Uploaded by Nirmani Rupasinghe

MAF605 - Aug 2022 Assignment

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ASSIGNMENT
AUGUST 2023
SUBJECT CODE
: MAF605
SUBJECT TITLE
: ACCOUNTING & FINANCE FOR MANAGERS
LEVEL
: MASTER
Matric No
:
INSTRUCTIONS TO CANDIDATES
INSTRUCTIONS TO STUDENTS
1) Plagiarism in all forms is forbidden. Students who submit plagiarized assignment will be penalized.
2) References MUST be included and taken from reliable sources. Please use the APA Referencing
3)
4)
Style and cite your work appropriately.
This assignment carries a 60% weightage toward final grade.
The submission date of this assignment is 31st of August 2023
QUESTION 1
(a) An accountant prepares a statement of financial position for a business. In this statement,
the equity of the owner was shown next to the liabilities. This confused the owner, who
argued: ‘My equity is my major asset and so should be shown as an asset on the statement
of financial position.’ How would you explain this misunderstanding to the owner?
(b) ‘The statement of financial position shows how much a business is worth.’ Do you agree
with this statement? Explain the reasons for your response.
(c) “When evaluating projects, we’re concerned with only the relevant incremental after-tax
cash flows. Therefore, because depreciation is a non-cash expense, we should ignore its
effects when evaluating projects.” Critically evaluate this statement.
(750 words – 30 marks)
QUESTION 2
Alpha Ltd and Beta Ltd are both wholesalers serving broadly the same market, but they seem to
take a different approach to it according to the following information:
Ratio
Alpha Ltd
Beta Ltd
Return on capital employed (ROCE)
20%
19%
Return on ordinary shareholders’ funds (ROSF)
30%
28%
The average settlement period for trade receivables
63 days
21 days
The average settlement period for trade payables
50 days
45 days
Gross profit margin
40%
15%
Operating profit margin
10%
10%
The average inventory turnover period
52 days
25 days
Required:
Describe what this information indicates about the differences in approach between the two
businesses. If one of them prides itself on customer service and one of them on competitive
prices, which do you think is which and why?
(750 words – 30 marks)
QUESTION 3
The capital budget is a summary of planned investments of assets that will last for more than a
year, and capital budgeting is the whole process of analyzing projects and deciding which ones to
accept. An important responsibility of a capital-budgeting analyst is determining which projects
or investments a firm should undertake.
Suppose you are a new capital-budgeting analyst for a company considering investments in the
eight projects listed in Exhibit 1. The Chief Executive Officer of your company has asked you to
prepare a detailed report, rank the projects and recommend the “four best” projects that the
company should accept. The CEO has further declared that the maximum capital budget of the
company as $8,000,000.
In this analysis, only the quantitative considerations are relevant. No other project characteristics
are deciding factors in the selection, except that management has determined that projects 7 and
8 are mutually exclusive.
All the projects require the same initial investment of $2 million. Moreover, all are believed to be
of the same risk class. The firm’s weighted average cost of capital has never been estimated. In
the past, analysts have simply assumed that 10% was an appropriate discount rate. However,
certain officers of the company have recently stated that the discount rate should be much higher.
The company has the following capital structure, which it considers to be optimal. The current tax
rate is 32%.
Capital structure
Debt capital
Preferred stock capital
Common equity capital
The cost of each source of finance is as follows:
The interest rate on the company’s debt (before tax)
The cost of preferred stocks
The cost of common equity
%
25%
10%
65%
%
10%
12%
14%
To stimulate your analysis, consider the following questions:
1. Can you rank the projects simply by inspecting the cash flows?
2. What criteria might you use to rank the projects? Which capital budget ranking methods
are better? Why?
3. What is the ranking you found by using capital budget ranking methods? Does this ranking
differ from the ranking obtained by simple/non-discounted capital budgeting techniques?
If yes, describe why.
4. Is it suitable to use the company analyst’s assumption of a 10% discount rate for
evaluations? If not, what discount rate should be used? Why?
5. What combination of projects maximizes shareholder wealth? How?
EXHIBIT 1 | Projects’ after-tax Net Cash Flows (US$ in thousands)
Project No
1
2
3
4
5
6
7
8
Initial Investment
(2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000)
Year 1
330
1,666
270
313
2,240
1,200
(350)
Year 2
330
334
300
313
900
(60)
Year 3
330
230
350
313
300
60
Year 4
330
395
313
190
350
Year 5
330
432
313
70
850
Year 6
330
440
313
1,450
Year 7
330
442
313
2,350
Year 8
1,400
444
313
Year 9
446
313
Year 10
448
313
Year 11
450
313
Year 12
451
313
Year 13
451
313
Year 14
452
313
Year 15
13,100 (2,000)
313
The sum of net
3,710
2,230 13,100
3,771
4,695
2,240
2,660
4,650
cash flow
Excess cash flow
1,710
230 11,100
1,771
2,695
240
660
2,650
over the
Investment
Assume all receipts and payments are occurring at the year-end to which they relate and ignore
inflation. Attach your workings to the analysis.
(1000 words – 40 marks)
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