Mod003577 sfmanagement_ alternative assessment _122021 accounting

   

          

AngliaRuskinUniversity

CambridgeChelmsfordPeterborough

Alternative Assessment

  

Examination period

DEC 2021

 

Faculty

Business and Law

 

Discipline

Finance

 

Module Code

MOD003577

 

Module Title

Strategic Financial Management

 

Level & credit volume

5; 30

 

Number of questions 

4

 

Number of pages

6(including cover)

 

Name of module leader

Dr Ying Wang

Materials allowed in this assessment are as follows

  

Books/statutes/case studies or formulae tables to be   provided by the University 

N/A

 

Are students permitted to bring their own books/statutes/

case study 

No

 

Graph paper

No

 

Calculator 

Yes

Type permitted basic/standard or scientific 

 

Any other additional stationery or materials permitted

No

Instructions to Candidates

1. Students      are supposed to answer ALL sections of the alternative assessment
2. The      use of financial calculators is allowed for this exam (in line with ACCA      regulations)
3. All      workings must be clearly shown in the answer sheet
4. For      mitigation circumstances, see academic regulation below

Mitigation – Academic Regulations (Twelfth Edition August 2019) 6.112 – 6.122

6.118 Claims for mitigation are submitted by the student, or in exceptional circumstances (e.g. when a student has been hospitalised) by a Director of Studies or Student Adviser on behalf of the student, no later than five working days after the published (or extended) submission deadline for the assessment task or the date on which an examination was held.

   

         

Statementsoffinancialpositionasat30June

 

2014

2015

 

£’000

£’000

£’000

£’000

 

Non-currentassets

Currentassets

820

1,000

 

Inventory

340

420

 

Receivables

360

570

 

Cash

10

 

710

990

 

Totalassets

1,530

1,990

 

Equity&liabilities

 

Ordinaryshares{25p)

400

400

 

Retainedearnings

450

530

 

Totalequity

850

930

 

Non-currentliabilitiesCurrentliabilities

200

200

 

Overdraft

140

250

 

Tradepayables

280

510

 

Otherpayables

60

100

 

Totalcurrentliabilities

480

860

 

1,530

1,990

 

Incomestatementsfortheyearsending30June

 

2014

2015

 

£’000

£’000

 

Revenue

1,800

2,900

 

Grossprofit

210

260

 

Profitbeforetax

120

160

 

Incometaxexpense

30

40

 

Profitfortheperiod

90

120

 

Dividends

40

40

 

Retainedprofitfortheperiod

50

80

 

Inflationduringthelastyearwas5%.

Question1

WoolpitCoisamanufacturingcompanybasedintheWestCountryoftheUK.Summarisedaccountsforthelasttwoyearsarepresentedbelow:

–

   

Required:

(a) Illustratingyouranswerusingtheabovefinancialdata,fullyexplainwhatismeantbyovertrading,whataretheimplicationsanddiscusshowitmightberecognisedinacompany.

{10marks)

(b) OneofWoolpit’smanagershassuggestedthatthecompanywouldbemoreefficientifitreduceditsoperatingcycletotheminimumpossibleperiod oftime.

(i) Explainwhatismeantbytheoperatingcycleofacompany,explainthesignificanceandcalculateitfor2015.

{8marks)

(ii)  

      

(

Discusshowacompanycouldtrytoreducetheoperatingcycleandwhetheritshouldalwaysbereducedtothe minimumpossibleperiod.

(7marks)

(Total25marks)

Question2

FuntimeComanufactures safetysurfacingforchildren’splaygrounds.Themainrawmaterialrequiredisrubberparticlesandthesearecurrentlypurchasedfromanoutsidesupplier for

$3.50pertonne,fixedforthenextfouryears.Ifthecontractisterminatedwithinthenexttwo years, Funtime Co will be charged an immediate termination penalty of $150,000, whichwillnotbeallowedasataxdeductibleexpense.

The directors are considering investing in equipment that would allow Funtime Co tomanufacture theseparticlesin-houseby using recycledtyres. The machinerequired toprocessthetyreswillcost$400,000,witharesidualvalueof$50,000after4years.

