CHALIMBANA UNIVERSITY

MBUS 5101: MANAGEMENT AND FINANCIAL ACCOUNTING

POSTGRADUATE-ASSIGNMENT ONE & TWO

Instructions

a) Answer all the questions in this assignment and all the question carry equal marks
b) You are expected to consult a broad and balanced source of information and you should have at
least a minimum of seven references. For this course, adopt Harvard reference style. For all
computation questions, citations may not be necessary.

c) PLAGIARISM is a crime, and it is prohibited in the university, and it is applied across faculties

d) For essay questions, credit will be given for:

i. Content: Knowledge of the topic, development of the answer and relevance to the
assigned topic.
ii. Organisation: Extent to which your ideas and reasoning are clearly stated and good
logical continuity of thought clearly expressed.
iii. Vocabulary & Language Use: Appropriate use of English words and constructions;
sentence construction, proper use of tenses, articles, nouns, spellings, punctuation
marks etc.
iv. Presentations: Legible handwriting, clear and clean presentation.
v. Structure: Good introduction, main body and conclusion.

e) DUE DATE:5TH SEPTEMBER,2022

QUESTION ONE

Mwaiseni stores is a profitable company which is financed by equity with a market value of ZMW 180
million and by debt with a market value of ZMW 45 million.

The company is considering two investment projects, as follows.

Project A

This project is an expansion of existing business costing ZMW 3·5 million, payable at the start of the
project, which will increase annual sales by 750,000 units. Information on unit selling price and costs is
as follows:

Selling price: ZMW 2·00 per unit (current price terms)

Selling costs: ZMW 0·04 per unit (current price terms)

Variable costs: ZMW 0·80 per unit (current price terms)

Selling price inflation and selling cost inflation are expected to be 5% per year and variable cost inflation
is expected to be 4% per year. Additional initial investment in working capital of ZMW 250,000 will also
be needed and this is expected to increase in line with general inflation.

Project B

This project is a diversification into a new business area that will cost ZMW 4 million. A company that
already operates in the new business area, ZCBC Co, has an equity beta of 1·5. ZCBC Co is financed
75% by equity with a market value of ZMW 90 million and 25% by debt with a market value of ZMW 30
million.

Other information

Mwaiseni Co has a nominal weighted average after-tax cost of capital of 10% and pays profit tax one
year in arrears at an annual rate of 30%. The company can claim capital allowances (tax-allowable
depreciation) on a 25% reducing balance basis on the initial investment in both projects.

Risk-free rate of return: 4%

Equity risk premium: 6%

General rate of inflation: 4·5% per year

Directors’ views on investment appraisal

The directors of Mwaiseni Co require that all investment projects should be evaluated using either
payback period or return on capital employed (accounting rate of return). The target payback period of
the company is two years and the target return on capital employed is 20%, which is the current return
on capital employed of Mwaiseni Co. A project is accepted if it satisfies either of these investment criteria.

The directors also require all investment projects to be evaluated over a four-year planning period,
ignoring any scrap value or working capital recovery, with a balancing allowance (if any) being claimed
at the end of the fourth year of operation.

Required:

a) Calculate the net present value of Project A and advise on its acceptability if the project were to
be appraised using this method.
b) Critically discuss the directors’ views on investment appraisal.
c) Calculate a project-specific cost of equity for Project B and explain the stages of your calculation.

[Total=25 marks]

QUESTION TWO

a) Discuss the differences between weak form, semi-strong form and strong form capital market
efficiency, and discuss the significance of the efficient market hypothesis (EMH) for the financial
manager.
b) Identify and explain sources of financing for corporations in Zambia
c) List and evaluate key stakeholders in company

