ECONM1007MScFAExam.docx

ECONM1007MScFAExam.docx

《ECONM1007MScFAExam.docx》由会员分享，可在线阅读，更多相关《ECONM1007MScFAExam.docx（14页珍藏版）》请在冰豆网上搜索。

ECONM1007MScFAExam

UNIVERSITYOFBRISTOL

ExaminationfortheDegreeofM.Sc.inAccounting,FinanceandManagement,

andinEconomics,FinanceandManagement

MAY/JUNE2008

EXAMPAPERNUMBERECONM1007

FINANCEANDACCOUNTING

（ModuleNo.ECONM1007）

Timeallowed:

THREEhours

AnswerTHREEquestionsfromthefollowingFIVE,

TWOfromSectionAandONEfromSectionB.

QuestionsinSectionAcarry35markseachand

questionsinSectionBcarry30markseach

Approvedelectroniccalculatorsmaybeused,butcandidates

mustshowthebasisofallcalculations.

Interesttablesareprovided.

Youmayfindthefollowingformulaehelpfulintheexamination:

MVg=MVu+DTc

Keg=Keu+[（Keu-rd）（1-Tc）（D/E）]

g=u+u（1-Tc）（D/E）

TURNOVER

SECTIONA

AnswerTWOquestionsfromthissection.Answerallpartsofthequestionyouchoose.

Question1

TheDirectorsofBlenheimplcaretryingtofindanappropriatecostofcapitaltouseinappraisingnewprojects.AsastartingpointtheywanttofindtheexistingWeightedAverageCostofCapital（WACC）ofthecompany.

Blenheimplchasanauthorisedsharecapitalof10million50pordinaryshares,ofwhich7millionhavebeenissued.Thecurrentexdivmarketpriceperordinaryshareis120pandadividendof15ppersharehasrecentlybeenpaid.Thecompanymaintainsapolicyofpaying40%ofitsprofitsaftertaxasadividendeachyear.Earningsretainedproduceareturnof10%whenreinvested.Extractsfromthelatestbalancesheetaregivenbelow:

£’000

Issuedsharecapital

3,500

Sharepremium

500

Retainedearnings

3,500

Shareholders’funds

7,500

NonCurrentLiabilities

2.6%irredeemabledebentures

1,000

3%redeemabledebentures

1,800

Bankloans

2,600

Alldebtinterestispayableannuallyandinterestpaymentshavejustbeenmadeonallthedebentures.Thecurrentex-interestmarketpricesfor£100nominalvalueare£80.40forthe2.6%debenturesand£105.70forthe3%debentures.The3%debenturesareredeemableatparin20years’time.

Thebankloansbearinterestat2%abovebaserate,whichiscurrently6%,andaredueforrepaymentin6years.Theeffectiverateofcorporationtaxis30%.

Required:

（a）CalculatetheeffectiveaftertaxWACC.

[12marks]

（b）WhatfactorswouldBlenheimplcneedtoconsiderbeforeusingtheWACCcalculatedin1（a）toappraiseanewproject?

[8marks]

（c）Ithasbeenarguedthatthepatternofdividendspaidtoshareholdersisirrelevantwhenvaluingthesharesofacompany.Explainthisargumentanddiscuss3factorsrelatingtothefinancialaspectsofacompanywhichmay,inpractice,influencethelevelofdividendsacompanydistributestoitsshareholders.

[15marks]

TURNOVER

Question2

GreymouthplcisaUnitedKingdom（UK）basedmanufacturerofnavigationequipmentforaircraft.Thecompanyiscurrentlyconsideringwhetherornottoestablishanewmanufacturingdivision,whichwillproducepassengersafetyequipmentforcars.TheBoardofDirectorshasaskedtheFinanceDepartmenttoconductafinancialappraisaloftheproposal.Thecompanyemploysnetpresentvalueanalysisfortheappraisalofallitslong-termprojects.

Thefollowinginformationhasbeentakenfromthebalancesheetofthecompanyfortheyearjustended:

£’m

Shareholdersequity

£1ordinaryshares

200

Retainedprofits

800

1,000

NonCurrentLiabilities

6%loanstock

300

Bankloan

200

500

Theordinaryshareshaveacurrentmarketvalueof£5.35pershareandthegearedbetaofthecompanyis1.2.Thereturnfromthemarketis10.4%andtheriskfreerateis5.1%.Theloanstockisirredeemableandcurrentlytradingat£110per£100nominalvalue.Itcanbeassumedthatallofthecompany’sloancapitalisriskfree.Thecompanywillnotneedtoraisenewfinancefortheexpansion.

TheFinanceDepartmenthasidentifiedacompanywhichmanufacturespassengersafetyequipmentforcars.Thecompanyisfinanced50%byequityand50%bydebt,basedonmarketvalues,andhasagearedbetaof1.6.

Theeffectiverateofcompanytaxforbothcompaniesis25%.

Required:

（a）ExplainwhytheexistingWeightedAverageCostofCapital（WACC）ofGreymouthshouldbeadjustedwhenevaluatingthenewinvestmentproposalandwhatproblemsmaybeencounteredinmakinganyadjustment.

[8marks]

（b）UsingtheModiglianiandMillerequations,calculatetheWACCthatshouldbeusedasthediscountratewhenevaluatingthenewproposal.

[12marks]

（c）Ithasbeensuggestedthatthelevelofgearingemployedbyacompanywillhavenoeffectonitsoverallcostofcapital.Discusstheargumentsforandagainstthisviewpoint.