Thecostsassociatedwiththenewventureareasfollows:

– Variablecosts(pertonneproduced)$0.80Fixedcosts(perannum)$192,500

The additional fixed costs include maintenance costs of $40,000 and the additionaldepreciationcharge(calculatedonastraight-linebasisoverthelifeoftheasset)relatingtothemachine.

Alloftheabovefigures arequotedincurrentdayterms.Inflationaryincreasesareexpectedasfollows:

– Variablecosts:3%perannumMaintenancecosts:5%perannumOtherfixedcosts:2%perannum

Theannualdemandfortheparticles(basedonthesalesforecastsofthecompany)is:

  

Year1

Year2

Year3

Year4

 

Demand(intonnes)

100,000

110,000

130,000

160,000

Corporationtax of 30% per year will be payableone year inarrears. Tax-allowabledepreciationon a25% reducing balance basis couldbe claimed on thecost oftheequipment,withabalancingallowancebeingclaimedinthefourthyearofoperationwhenthemachineisdisposedof.

Required:

(a) Using 15% as theafter-tax discount rate, advise Funtime Co on thedesirabilityofpurchasingtheequipment.{Yourworkingsshouldbeshowntothe nearest$000.)

   

(20marks)

(b) Explaintheadvantagesofthepaybackmethodofinvestmentappraisaloverdiscountingmethods(NPVandIRR)andsuggestinwhatsituationspaybackmightbepreferred.

(5marks)

(Total 25marks)

Question3

Norton Co, whose home currency is theNew ZealandDollar (NZD), trades regularlywithcustomers and suppliers in a number of different countries and currencies. As well as othertransactions, thecompanyexpects pay EUR500,000 toa French supplier in six months’ time.Current exchangeratesbetweenthe NewZealandDollarandtheEuroareasfollows:

Spotexchangerate:NZD1=EUR0.6105-0.6443

3-monthforwardexchangerate:NZD1=EUR0.5955-0.62606-monthforwardexchangerate:NZD1=EUR0.5810-0.6100

Interestratesin.NewZealandandtheEurozoneforthenextyearareexpectedtobeasfollows:

NewZealand2.3%-2.5%

Eurozone0.5%-0.7%

Aswell as considering the use ofmoney market products and derivativestohedge the riskexposurepresentedbypaymentsandreceiptsindifferentcurrencies,thetreasurerofNorton Co is looking at ‘internal’methods suchas invoicing all customersinNZD, insistingthatsuppliersinvoicetheminNZDandleadingandlagging.

Required:

(a) DiscussthedifferenttypesofforeignexchangeriskexposureNortonCoisfacing.

(6marks)

(b) Calculate thegainor loss compared toits currentNZDvalue which Norton Co will incurby taking outa forward exchangecontractfor thefuture EUR payment totheFrenchsupplier.

(5marks)

(c) Calculate thepaymentin NZD ifNorton uses a money market hedge tohedge thepaymenttotheFrenchsupplierin6months’time.

(5marks)

(d) Based on the expected movement in the NZ dollar and the Euro, if Norton Co decidesagainsthedging,explainwithreasons whetheraleadingorlaggingactionshouldbetakentominimiseexchangelosses.Includeanyunderpinningtheoryinyourexplanation.

(5marks)

(e) Brieflydiscussanyimplicationsoftheproposaltoinvoicecustomers andreceivesupplierinvoicesinNZ dollars

(4marks)

(Total 25marks)

  

Question4

WetherbyCoisalistedcompanywith10million$1sharesinissue.Thesharesarecurrentlytrading at $1.69. Historicdividend growthhas been4% per year, and this is expected tocontinueinthefuture.Themostrecentdividendwas18.45centspershare.

Thecompanyis also financed by two different types of bonds, with details as follows:50,000(x$100)Redeemablebonds,withamarketvalueof$105.Thecouponrateis6% andredemptionisin5 yearsattheparvalueof$100.

50,000 (x $100) Convertiblebonds, with a market value of$90. Thecouponrate is 5%and the bond holder can choose to convert each $100 nominal value bond into 80sharesin3years’time,ortoredeemthebondatitsparvalue.

Thecompany’staxrateis25%.