[Total=25 marks]
QUESTION THREE

Bwalya Nelson and Masautso Phiri just graduated from Chalimbana University with A Master of Business
Administration (MBA)degree with major in education and minor Finance. They want to set up their own
finance consultancy company to help make finance information available to their would-be customers or
clients in the capital city of eastern province. The financial consultancy firm will play a key role in the
provision of financial information and strategic management in corporate organizations and other
institutions in the Chipata area. They know from independent investment research that finance
businesses are striving and very profitable in the city of Lusaka where they want to locate the business.
Nelson and Phiri know that before they can invest their time and other resources in the project, they must
obtain financing, which means that they must raise money to pay for the investment cost and other
operating expenses. Because the company might not be listed in any capital market right away, they
might not be able to raise equity funding publicly. Therefore, they are considering raising long term capital
from various sources including angel investors, venture capital market, bank/finance companyy’s long-
term loans, crowd funding, and initial public offerings (IPOs). They learnt in corporate finance course they
took two years ago the advantages and disadvantages of different forms of business organizations
(mainly sole proprietorship, partnership, limited liability, and corporation). They are worried about the
legal concept of limited liability and how it will affect their personal fortunes in the future in case the
business fails. They are not very sure which form of business organization to set up to protect their
personal liability and access huge funding. Therefore, they are considering a partnership, a limited
liability, or a corporation. A cash budget they prepared shows that ZMW 5 million seed money would be
needed to hire programmers, buy computers, rent an office space, promote, and market the business as
well as to meet other business development expenditures. They have agreed to share profits and losses
equally if they decide to form a limited partnership. The general partner will, however, be paid a fixed
salary of ZMW 5,000 per month before taxes and other payroll deductions.

In order to make good and right decision, Bwalya and Phiri have approached you to help them understand
the advantages and disadvantages of the various forms of business organizations and possible sources
of funding for the business.

Required

a) Discuss 2 advantages and 2 disadvantages of each of the following forms of business organization
to Bwalya and Phiri:

o partnership,
 o limited liability, and

o corporation

b) Ultimately, what form of business organization would you recommend for Bwalya and Phiri to
consider and why?

c) Based on your recommendation above, explain to Bwalya and Phiri if the following sources of raising
long-term capital are appropriate for them:

o angel investors (angels)

o crowdfunding

o venture capital

o initial public offering, and

o long-term debt

d) As the firm plans regarding the shareholders’ investments and ways of increasing the value of the
firm, senior finance Manager engages in making the financial decisions.
Required:
Identify and discuss three main investment decision that senior finance managers could present to
the board meeting.
[Total=25 marks]
QUESTION FOUR

Statements of Financial Position as at 31 December 2020 2021

2021 2022

ZMW ZMW ZMW ZMW

ASSETS

Non-current assets 1,341 826

Current assets Inventory 1,006 871

Receivables 948 708

Cash 360 100

2,314 1,679

3,655 2,505

EQUITY AND LIABILITIES

Share capital and reserves 2,190 1,401

Non-current liabilities 500 400

Current liabilities 965 704

3,655 2,505
Income statement for the year ended 31 December 2021 and 2021

ZMW ZMW

Revenue 7,180 5,435

Cost of sales 5,385 4,212

Gross profit 1,795 1,223

Distribution costs 335 254

Administrative expenses 670 507

Profit from operations 790 462

Finance costs 50 52

Profit before taxation 740 410

Company tax expense 262 144

Profit after taxation 478 266

a) Calculate the profitability, liquidity, and gearing ratios.

b) Based on your calculations, write a management report to the board, explaining the position of
the company based on you calculation
[Total=25 marks)
QUESTION FIVE

a) The New Dawn Government has secured a new project in Mansa and the total l cost is ZMW
80,000,000.00 and it is expected to last 4 years. At the end of 4 years it is expected to have a scrap
value of ZMW 10,000,000.00.
The project is expected to generate operating cash flows Zambian Kwacha each year as follows:

Year 1 20,000,000.00

Year 2 30,000,000.00

Year 3 40,000,000.00

Year 4 10,000,000.00

Assume that all operating cash flows occur at the ends of years.

i. If interest is 10% p.a., calculate the Net Present Value of the project and state your decision as
to whether or not we should invest.
ii. Calculate the net present value at interest of 15% and hence estimate the Internal Rate of
Return of the project.
iii. Calculate the payback period and discounted payback period
iv. Identify the objectives of working capital management and discuss the central role of working
capital management in financial management.
[Total=25 marks]
QUESTION SIX

Louis started a new business on 1 January 2021. The following transactions took place during his first
month in business.

