You are on page 1of 3

QUESTION 1

The following information has been extracted from the books of Magumede Ltd for the year
ended 31December 2010:

Magumede Ltd, Trial Balance as at 31 December 2010


$000 $000
Issued and paid-up capital:
Ordinary shares 1 000
8% Preference shares 1 000
Share premium account 100
Profit and loss balance at 1 January 2010 5
Premises (at cost) 1 800
Equipment, Machinery (at cost) 650
Motor vehicles (at cost) 450
Investments 600
Provision for depreciation at 1 January 2010:
Premises 20
Equipment, Machinery 140
Motor vehicles 110
Debtors, Creditors 280 50
Bank and cash balances 330
Prepayments, Accruals 5 10
Bank loan (2020) 123
Purchases, Sales 1 200 3 500
Stock at 1 January 2010 85
Sales and distribution costs:
Sales salaries 85
Warehouse costs 150
Advertising, Publicity 250
Motor expenses 150
Administration expenses:
Office salaries 80
General overheads 255
Rates, Insurance 15
Heat and Light 23
Interest paid 60
Dividends received 10
Reserves 400
6 468 6 468

Other information as on 31 December 2010:


1. Stock is valued at $65 000.
2) Depreciation charges for the year:
Equipment, Machinery $230 000.
Motor vehicles $300 000.
3) The board of directors recommended that the preference shareholders be paid
their dividend and that 10% should be provided for ordinary share dividends.
4) A sum of $200 000 is to be set aside for corporation tax and $300 000 is to be
transferred to reserves

Required:

Prepare the following statements for Magumede Ltd for the year ending 31December 2010:

a) Statement of Comprehensive Income [11]

b) Statement of Changes in Equity [4]

c) Statement of Financial Position . [10]

QUESTION 2

A company has to choose between two projects both of which involve an investment of
£20 000. The current cost of capital is 10%. The net cash inflows of the projects are:
______________________________________________________
Year Project A Project B
$ $
1 7 000 14 000
2 7 000 8 000
3 7 000 2 000
4 7 000 2 000
______________________________________________________

Required:

For each Project calculate the following:

i) Payback Period ……………………. ………………………… [2]


ii) Discounted Payback Period ………………………………….. [6]
iii) Net Present value (NPV)..…………………………………….. [3]
iv) Profitability Index (P.I.) ……………………………………… [2]
v) Internal Rate of Return (IRR) ………………. ……………….. [6]
vi) Modified Internal Rate of Return……………………………… [6]
QUESTION 3

You are interested in forming a portfolio based on two securities with the following
characteristics:

Parameter Asset A Asset B


Expected return 24% 36%
Standard deviation 50% 80%

The correlation coefficient between A and B is 0.125.

Required:

a) Calculate the expected return and the standard deviation for the equally weighted
portfolio. [13]

b) Would an investor choose to invest in this portfolio or invest in a single security? [7]

c) What other considerations should be taken into account when deciding on portfolio
construction? [5]