[15marks]

Question3

MethvenplcisamanufacturerofelectronicdevicesintheUnitedKingdom（UK）.IthasbeenapproachedbyanAmericancompanywhoownthepatentrightstoanewdevicewhichisquicklybecomingverypopularintheUnitedStatesofAmerica.MethvenplchavebeenofferedexclusiverightstomakeanddistributethedeviceintheUKforanimmediatepaymentof£3.2millionandaroyaltyof£1foreachdevicesold.Researchwascarriedout,atacostof£0.4million,whichshowedthatifMethvenplccharged£9perdevicetheywouldbeabletosell400,000devicesineachofthenext4years.After4yearsmoreadvancedtechnologywouldrenderthedevicesobsolete.

Productionwouldrequireequipmentcosting£1milliontobeboughtimmediately.Thisequipmentwouldhavearesidualvalueattheendof4yearsof£0.5million.Thevariablecostsofproduction（excludingtheroyaltypayment）areestimatedtobe£3.25perunitandthefixedcostsareexpectedtobe£1.325perannumincludingstraightlinedepreciationofthenewproductionequipment.Halfofthefixedcosts,excludingdepreciation,area‘fairshare’ofthecentraloverheadcostsofthecompany,whiletheremainderrelatedirectlytotheproductionofthenewdevice.

Methvenplcisfinanced100%byequityandthecompany’sshareshaveabetavalueof1.2.Themarketrateofreturnis9%andtheriskfreerateis4%.

Required:

（a）Basedonanetpresentvalueanalysis,adviseMethvenplconwhethertheyshouldproduceandsellthisnewdevice.

[13marks]

（b）Carryoutsensitivityanalysistoshowbyhowmucheachofthefollowingwouldhavetochangebeforeyourdecisionin3（a）changes:

i.Theresidualvalueoftheequipment

ii.Thenumberofdevicessoldperannum

iii.Thesellingprice

iv.Thediscountrate

Commentontheresultsofthesensitivityanalysis.

[16marks]

（c）Discusstheassumptionsyouhavemadeinestimatingthecostofcapitalandcommentonwhetheryouthinkthesearereasonableinthecurrentsituation.

[6marks]

TURNOVER

SECTIONB

AnswerONEquestionfromthissection.Answerallpartsofthequestionyouchoose.

Question4

（a）Acompanypurchasedacaron1April2006for£15,000,whichisbeingdepreciatedover5years.Plantandmachineryof£20,000waspurchasedonthesamedate.Itisbeingdepreciatedby25%onareducingbalancebasis.On31January2008thecarissoldfor£8000.Whatentrieswilltherebe,inthefinancialstatements,inrespectoftheseassetsfortheyearended31March2008?

Youmayassumethatthereisnodepreciationintheyearofdisposal,butafullyear’sdepreciationintheyearofpurchase.

[6marks]

（b）Acompanyistoissue300,000£1ordinarysharesatanissuepriceof£3.

（i）Whatentrieswilltherebeinthefinancialstatementstoreflectthis

transaction?

[3marks]

（ii）Discussthedifferencesbetweenanofferforsaleshareissueandarightsissue.

[3marks]

（c）PictonLtdwasrecentlyformedtoimportphotocopiersfromAsia.Thebalancesheetofthecompanyat31May2008isasfollows:

Balancesheet

PictonLtd

£

Non-currentassets

Freeholdpremises

116,000

Equipment

54,000

170,000

Currentassets

Inventories

125,000

Tradereceivables

228,000

Cash,shorttermdepositsetc

22,000

375,000

CurrentLiabilities

Tradepayables

（125,000）

Accruedoverheads

（12,000）

Dividends

（22,000）

（159,000）

NetCurrentassets

216,000

TotalAssetslesscurrentliabilities

386,000

Equity

£1Ordinaryshares

350,000

Retainedprofit

36,000

386,000

ThelevelofsaleshasremainedconstantoverthepastthreemonthsandtheSalesDirectorhasestimatedthatsalesofphotocopiersoverthenext6monthswillbeasfollows:

Month

SalesUnits

June

50

July

40

August

60

September

80

October

80

November

100

TheSalesDirectorisnotveryconfidentabouttheaccuracyoftheseforecastsasthebusinessisstillrelativelynewandthemarketforphotocopiershasbecomeverycompetitiveinrecentmonths.

Thephotocopiersaresoldfor£2,850eachandcost£2,500tobuy.Allsalesaremadeon2monthscredit.Theoperatingexpensesofthecompanyareexpectedtobe£15,000inJune2008,risingto£18,000foreachofthenext4monthsandthenrisingagainto£22,000inNovember2008.Theseoperatingexpensesarepaid1monthaftertheyareincurredandincludeadepreciationchargeof£1,500permonth.

Thecompanyisgiven1monthscreditfromitssuppliersandbuysthephotocopiersthemonthbeforetheyaresold.Newequipmentandvehiclescosting£55,000willbepurchasedandpaidforinNovember2008.Thesewillbeneededtocopewiththeforecastincreaseinsales.

ThecompanyannouncesadividendinMayandNovembereachyearandthepolicyofthecompanyistopaydividends2monthsaftertheyareannounced.ThedividendforNovember2008isplannedtobe£15,000.

Required:

（i）Prepareacashflowforecastforeachofthe6monthsto30November

2008.

[12marks]

（ii）Prepar