2021

1.1 Edward commenced business with ZMW 10,000 in cash.

3.1 He paid ZMW 8000 of the cash into a business bank account.

6.1 He bought a van on credit from Perkin’s garage for ZMW 3000.

9.1 Edward rented shop premises for ZMW 1000 per quarter; he paid for the first quarter
immediately by cheque.

12.1 He bought goods on credit from Roy Limited for ZMW 4000.

15.1 He paid shop expenses amounting to ZMW 1500 by cheque.

18.1 Edward sold goods on credit to Scott and Company for ZMW 3000.

21.1 He settled Perkin’s account by cheque.

24.1 Edward received a cheque from Scott and Company for ZMW 2000; this cheque was
paid immediately into the bank.

27.1 Edward sent a cheque to Roy Limited for ZMW 500.

31.1 Goods costing ZMW 3000 were purchased from Roy Limited on credit.

31.1 Cash sales for the month amounted to ZMW 2000.

Required:

a) Enter the above transactions in appropriate ledger accounts, balance off each account as at 31
January 2021, and bring down the balances as at that date.
b) Extract a trial balance as at 31 January 2021
c) Identify and explain the elements of financial statements
d) Explain the qualitative characteristics of good accounting information
e) List and briefly describe the steps involved in the process of accounting
f) Identify and explain users of accounting information and why they need the information
[Total=25 marks]
QUESTION SEVEN

From the following trial balance of G Still, draw up a trading and profit and loss account for the year ended
30 September 20X9, and a balance sheet as at that date.
Debit Credit
ZMW ZMW
Stock 1 October 20X8 41,600
Carriage outwards 2,100
Carriage inwards 3,700
Returns inwards 1,540
Returns outwards 3,410
Purchases 188,430
Sales 380,400
Salaries and wages 61,400
Warehouse rent 3,700
Insurance 1,356
Motor expenses 1,910
Office expenses 412
Lighting and heating expenses 894
General expenses 245
Premises 92,000
Motor vehicles 13,400
Fixtures and fittings 1,900
Debtors 42,560
Creditors 31,600
Cash at bank 5,106
Drawings 22,000
Capital 68,843
484,253 484,253

Stock at 30 September 20X9 was ZMW 44,780

[Total=25 marks]
QUESTION EIGHT

The following Trial Balance was extracted from the books of Kalusa Investment Plc at 31 December 2019:

Dr Cr
ZMW ’000 ZMW ’000
Sales revenue 1,285
10% debentures 2023 125
Payables 159
Bank Overdraft 62
Land at valuation 248
Plant and machinery at cost 175
- Depreciation to 1 January 2018 10
Motor vans at cost 110
- Depreciation to 1 January 2018 15
Patents and trademarks 100
Inventory at 1 January 2018 105
Receivables 438
Cash in hand 1
Administration expenses 132
Selling and distribution expenses 146
Dividends paid 41
Debenture interest 6
Purchases 873
Ordinary shares of K1 each 400
5% preference shares 100
Share premium 50
Revaluation reserve 68
Retained earnings at 1 January 2018 95
Provision for doubtful debts 6
2,375 2,375
The following additional information at 31 December 2019 is available:

a) The allowance for receivables is to be adjusted to 2% of the receivables figure.

b) Income tax on the current year profits is estimated at ZMW 10,000.
c) Depreciation at 5% reducing balance method of plant and machinery is to be provided.
d) The Motor vans are to be depreciated at 10% per annum straight line.
e) Debenture interest amounting to ZMW 6,000 was paid by 28 November, 2019. No accrual has
been made.
f) Closing inventory at cost of ZMW 97,000 was recorded.
g) Prepaid selling and delivery expenses amount to ZMW 7,000.
h) Accrued administration expenses amount to ZMW 8,500, while ZMW 6,000 was prepaid.
i) The land is to be revalued at ZMW 275,000.

Required:

1. Prepare an income statement for the year ended 31 December 2019.

2. Prepare a statement of financial position as at 31 December 2019.
3. Identify and explain the main branches of accounting
4. List and explain books of prime entries
[Total=25 marks]
QUESTION NINE

An accounting professor at Trade Kings Limited is interested in the relationship between hours spent
reconciling books of accounts and total number of months in a year. Data collected on 10 students who
took the course last year is shown in the table below.

hours spent reconciling books of accounts total number of months in a year

20 21
20 19
40 15
30 16
60 14
40 17

Required

1. Develop an estimated least square equation showing how total number of months in a year is
related to hours spend on reconciling books of accounts.
2. Predict the total number of months in a year for 90 days spent reconciling books of accounts
3. Find the coefficient of determination and interpret for the data.
4. List and discuss types of cost classification
[Total= 25 marks]
QUESTION THREE

SAVENDA electronics has employed maintenance engineers to keep the equipment running in peak
condition at its production company located in M-Phase in Lusaka. Over the past eight months,
SAVENDA incurred the following maintenance cost for these engineers. Plant activity is best measured
by direct labour hours.

