FM202 Revision Guide Semester 2, 2022

Question 1

Two years ago you invested in a start-up called Coffee Express. Today, Coffee Express has
become one of the popular coffee hangout places in Suva. Due to popular demand, you are
considering opening an outlet at the other end of the city. You plan to have an investment period
of 5 years. After a thorough feasibility study, you gather the following information:

 Leasing a shop would involve payment of $54,000 per year for 5 years.

 Another shop, identical to the shop being offered on lease and located just next door, is up for
sale and the current owners are asking a cash price of $250,000. To consider this option, you
would need to obtain a SME loan under Coffee Express for the full amount at 5% per annum
with annual ordinary repayments. Interest is applied using reducing balance method.

 Other costs associated with buying the shop would be per year maintenance and security costs
of $2,000 and $1,500 respectively.

 As per local tax laws, the applicable tax rate is 20% and straight-line depreciation is allowed.
 After-tax cost of capital would be 4%

Required:

1. If you consider buying the shop, prepare an amortization table (using the format below)
to show repayment of SME loan over the 5 years.
2. Calculate the present total cost of buying the shop.
3. Calculate the present total cost of leasing the shop.
4. Based on (1) above, what would be your final decision?

Question 2

You are the owner of the medium enterprise called Fresh Fish Supplies which you started up in
2016. After being in the business for two successful years, you are now considering writing up a
business plan to source some additional funding for a new fishing vessel. From the records
maintained in 2017, you were able to construct the following statements according to your best
estimates. Your estimated 2017 Sales is about $205,227 while your Total Assets is estimated to
be $109,219. As part of your financials in the business plan, you plan to include some key ratios
to support your justification for funding.
Calculate the following key ratios and provide an explanation as to why this ratio should be part
of your financials in the business plan.

a. Current ratio

b. Total Asset Turnover

c. Debt-Equity ratio d. Profit margin

e. Return on Equity

Question 3

You are the owner of Sand & Gravel Supplies. Due to a boom in the construction industry the
demand for your supplies has increased considerably. As a result, you are considering buying or
leasing another truck to add to your current fleet of 2 trucks. You can lease a truck for 4 years at
a cost of $2,500 monthly. Alternatively, you can buy a truck using cash at a cost of $80,000, with
annual maintenance expenses of $10,000. The truck will be sold at the end of 4 years for $20,000
after tax. You are expecting a return of 10% on your investment.

a. Calculate the cost of

a. Leasing the truck

b. Buying the truck.

b. Based on your calculations in (a) above, explain which option you would recommend
Question 4

Shiwal is the sole owner of Best Bites restaurant currently operating in the USP Dining Hall. The
business has seen growth over its last 2 years of operation and as a result there is a golden
opportunity for Shiwal to open up another restaurant in Suva City. However, Shiwal is facing
financial constraints and will need to finance part of his investment from a bank loan. After
doing market search, he finds that Westpac Bank offers him the best interest rate of 9.5%,
compounded monthly. Shiwal is looking to take a loan of $25,000 for five months. Periodic loan
repayments must be made at the end of each month, including the first month. Shiwal needs your
assistance in constructing the amortization table below.