COURSE TITLE : DIPLOMA IN BUSINESS ADMINISTRATION
- (ACCOUNTING & FINANCE)
- (BANKING & FINANCE)
MODULE TITLE : FINANCIAL MANAGEMENT
EXAM DATE : 25 SEPTEMBER 2017
ANSWER ALL QUESTIONS (25 marks each)
Write your answers in the answer booklet provided, starting your answer to each question on a new page. Number your answers according to the question number, and also enter these numbers on the front of the answer booklet.
Question 1
Curly Ramen Pte Ltd is a factory that manufactures instant noodles. The company has completed a research exercise amounting to $5,200 to improve its production process. Due to the outcome of the research, it is now considering purchasing new machines to replace its older machines.
The new machines will cost $290,000 altogether, and incur an additional installation expense of $10,000. The old machines can be sold now for a proceed of $51,000, but required a disposal fee of $1,000.
The table below shows the cash revenue and expenses for the existing machines:
|
Year
|
Cash Revenue
|
Cash Expenses
|
|
1
|
300,000
|
200,000
|
|
2
|
400,000
|
320,000
|
|
3
|
500,000
|
440,000
|
The cost of capital for the company is 4%.
Required:
a. Calculate the initial investment for the proposed machines. (4 marks)
b. It is estimated that the new machines are expected to increase cash revenue by 35% and expenses by 10% respectively. Calculate the following:
i. Operating cash inflows for the existing machines. (3 marks)
ii. Operating cash inflows for the proposed new machines. (3 marks)
iii. Incremental cash flows for the project. (3 marks)
c. i. Calculate the Net Present Value for the proposed project. (5 marks)
ii. Should the company continue to operate the old machine or purchase the new machine? State your reason. (2 marks)
d. i. Explain what is sunk cost and it’s relevance to investment decisions. (2 marks)
ii. Identify a sunk cost from the case above. (1 mark)
e. If the Internal Rate of Return (IRR) for the project is 9%, should the company accept or reject the project solely based on the IRR technique? State your reason. (2 marks)
Question 2
a. (i) Costlow Ltd. issued a 25-year, 6% coupon interest rate, $1,000 par value bond
that pays interest annually. The required return is 4%. Compute the value of the bond. (5 marks)
(ii) Another corporation Laitley Ltd, also issued bonds but did this with 8% coupon rate. What could be the reasons Laitley issued with higher coupon rates? (4 marks)
b. Sulley Mikey Ltd. paid a dividend of $5.60 per share last year (D0). The
dividends are expected to grow at a constant rate of 3% per year. The current required return for the stock is 8%. Calculate the value of the common stock. (5 marks)
c. Corporate tax rate is at 40%. Information on the company’s debt, preferred stock and common stock are as follows:
Debt: The company can issue bonds at a yield to maturity of 3%.
Preferred Stock: The company can sell 4.8% preferred stock at its $100 per share par-value. Flotation costs are $5 per share.
Common Stock: Price per share is currently $35. Dividends are projected at $2 per share next year with a dividend growth rate of 2.5%.
i. Calculate the cost of debt. (2 marks)
ii. Calculate the cost of preferred shares. (3 marks)
iii. Calculate the cost of common stock. (3 marks)
iv. The capital structure of the firm is 20% debt, 15% preferred stock and 65% common stock. Calculate the weighted average cost of capital (WACC). (3 marks)
Question 3
a. The average payment period and average collection period for Augustro Inc. are
20 days and 40 days, respectively. The firm has an inventory turnaround of 5 times a year. The firm’s annual sales are approximately $5 million. Assume that there is a 365-day year.
i. Calculate the firm’s operating cycle and cash conversion cycle. (5 marks)
ii. How much resources are required to support the firm’s cash conversion cycle? (3 marks)
b. Livenest Inc uses 12,000 units ofa product per year. The demand rate is constant. The ordering cost of the item is $40 per order, and the carrying cost is $6 per unit per year.
i. Calculate the EOQ. (5 marks)
ii. Calculate the ordering cost, carrying cost and total cost of inventory ifthe company orders with EOQ. (7 marks)
c. Dellys Inc. uses 3,500 units ofa product per year. It takes 7 days for the company to receive the item after it has placed an order. The company wants to maintain a safety stock of 30 units. Determine the reorder point. Assume that there is a 250-day year. (5 marks)
Question 4
a. Describe the five steps in planning personal financial affairs. (10 marks)
b. Mr Tony and wife have collected their personal income and expense information for the year 2016 as follows:
$
Mr Tony's Salary 25,000
Mrs Tony's Salary 8,000
Bonuses 6,000
Interest income 300
Housing expense 23,200
Food 6,000
Medical expenses 500
Vacation 8,500
Taxes 1,300
i. Prepare a personal income and expense statement for the period ended 31 December 2016 for Tony’s family. (9 marks)
ii. Based on 2016 statement:
a. Briefly comment on the financial health of the family. (2 marks)
b. Suggest ways to improve the financial health for the family. (2 marks)
iii. Name one other personal financial statement and briefly explain the content of the statement. (2 marks)