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    b1 Solving Set 3 May 2018 - Online

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    Gadafi Fuad
    This document contains three financial management problems related to ratio analysis, investment appraisal, and cost of capital calculation. The ratio analysis problem involves forecasting income statements and balance sheets for a company. The investment appraisal problem requires using an expected value approach to analyze two product development options. The cost of capital problem involves calculating the weighted average cost of capital on a market value basis for a company with shares, loan notes, and bank debt.

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    b1 Solving Set 3 May 2018 - Online

    Uploaded by

    Gadafi Fuad
    14 views4 pages
    This document contains three financial management problems related to ratio analysis, investment appraisal, and cost of capital calculation. The ratio analysis problem involves forecasting income statements and balance sheets for a company. The investment appraisal problem requires using an expected value approach to analyze two product development options. The cost of capital problem involves calculating the weighted average cost of capital on a market value basis for a company with shares, loan notes, and bank debt.

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    This document contains three financial management problems related to ratio analysis, investment appraisal, and cost of capital calculation. The ratio analysis problem involves forecasting income statements and balance sheets for a company. The investment appraisal problem requires using an expected value approach to analyze two product development options. The cost of capital problem involves calculating the weighted average cost of capital on a market value basis for a company with shares, loan notes, and bank debt.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views4 pages

    b1 Solving Set 3 May 2018 - Online

    Uploaded by

    Gadafi Fuad
    This document contains three financial management problems related to ratio analysis, investment appraisal, and cost of capital calculation. The ratio analysis problem involves forecasting income statements and balance sheets for a company. The investment appraisal problem requires using an expected value approach to analyze two product development options. The cost of capital problem involves calculating the weighted average cost of capital on a market value basis for a company with shares, loan notes, and bank debt.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    PROBLEM SOLVING SESSION FOR FINANCIAL

    MANAGEMENT (B1)
    DESIGNATED FOR CPA & ACCA EXAMS

    [SET 3]

    Prepared By
    Godson Mkaro [MSc in Finance & Investments, BSc in Computer Science (Hons), ATEC II, CPA (T)] &
    Emmanuel Christopher [MBA (Finance), BCom Accounting (Hons), CPA (T)]

    Phone: 0717/0769 348 616 |Email:info@covenantfinco.com |website: www.covenantfinco.com


    FINANCIAL MANAGEMENT PROBLEM SOLVING SESSION [SET 3]

    QUESTION ONE [RATIO ANALYSIS]

    APEX Co achieved a turnover of TZS 16 million in the year that has just ended and expects a turnover
    growth of 8.4% in the next year. Cost of sales in the year has just ended was TZS 10.88 Million and other
    expenses were TZS 1.44 Million. The financial statement of APEX CO. for the year that has just ended is
    as follows:

    Statement of financial position

    AMOUNT (TZS Mil)


    Assets
    Non- Current Assets 22.0
    Current Assets
    Inventory 2.4
    Trade Receivables 2.2
    Total Assets 26.6
    Equity and Liabilities
    Equity Finance
    Ordinary shares 5.0
    Reserves 7.5
    Long term loan 10.0
    Trade payable 1.9
    Overdraft 2.2
    Total Equity and Liabilities 26.6

    The long-term bank loan has a fixed annual interest of 8% per year. APEX CO. pays taxation at annual
    rate of 40% per year .the following accounting ratios have been forecasted for the next three years :

    Gross profit margin 30%


    Operating profit margin 20%
    Dividend payout 50%
    Inventory turnover 110 days
    Trade receivables period 65 days
    Trade payables period 75 days

    Overdraft interest in the next year is expected to be TZS 140,000. No change is expected in the in the
    level of non-current assets and depreciation should be ignored.

    REQUIRED

    (a) Prepare the following forecasted statements for APEX CO :


    (i) A statement of income for the next year (7 marks)
    (ii) A statement of financial position at the end of the year (7 marks)
    (b) Analyze and discuss the working capital financial policy of APEX CO ( 6 marks)

    Phone: 0717/0769 348 616 |Email:info@covenantfinco.com |website: www.covenantfinco.com 1


    FINANCIAL MANAGEMENT PROBLEM SOLVING SESSION [SET 3]

    QUESTION TWO [COMPLEX INVESTMENT APPRAISAL – EXPECTED VALUE APPROACH]

    The Thompton Company Ltd is facing an option to develop two models of the same product:
    Model A and Model B. Both models are expected to be hot sellers for the next two years. The
    capital expenditure involved in the development of model A is TZS.2, 250 million while Model
    B costs TZS 2,500 million. Because of familiarity of the existing users, Model A which is an
    improved version of the existing one, it offers a certain cash flow of TZS 1, 400 million in the
    first year and TZS. 1,800 million for the next year.

    In respect of Model B, Thompton Ltd is not very sure of the cash inflows. It expects a cash
    inflow of TZS 1,500 million in the first year with 70% probability. However, the product may do
    better to yield cash inflow of TZS 1,800 million with the probability of 30%. The cash inflows in
    the second year are dependent upon what happens in the first year. If the firm faces a normal
    cash inflow of TZS 1,500 million in the first year, the chances are that it would repeat with
    probability of 30%, improve to TZS l,800 million with a probability of 40%, and do
    exceptionally well with cash inflow of TZS 2,200 million with a probability of 30%. If the firm
    faces better prospects in the first year, the chances are that it would have second year cash
    inflows of TZS 2,200 million, TZS 2,300 million and TZS 2,500 million with probabilities of
    50%, 30% and 20% respectively.

    REQUIRED:

    Examine both models and recommend to Thompton Company Ltd which of the two models they
    should go ahead with. Assume a cost of capital of 12%.

    QUESTION THREE [COST OF CAPITAL]

    Dinla Co has the following capital structure.

    Equity and reserves $000 $000

    - Ordinary shares 23,000


    - Reserves 247,000 270,000

    Non-current liabilities

    - 5% Preference shares 5,000


    - 6% Loan notes 11,000
    - Bank loan 3,000 19,000
    289,000

    Phone: 0717/0769 348 616 |Email:info@covenantfinco.com |website: www.covenantfinco.com 2


    FINANCIAL MANAGEMENT PROBLEM SOLVING SESSION [SET 3]

    The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex dividend basis
    and have a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the
    future by 4% per year and a dividend of $0·25 per share has just been paid.

    The 5% preference shares have an ex dividend market value of $0·56 per share and a nominal
    value of $1·00 per share. These shares are irredeemable.

    The 6% loan notes of Dinla Co are currently trading at $95·45 per loan note on an ex interest
    basis and will be redeemed at their nominal value of $100 per loan note in five years’ time.

    The bank loan has a fixed interest rate of 7% per year.

    Dinla Co pays corporation tax at a rate of 25%.

    Required:

    (a) Calculate the after-tax weighted average cost of capital of Dinla Co on a market value basis.

    (b) Discuss the connection between the relative costs of sources of finance and the creditor
    hierarchy

    Phone: 0717/0769 348 616 |Email:info@covenantfinco.com |website: www.covenantfinco.com 3

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