ECONM1007MScFAExam.docx

1、ECONM1007MScFAExamUNIVERSITY OF BRISTOLExamination for the Degree of M.Sc. in Accounting, Finance and Management,and in Economics, Finance and ManagementMAY/JUNE 2008EXAM PAPER NUMBER ECONM1007FINANCE AND ACCOUNTING(Module No. ECONM1007)Time allowed: THREE hoursAnswer THREE questions from the follow

2、ing FIVE,TWO from Section A and ONE from Section B.Questions in Section A carry 35 marks each and questions in Section B carry 30 marks each Approved electronic calculators may be used, but candidates must show the basis of all calculations.Interest tables are provided. You may find the following fo

3、rmulae helpful in the examination:MVg = MVu + DTcKeg = Keu + (Keu - rd) (1-Tc) (D/E)g = u + u(1-Tc) (D/E)TURN OVERSECTION AAnswer TWO questions from this section. Answer all parts of the question you choose.Question 1 The Directors of Blenheim plc are trying to find an appropriate cost of capital to

4、 use in appraising new projects. As a starting point they want to find the existing Weighted Average Cost of Capital (WACC) of the company.Blenheim plc has an authorised share capital of 10 million 50p ordinary shares, of which 7 million have been issued. The current ex div market price per ordinary

5、 share is 120p and a dividend of 15p per share has recently been paid. The company maintains a policy of paying 40% of its profits after tax as a dividend each year. Earnings retained produce a return of 10% when reinvested. Extracts from the latest balance sheet are given below:000Issued share capi

6、tal3,500Share premium 500Retained earnings3,500Shareholders funds7,500Non Current Liabilities2.6% irredeemable debentures1,0003% redeemable debentures1,800Bank loans2,600All debt interest is payable annually and interest payments have just been made on all the debentures. The current ex-interest mar

7、ket prices for 100 nominal value are 80.40 for the 2.6% debentures and 105.70 for the 3% debentures. The 3% debentures are redeemable at par in 20 years time. The bank loans bear interest at 2% above base rate, which is currently 6%, and are due for repayment in 6 years. The effective rate of corpor

8、ation tax is 30%.Required:(a) Calculate the effective after tax WACC. 12 marks(b) What factors would Blenheim plc need to consider before using the WACC calculated in 1(a) to appraise a new project? 8 marks(c) It has been argued that the pattern of dividends paid to shareholders is irrelevant when v

9、aluing the shares of a company. Explain this argument and discuss 3 factors relating to the financial aspects of a company which may, in practice, influence the level of dividends a company distributes to its shareholders. 15 marksTURN OVER Question 2 Greymouth plc is a United Kingdom (UK) based man

10、ufacturer of navigation equipment for aircraft. The company is currently considering whether or not to establish a new manufacturing division, which will produce passenger safety equipment for cars. The Board of Directors has asked the Finance Department to conduct a financial appraisal of the propo

11、sal. The company employs net present value analysis for the appraisal of all its long-term projects.The following information has been taken from the balance sheet of the company for the year just ended: mShareholders equity1 ordinary shares 200Retained profits 8001,000Non Current Liabilities6% loan

12、 stock 300Bank loan 200 500The ordinary shares have a current market value of 5.35 per share and the geared beta of the company is 1.2. The return from the market is 10.4% and the risk free rate is 5.1%. The loan stock is irredeemable and currently trading at 110 per 100 nominal value. It can be ass

13、umed that all of the companys loan capital is risk free. The company will not need to raise new finance for the expansion.The Finance Department has identified a company which manufactures passenger safety equipment for cars. The company is financed 50% by equity and 50% by debt, based on market val

14、ues, and has a geared beta of 1.6.The effective rate of company tax for both companies is 25%.Required:(a) Explain why the existing Weighted Average Cost of Capital (WACC) of Greymouth should be adjusted when evaluating the new investment proposal and what problems may be encountered in making any a

15、djustment. 8 marks(b) Using the Modigliani and Miller equations, calculate the WACC that should be used as the discount rate when evaluating the new proposal. 12 marks(c) It has been suggested that the level of gearing employed by a company will have no effect on its overall cost of capital. Discuss

