% paid 2 mth after Wages & Salary Rent Interest Cash dividends Tax Office equipment Total cash disbursement

247,000

25,000 219,000

196,000

Net cash flow Beginning cash balance Ending before borrowing

(29,000) 22,000 (7,000)

(19,000) 15,000 (4,000)

(21,000) 15,000 (6,000)

Minimum cash balance Surplus / deficit Ending after borrowing

15,000 (22,000) 15,000

15,000 (19,000) 15,000

15,000 (21,000) 15,000

40,000

3

QUESTION 3 Pearl Imada Inc Pro forma Balance Sheet as at December 31, 2013 (RM) Cash Accounts receivables Inventories Fixed assets

8,250 ,000 14,250 ,000 15,150 ,000 63,750 ,000

Account payable Tax payable Notes payable Long term debt Common stock Retained earnings Additional fund needed

Total assets

101,400,000 Total liabilities and equity

DPOR = dividend / net profit = 2.025,000 / 4,500,000 = 0.45 or 45%

NPM

3,150,000 3,600,000 1,000,000 14,000,000 40,000,000 11,812,500 27,837,500 101,400,000

= net profit/sales = 4,500,000 / 30,000,000 = 0.15 or 15%

New RE = last yr RE + additional RE = last yr RE + [ projected sales x NPM x (1 - DPOR)] = 8,100,000 + 45,000,000 x 0.15 x (1 - 0.45) = 11,812,500 BONUS QUESTION (Please complete the previous questions before attempting this bonus question) The Gardenet Breads Company buys and sells (as bread) 800,000 bushels of wheat annually. The wheat must be purchased in multiples of 2,000 bushels. Ordering costs, which include grain elevator removal charges of RM300 are RM500 per order. Annual carrying costs are 2% of the purchase price per bushel of RM5. The company maintains a safety stock of 5,000 bushels. The delivery time is 2 weeks. (Assume the company is operating 50 weeks a year). i)

What is the economic order quantity (EOQ)? EOQ

= √ 2 x D x OC / CC = √ 2 x 800,000 x 500 / 0.10 = 89,442 units ≈ 90,000 (multiple of 2,000 units) CC

= 2% x RM5 = RM0.10

ii)

At what inventory level should a reorder be placed to prevent having to draw on the safety stock? ROP = ( Lead time / 50 weeks x D ) + SS = ( 2 / 50 x 800,000) + 5,000 = 37,000 units

iii)

What are the total inventory costs? TIC = TOC + = ( D / Q ) OC + = (800,000 / 90,000 ) 500 + = RM4,444.44 + = RM9,444.44

TCC ( Q / 2 + SS ) CC (90,000 / 2 + 5,000 ) 0.10 RM5,000

4

5

FINANCIAL MANAGEMENT (FIN 420) ANSWER SCHEME FOR TEST 2 / SEM: SEPT 2013 – JAN 2014 QUESTION 1 Interest = 10% x 500,000 x 6/12= RM25,000

i) EIR

= = =

Interest x 360 usable fund t 25,000 x 12 475,000 6 10.53%

Comp. balance = 5% x RM500,000 = RM25,000  Since the company has RM30,000 in its account balance therefore the company will get the full amount of loan Usable fund = Loan – interest - comp. balance = RM500,000 – RM25,000 – 0 = RM475,000

EIR

= = =

Interest + commitment fee x 360 usable fund t 30,000 + 500 x 12 465,000 6 13.12%

Interest = 12% x 500,000 x 6/12 = RM30,000 Com. Fee = 0.5% x (RM600,000 – RM500,000) = RM500 Comp. balance = 7% x RM500,000 = RM35,000 Usable fund = Loan – comp. balance = RM500,000 – RM35,000 = RM465,000

EIR

= Interest + processing fee x 360 usable fund t = 25,000 + 7,500 x 12 467,500 6 = 13.90%

Interest= 10% x 500,000 x 6/12= RM25,000 Proc. Fee = RM1,500 x 5 pieces of comm. Paper = RM7,500 Usable fund = Value of C.paper – inte rest – proc. Fee = RM500,000 – RM25,000 – RM7,500 = RM467,500

ii)

The company should choose the first alternative (discounted loan) due to the lowest EIR

QUESTION 2 i)

Cost of bond before tax = Interest + [ ( PV – MP ) / n ] [ ( PV + MP ) / 10 ] = 140 + [ (1,000 – 883.50) / 10 ] (1,000 + 883.50) / 2 ] = 0.1610 or 16.10%

Interest = 14% x RM1,000 = RM140

Cost of bond after tax= Cost of bond before tax ( 1–tax rate ) = 16.10% ( 1 - 0.30 ) = 11.27%

N = 10 yrs

Using financial 10 883.50 140 1,000 CPT 16.45

Interest = 14% x RM1,000 = RM140

calculator: N PV +/PMT +/FV I/Y

Mkt price= MP –FC = RM950– (7% x RM950) = RM950 – RM66.50 = RM883.50

Mkt price= MP –FC = RM950– (7% x RM950) = RM950 – RM66.50 = RM883.50 N = 10 yrs

Cost of bond after tax= Cost of bond before tax ( 1–tax rate ) = 16.45% ( 1 - 0.30 ) = 11.52% Cost of preferred stock = D / MP = 8.50 / 87 = 9.77%

D =8.5% x RM100 = RM8.50

Cost of common stock

D1 = RM0.30

= ( D1 / MP ) + g = ( 0.30 / 4.80 ) + 0.08 = 14.25%

Mkt price

= MP –FC = RM90 – (3% x RM100) = RM90– RM3 = RM87

Mkt price= MP – FC = RM5 – RM0.20 = RM4.80

QUESTION 3 Investment 1 a) i) Payback period:

