ASSIGNMENT (accounting and finance)

There are three parts – Part A (12.5 marks); Part B (12.5 marks) and Part C (10 marks)

Student work will be assessed in terms of the following criteria:

Effectiveness of communication –i.e. readability, legibility, neatness, completeness and presentation will be a minimum threshold requirement for all written work submitted for assessment.

Demonstrated understanding of the subject matter covered – This will be evidenced by the student’s ability to be analytical and the accuracy of submitted answers.

Note:

Certain aspects of these questions may require some assumptions to be made. Therefore, different answers are very acceptable. For ease of marking I would appreciate you specify these if you think it clarifies your decisions.

PART A:(12.5 marks)

Broun Ltd

Comparative Profit and Loss Statements
$000’s $000’s $000’s
2013 2014 2015

Sales 30000 25000 20000
Less Cost of Sales 19500 15500 12000
Gross Profit 10500 9500 8000
Operating Expenses* 9390 8425 7080
Operating profit before income tax 1110 1075 920
Income Tax Expense 510 500 420
Operating profit after income tax 600 575 500

Includes *Interest Expense 290 275 260
Dividends paid to Shareholders 90 155 135
Cash Dividend per share 2.1c 3.7c 5c

Market Price per share $1.15

Details of the Cost of Sales are as follows
$000’s $000’s $000’s
2013 2014 2015

Beginning Inventory 1000 1060 650
Plus Purchases 19560 15090 12330
Goods available for sale 20560 16150 12980
Less Ending Inventory 1060 650 980
Cost of Sales 19500 15500 12000

* Assume all sales and purchases are on credit.

Broun Ltd

Comparative Balance Sheets
$000’s $000’s $000’s
2013 2014 2015
Assets
Current Assets 1320 870 1200
Plant and Equipment (Net of Depreciation) 7080 6630 4800
Total Assets 8400 7500 6000

Liabilities
Current Liabilities 738 684 600
Non-Current Liabilities 1572 1236 1200
Total Liabilities 2310 1920 1800

Net Assets 6090 5580 4200

Shareholder’s Equity
Share Capital ($1 ordinary shares) 4200 4200 2700
Retained Profits 1890 1380 1500
Total Shareholder’s Equity 6090 5580 4200

Questions (Required)

Prepare common size comparative profit and loss accounts for the three-year period.(1.5 marks)
Prepare all relevant financial statement ratios for 2014 and 2015 (Cash Flow ratios are not required).(7 marks)
Comment on the significant trends and relationships revealed by your analytical computations. (3 marks)
Would you consider buying this company’s shares if they are now selling for $1.15 per share? Why?(1 mark)

PART B: (12.5 marks)

Ken Blow is considering going into business by opening a food store. He has found suitable premises. However, before the bank will grant him an overdraft and lending facility, he has been asked to draw up a cash budget for the first three months of trading (February, March and April, 2016).

Ken has $100 000 of his own money that he is able to invest into the business. He will need to rent his premises one month before he opens the store, and he will also have to have his stock (inventory) and his staff on hand two weeks before he opens the doors. He also has the following relevant information:

Expected sales for each of the first three months of trading are February – $75 000, March – $90000 and April – $110000 respectively. It is assumed that the sales will be even over each four-week period.

Staff costs are expected to be $1 500 per week; rent is $2 000 per week, payable one month in advance; electricity and phone are expected to be $500 per week, payable a month in arrears; insurance is $10 000 per annum payable a year in advance; equipment of $45 000 will need to be purchased when the store is first rented and will be depreciated, straight line, over ten (10) years with no residual value.

Ken is allowing a 25% mark up on all goods sold. As he is a new customer, all suppliers will require him to pay for goods within seven (7) days. Inventory is ordered three weeks before it is required and there will be a weekly delivery.

The bank is prepared to grant overdraft and lending facilities to the extent of $10 000, if the cash budget indicates that the business should be successful. Interest on the overdraft will be charged at 16% per annum. The bank is also prepared to lend Ken a long-term loan of $50000 with an interest rate of 12% per annum with interest to be paid quarterly. The long-term loan must be taken in full, whether or not Ken requires the whole amount (simple interest calculations only are required).

Ken further estimates that his weekly turnover in twelve (12) months’ time will be $175 000 per week.

Some assumptions you may consider

Assume 4 weeks to a month
Assume all sales are cash sales
Depreciation will not affect the cash budget

Loan

Assume $50,000 borrowed in first week of January (interest paid quarterly – 12 weeks later)

Wages

Paid weekly

Rent

Assume rent is paid weekly but payable one month in advance

Electricity / Phone

Assume electricity / phone required when office rented.

Assume paid monthly in arrears

Electricity / Phone will therefore need to be paid from week 1 in February

Stock

Needs to have stock on hand two weeks before opening

Questions (Required)

A cash budget covering all the information given until the end of April.(9.5 Marks)
Do you think the business will be successful, based on the forecasts? Give reasons for your answer.(1.5 Marks)
Given Ken’s estimation that the turnover will increase within twelve months, what other costs would you expect to increase? Why? (1.5 Marks)

PART C: (10 marks)

Questions (Required)

Calculate the Net Present Value and Internal Rate of Return relative to the purchase of a new widget making machine.

Machinecost $3,400,000
Useful life: 7 years
For tax purposes a 30 per cent reducing balance depreciation would be used.
Maintenance cost per annum: $75,000.
Maintenance technician salary per annum: $125,000
Operator’s salary: $90,000, plus 35 per cent on-costs.
Restructuring cost (First year only): $180,000.
Employee training costs are projected as follows:

First Year $35,000

Second Year $25,000

Third Year $10,000

Increase in working capital required: $60,000.
Salvage value: $75,000.
Manufacturing cost savings per annum: $1,200,000.
Sale of now obsolete equipment over the next two years.

Company cost of capital: 10%
Tax rate: 30%.

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Posted on May 23, 2016Author TutorCategories Question, Questions