Required:

{a)Whatisthecost ofdebtassociatedwiththeredeemablebonds?

(10marks)

{b)Whatisthevalueoftheconversionoptionoftheconvertiblebonds?Stateanyassumptions.

(4marks)

{c) Whatisthecompany’scostofequity?

(3marks)

{d) The after tax cost of the convertible bonds has been calculated as 22.5%. Using this, and youranswersin{a)and{c) above,calculatethecompany’sweightedaveragecostofcapital.

(4marks)

{e) Briefly explain the two conditions that would be necessary for the company touse its existingcompanyweightedaveragecostofcapital{WACC)asadiscountrateforanewprojectappraisal?

(4marks)

(Total 25marks)

[END OF THE ALTERNATIVE ASSESSMENT]

  

 
 

Present Value   Table

 

 

 

Year

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

 

1

0.990

0.980

0.971

0.962

0.952

0.943

0.935

0.926

0.917

0.909

 

2

0.980

0.961

0.943

0.925

0.907

0.890

0.873

0.857

0.842

0.826

 

3

0.971

0.942

0.915

0.889

0.864

0.840

0.816

0.794

0.772

0.751

 

4

0.961

0.924

0.888

0.855

0.823

0.792

0.763

0.735

0.708

0.683

 

5

0.951

0.906

0.863

0.822

0.784

0.747

0.713

0.681

0.650

0.621

 

6

0.942

0.888

0.837

0.790

0.746

0.705

0.666

0.630

0.596

0.564

 

7

0.933

0.871

0.813

0.760

0.711

0.665

0.623

0.583

0.547

0.513

 

8

0.923

0.853

0.789

0.731

0.677

0.627

0.582

0.540

0.502

0.467

 

9

0.914

0.837

0.766

0.703

0.645

0.592

0.544

0.500

0.460

0.424

 

10

0.905

0.820

0.744

0.676

0.614

0.558

0.508

0.463

0.422

0.386

 

 

 

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

 

1

0.901

0.893

0.885

0.877

0.870

0.862

0.855

0.847

0.840

0.833

 

2

0.812

0.797

0.783

0.769

0.756

0.743

0.731

0.718

0.706

0.694

 

3

0.731

0.712

0.693

0.675

0.658

0.641

0.624

0.609

0.593

0.579

 

4

0.659

0.636

0.613

0.592

0.572

0.552

0.534

0.516

0.499

0.482

 

5

0.593

0.567

0.543

0.519

0.497

0.476

0.456

0.437

0.419

0.402

 

6

0.535

0.507

0.480

0.456

0.432

0.410

0.390

0.370

0.352

0.335

 

7

0.482

0.452

0.425

0.400

0.376

0.354

0.333

0.314

0.296

0.279

 

8

0.434

0.404

0.376

0.351

0.327

0.305

0.285

0.266

0.249

0.233

 

9

0.391

0.361

0.333

0.308

0.284

0.263

0.243

0.225

0.209

0.194

 

10

0.352

0.322

0.295

0.270

0.247

0.227

0.208

0.191

0.176

0.162

 

 

 

21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

 

1

0.826

0.820

0.813

0.806

0.800

0.794

0.787

0.781

0.775

0.769

 

2

0.683

0.672

0.661

0.650

0.640

0.630

0.620

0.610

0.601

0.592

 

3

0.564

0.551

0.537

0.524

0.512

0.500

0.488

0.477

0.466

0.455

 

4

0.467

0.451

0.437

0.423

0.410

0.397

0.384

0.373

0.361

0.350

 

5

0.386

0.370

0.355

0.341

0.328

0.315

0.303

0.291

0.280

0.269

 

6

0.319

0.303

0.289

0.275

0.262

0.250

0.238

0.227

0.217

0.207

 

7

0.263

0.249

0.235

0.222

0.210

0.198

0.188

0.178

0.168

0.159

 

8

0.218

0.204

0.191

0.179

0.168

0.157

0.148

0.139

0.130

0.123

 

9

0.180

0.167

0.155

0.144

0.134

0.125

0.116

0.108

0.101

0.094

 

10

0.149

0.137

0.126

0.116

0.107

0.099

0.092

0.085

0.078

0.073