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
- Students are supposed to answer ALL sections of the alternative assessment
- The use of financial calculators is allowed for this exam (in line with ACCA regulations)
- All workings must be clearly shown in the answer sheet
- 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
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