UNIVERSITY OF GLOUCESTERSHIRE BUSINESS SCHOOL MB466: Managing Finance and Accounting Time allowed: 3 hours ______________________________________________________________ INSTRUCTIONS TO CANDIDATES

Answer ANY 3 questions from the 6 presented. Please start each question in a new answer book, and indicate clearly on each book which question you are answering. You are reminded to enter your student number on the examination paper cover sheet. THIS IS A CLOSED BOOK EXAMINATION All questions carry equal marks. The examination accounts for 100% of the module assessment. You may use a calculator (not programmable)

Question 1
Below is Baynhall Ltd.’s income statement and balance sheet for the current year, and a projection for next year.
Balance Sheet Fixed assets Accum Depreciation Stocks Debtors Cash Creditors 104 208 0 313 52 260 1760 880 880 100 780 880 year+1 2944 1294 1650 115 301 -32 384 57 327 1977 988 988 100 888 988 Profit and Loss Revenue cost of good sold Gross profit Administrative expenses Depreciation Earnings before interest and tax interest paid Tax at 50% Net profit for distribution Dividends Profit retained 400 250 650 600 88 512 256 256 154 102 256 year+1 2750 1375 1375 440 294 734 641 99 542 271 271 163 108 271

2500 1000 1500

2500 1250 1250

Long term borrowing

Owners capital Profit reserves

You are required to:(i) Using no more than 10 ratios, assess the potential performance, efficiency, risk, and liquidity of this business over the next twelve months, noting the basis on which you have made your judgement in each case (20 marks) (ii) what further information you would require in order to give a more complete analysis? (7 marks) (iii) discuss the extent to which financial reports can provide relevant information to decision-makers both within and outside the firm. (7 marks)


Question 2 Jonas Ltd, a small company in the light engineering business, is reviewing the rate of return that it should use in the appraisal of a new capital investment project. Its industry is highly competitive and it has one major competitor in its dominant line of business from which it derives two-thirds of its revenue. Its competitor’s beta is 1.9. The other third of its activity is in a new area of machine tool development. The beta for that sector is quoted by the London Business School Risk Management Service as 1.4. The return on a 90-day Treasury Bill is 4.6 % per annum and the current Equity Risk Premium is 3.5 % for the UK. Jonas’ market gearing is in line with the industry norms at 20 % (debt to debt plus equity). The company pays the bank base plus 2 % p.a. on its borrowing. Current base rate is 4.5 % p.a. Debt interest is tax-deductible and the current rate of corporation tax is 30 %. As part of its capital expansion programme Jonas is contemplating taking on a further £5 million of borrowing which will lift its gearing ratio to 45 %. This additional gearing is likely to raise its cost of debt capital to base plus 2.5 % p.a. and raise its beta to 1.85. You are required: (i) To estimate the company’s cost of equity capital using the capital asset pricing model (10 marks) (ii) To calculate its current cost of capital both before and after taking out the additional borrowing (10 marks) (iii) To note any assumptions you have made in your analysis (5 marks) (iv) To discuss how you might refine your cost of capital calculation if you had more information at your disposal (9 marks)


Question 3 Apple Press Ltd., a new business which cold-presses apple juice, has completed its first six months trading from January 1st to 30th June. The summarised monthly cash account is as follows:Dec. Jan Feb May June March April Cash received from customers 12100 26950 29645 33600 46500 52300 Cost of sales 7260 16170 17800 21200 27900 33100 Gross Surplus 4840 10780 11845 12400 18600 19200 Marketing and distribution -4700 -2900 -3250 -3640 -4070 -4500 General administration -2200 -2250 -2700 -3890 -6500 -7600 Operating surplus -2060 5630 5895 4870 8030 7100 Purchase of opening inventory Equipment and fit out Capital introduced Bank loan Local start up grant Cash flow -8675 -18600 12000 12000 -3275 -2060 5630 5000 10895 4870 8030 7100

The following information is also relevant: 1. Its sales in June were £62,400, of which 10 days sales were still unpaid for at the month-end. 2. Its cost of sales was 62 % of turnover over the first six months. 3. There were no outstanding marketing and distribution costs at the end of June. However the general administration costs need to be adjusted for the following items that are not shown above:a. £1,200 was unpaid at the end of the month b. The equipment and fit-out costs are to be depreciated over a 6-year life (straight line) 4. Interest on the bank loan accrues on a monthly basis at 8 % per annum 5. Interest on any overdraft accrues at 1.5 % of the outstanding balance at each monthend. 6. Tax accrues at the small business rate of 10 % per annum [NB: capital allowances may be ignored]. 7. The firm has been granted a three-month rent holiday on its business premises. It paid its first rent in April. There was no rent outstanding at the end of June. 8. Inventory at the end of June was counted at £10,500. 9. The start-up grant is not repayable. You are required to: (i) Prepare a budgeted income statement and balance sheet for the period January 1st to June 30th (16 marks) (ii) Calculate and explain six ratios which best demonstrate the performance, risk and liquidity of this business. (9 marks) (iii) Provide a short written summary of the key issues that the owner of this business should bear in mind when running the business. (9 marks)


Question 4 Bernardo Ltd, a construction company, is considering a short-term contract which would require just 3 months to complete. It currently has a very full order book and there is a shortage of skilled labour in the construction industry. Taking the new work would entail the redeployment of part of the company’s regular workforce and the use of overtime working to complete the job. Bernardo’s current average labour cost per person is £15,000 per year (basic) plus £4,000 of on-costs (social security plus a contribution to personal pensions). The company costs each day at double-time (basic plus on-costs) when setting its minimum price for negotiation purposes. This job would entail the redeployment of eight men for 100 days, of which 20 days would be on overtime rates of time-and-a-quarter. The basic working year is 240 days. The redeployment of the men to this job will mean that other work will be foregone which would have earned a contribution of £150,000 (after charging the direct cost of labour). You are required: (i) To estimate the opportunity cost of labour as an average day rate and in total for this project noting any assumptions that you have made (15 marks) (ii) Given that materials and other direct costs are 10 % of total labour cost, calculate the minimum price that should be quoted for this contract (9 marks) (iii) Discuss the alternative approaches to labour costing that a company could employ in this situation and the relative advantages and disadvantages of the alternatives compared with the method described under (i) above (10 marks)


Question 5 Assuming that a company has identified its cost of capital, the net present value of a project provides us with an estimate of the value added to the firm by its decision to undertake a given capital investment. However, a number of other capital investment appraisal techniques are available which, whilst being theoretically inferior to the net present value model, can provide useful additional information for management in situations where the assumptions of the model are not perfectly realised. Describe the usefulness of these various techniques, and the extent to which they contradict the proposition that it is the role of management to maximise shareholder value. (34 marks)


Question 6 Activity-based costing is a system of costing which has grown in popularity over recent years. Advocates of the method argue that it delivers superior product costs that more accurately reflect the underlying opportunity costs of production. Furthermore, they argue that it also helps a firm to control complexity in its operations. To what extent do you agree with this, and what are the likely benefits and costs of implementing such a system in a small business of less than £20 million turnover per annum? (34 marks)


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