Month Direct Labour Hours Maintenance Cost

ZMW ‘000 ZMW’000

January 1,700 14,300

February 1,900 15,200

March 1,800 16,700

April 1,600 14,000

May 1,500 14,300

June 1,300 13,000

July 1,100 12,800

August 1,400 14,200

Required:

a) Using the high-low method and based on direct labour hours, determine the fixed and
variable components of the maintenance costs.
b) Describe the relationship between the output and costs in the form of a linear equation
c) Discuss four advantages and disadvantages of High-Low Method
d) Compare and contrast cost classification techniques in the name of high low method
and least square method
[Total=25 Marks]
IMPORTANT VERBS

Below is a list of important verbs that can be a part of essay questions in the corporate finance exam.
There is also an explanation of the meaning of each part as well as a key tip.

Define

Actual meaning: Give the meaning; usually a meaning specific to the course or subject.

Key tip: Explain the exact meaning because usually definitions are short.

Describe

Actual meaning: Give a detailed account or key features. List characteristics, qualities and parts.

Key tip: Make a picture with words; identification is not sufficient.

Discuss

Actual meaning: Consider and debate/argue about the pros and cons of an issue. Examine in-detail by
using arguments in favour and/or against.

Key tip: Write about any conflict, compare, and contrast.

Evaluate

Actual meaning: Determine the scenario in the light of the arguments for and against.

Key tip: Mention evidence/case/point/ issue to support evaluation. Give an opinion.

Explain

Actual meaning: Make an idea clear. Show logically how a concept is developed. Give the reason for an
event.

Key tip: Don’t just provide a list of points, add in some explanation of the points you’re discussing.

Analyse

Actual meaning: Break into separate parts and discuss, examine, or interpret each part.
Key tip: Give reasons for the current situation or what has happened.

Apply

Actual meaning: To judge the worth, importance, evaluate or estimate the nature, quality, ability, extent,
or significance
Key tip: Determine the strengths/weaknesses/importance/ significance/ability to contribute.

Calculate

Actual meaning: To determine by computation, to make an estimate of; evaluate, to perform a

mathematical process.

Key tip: Provide description along with numerical calculations.

Comment

Actual meaning: To remark or express an opinion

Key tip: Your answer should include an explanation, illustration, or criticism.

Compare

Actual meaning: Examine two or more things to identify similarities and differences

Key tip: Clearly explain the resemblances or differences

Conclusion / Conclude

Actual meaning: The result or outcome of an act or process or event, final arrangement, or settlement.
Key tip: End your answer well, with a clear decision and NOT duplicating what has been written in your
earlier discussions. Provide your own standpoint

Criticize

Actual meaning: Present the weaknesses/ problems; evaluate comparative worth. Do not explain the
situation. Instead, analyse it.
Key tip: Criticism often involves analysis.

Illustrate

Actual meaning: Give concrete examples. Explain clearly by using comparisons or examples.

Key tip: Add in some description.

Interpret

Actual meaning: Comment on, give examples, describe relationships.

Key tip: Include explanation and evaluation (give an opinion).

List

Actual meaning: List several ideas, aspects, events, things, qualities, reasons, etc

Key tip: Don’t discuss, just make a list.

Outline

Actual meaning: Describe main ideas, characteristics, or events.

Key tip: Briefly explain the highlighted points.

Recommend

Actual meaning: Advice on the appropriate actions to pursue in terms that the recipient will understand

Key tip: Give advice or counsel.

Relate

Actual meaning: Show the connections between ideas or events

Key tip: Relate to real time examples.

State

Actual meaning: Explain precisely.

Key tip: Focus on the exact point.

Summarise

Actual meaning: Give a brief, condensed account. Include conclusions. Avoid unnecessary details

Key tip: Remember to conclude your explanation.