Investment 2 Payback period:

Acc. CF(RM) 20,000 need 30,000 = 50,000 Payback period = 1.60 yrs

Yr 1 2

CF (RM) 20,000 50,000

1+ 0.60

ii) Net Present Value: = Total PV – Initial outlay Year Cash flow (RM) 1 20,000 2 50,000 3 10,000

(PVIF 8%,n) 0.9259 0.8573 0.7938 Total PV Initial outlay NPV

Acc. CF(RM) (10,000) (10,000) need 70,000 120,000 Payback period = 2.58 yrs

Yr 1 2 6

CF (RM) (10,000) 0 120,000

=

2 + 0.58

Net Present Value: = Total PV – Initial outlay Total PV 18,518 42,865 7,938 69,321 (50,000) 19,321

Year Cash flow (RM) 1 (10,000) 2 0 3 120,000

(PVIF Total PV 8%,n) 0.9259 (9,259) 0.8573 0 0.7938 95,256 Total PV 85,997 Initial (60,000) outlay NPV 25,997

Decision: Since they are independent investments, therefore both investments can be accepted because they give a positive NPV b) Internal Rate of Return: Step 1 = Cash flow (PVIFA IRR,5) = initial outlay = 15,000 (PVIFA IRR,4) = 40,000 (PVIFA IRR,4) = 40,000 15,000 = 2.6667 Find 2.6667 from the PVIFA table (n = years), it falls between 18% and 19%. Step 2 Do interpolation to get the exact rate. 18% 2.6901 IRR 2.6667 19% 2.6386 IRR – 18% = 2.6667 – 2.6901 19% - 18% 2.6386 - 2.6901 IRR = 0.1845 or 18.45% This project should be accepted because its IRR (18.45%) is higher than cost of capital (12%)

Investment 1 c) i) Payback period: Acc. CF(RM) 20,000 need 30,000 = 50,000 Payback period = 1.60 yrs

Yr 1 2

CF (RM) 20,000 50,000

Investment 2 Payback period:

1+ 0.60

Acc. CF(RM) (10,000) (10,000) need 70,000 120,000 Payback period = 2.58 yrs

Yr 1 2 3

CF (RM) (10,000) 0 120,000

ii) Net Present Value

Net Present Value

CF

CF

CFO 50,000 +/- ENTER CO1 20,000 ENTER FO1 1 CO2 50,000 ENTER FO2 1 CO3 10,000 ENTER FO3 1 NPV 8 ENTER CPT 19,323.78

=

2 + 0.58

CFO 60,000 +/- ENTER CO1 10,000 +/- ENTER FO1 1 CO2 0 ENTER FO2 1 CO3 120,000 ENTER FO3 1 NPV 8 ENTER CPT 26,000.61

Decision: Since they are independent investments, therefore both investments can be accepted because they give a positive NPV

d) Internal Rate of Return: CF

CFO 40,000 +/- ENTER CO1 15,000 ENTER FO1 4 ENTER 2nd IRR CPT 18.45% This project should be accepted because its IRR (18.45%) is higher than cost of capital (12%)

QUESTION 4 Alternative 1 New interest = 15% x RM8,000,000 = RM1,200,000

Bond

Alternative 2

Interest outstanding = 6% x RM6,000,000 = RM360,000

Interest outstanding = 6% x RM6,000,000 = RM360,000 No of new shares = RM8,000,000 RM8 = 1,000,000 units

No of outstanding shares = 1,000,000 units

No of outstanding shares = 1,000,000 units

Common shares

1.

i)

ii)

EBIT breakeven: EPS Alternative 1 ( EBIT – 1,560,000 ) ( 1- 0.28) 1,000,000 ( 0.72 EBIT – 1,123,200) 1,000,000 EBIT

= = = =

EPS Alternative 2 ( EBIT – 360,000 ) ( 1- 0.28) 2,000,000 ( 0.72 EBIT – 259,200 ) 2,000,000 RM2,760,000

EBIT-EPS analysis chart EPS Alternative 1

alternative 2

EBIT 360,000 1,560,000

2,760,000

Indifference EPS for Alternative 1 = (2,760,000– 1,560,000 ) ( 1- 0.28 ) 1,000,000 = RM0.8640 Indifference EPS for Alternative 2 = (2,760,000– 360,000 ) ( 1- 0.28 )

=

iii)

2,000,000 RM0.8640

EPS for Alternative 1 if EBIT is RM4m = (4,000,000– 1,560,000 ) ( 1- 0.28 ) 1,000,000 = RM1.7568 EPS for Alternative 2 if EBIT is RM4m = (4,00,000– 360,000 ) ( 1- 0.28 ) 2,000,000 = RM1.3104

BONUS QUESTIONS

i)

In order to improve its cash turnover, firm needs to ( increase / decrease ) its average age of inventory.

ii)

( Mutually exclusive / Independent ) project refers to project that has no bearing on the adoption or rejection of the other project.

iii)

( Business risk / financial risk ) arises due to change in the capital structure of the organization.

iv)

( Speculative / transaction ) motive is one of the motives of holding cash in which it is to take advantage of any bargains or opportunities that arise.

v)

In evaluating the potential credit customers, their ( character / capital ) will determine their ability to pay.

vi)

( Common stock holder / Bond holder ) will be the first to receive any claims on assets and income of the company in the event of bankruptcy.

vii)

Explain the meaning of this credit term: “2 / 10 net 50” ________________________________________________________________________ ______________________________________________________________________

viii)

List any two (2) factors in influencing the choice of marketable securities investment. ________________________________________________________________________ _____________________________________________________________________...