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)