16、 the arguments for and against this viewpoint. 15 marksQuestion 3 Methven plc is a manufacturer of electronic devices in the United Kingdom (UK). It has been approached by an American company who own the patent rights to a new device which is quickly becoming very popular in the United States of Ame

17、rica. Methven plc have been offered exclusive rights to make and distribute the device in the UK for an immediate payment of 3.2 million and a royalty of 1 for each device sold. Research was carried out, at a cost of 0.4 million, which showed that if Methven plc charged 9 per device they would be ab

18、le to sell 400,000 devices in each of the next 4 years. After 4 years more advanced technology would render the devices obsolete.Production would require equipment costing 1 million to be bought immediately. This equipment would have a residual value at the end of 4 years of 0.5 million. The variabl

19、e costs of production (excluding the royalty payment) are estimated to be 3.25 per unit and the fixed costs are expected to be 1.325 per annum including straight line depreciation of the new production equipment. Half of the fixed costs, excluding depreciation, are a fair share of the central overhe

20、ad costs of the company, while the remainder relate directly to the production of the new device.Methven plc is financed 100% by equity and the companys shares have a beta value of 1.2. The market rate of return is 9% and the risk free rate is 4%.Required:(a) Based on a net present value analysis, a

21、dvise Methven plc on whether they should produce and sell this new device. 13 marks(b) Carry out sensitivity analysis to show by how much each of the following would have to change before your decision in 3(a) changes:i. The residual value of the equipmentii. The number of devices sold per annumiii.

22、 The selling priceiv. The discount rate Comment on the results of the sensitivity analysis. 16 marks(c) Discuss the assumptions you have made in estimating the cost of capital and comment on whether you think these are reasonable in the current situation. 6 marks TURN OVERSECTION BAnswer ONE questio

23、n from this section. Answer all parts of the question you choose.Question 4 (a) A company purchased a car on 1 April 2006 for 15,000, which is being depreciated over 5 years. Plant and machinery of 20,000 was purchased on the same date. It is being depreciated by 25% on a reducing balance basis. On

24、31 January 2008 the car is sold for 8000. What entries will there be, in the financial statements, in respect of these assets for the year ended 31 March 2008? You may assume that there is no depreciation in the year of disposal, but a full years depreciation in the year of purchase. 6 marks(b) A co

25、mpany is to issue 300,000 1 ordinary shares at an issue price of 3. (i) What entries will there be in the financial statements to reflect this transaction? 3 marks (ii) Discuss the differences between an offer for sale share issue and a rights issue. 3 marks(c) Picton Ltd was recently formed to impo

26、rt photocopiers from Asia. The balance sheet of the company at 31 May 2008 is as follows:Balance sheetPicton LtdNon-current assetsFreehold premises116,000Equipment54,000170,000Current assetsInventories125,000Trade receivables228,000Cash, short term deposits etc22,000375,000Current LiabilitiesTrade p

27、ayables(125,000)Accrued overheads(12,000)Dividends (22,000)(159,000)Net Current assets216,000Total Assets less current liabilities386,000Equity1 Ordinary shares350,000Retained profit36,000386,000The level of sales has remained constant over the past three months and the Sales Director has estimated

28、that sales of photocopiers over the next 6 months will be as follows: Month Sales Units June 50 July 40 August 60 September 80 October 80 November 100 The Sales Director is not very confident about the accuracy of these forecasts as the business is still relatively new and the market for photocopier

29、s has become very competitive in recent months.The photocopiers are sold for 2,850 each and cost 2,500 to buy. All sales are made on 2 months credit. The operating expenses of the company are expected to be 15,000 in June 2008, rising to 18,000 for each of the next 4 months and then rising again to

30、22,000 in November 2008. These operating expenses are paid 1 month after they are incurred and include a depreciation charge of 1,500 per month.The company is given 1 months credit from its suppliers and buys the photocopiers the month before they are sold. New equipment and vehicles costing 55,000

31、will be purchased and paid for in November 2008. These will be needed to cope with the forecast increase in sales.The company announces a dividend in May and November each year and the policy of the company is to pay dividends 2 months after they are announced. The dividend for November 2008 is planned to be 15,000. Required: (i) Prepare a cash flow forecast for each of the 6 months to 30 November 2008. 12 marks(ii) Prepar