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MSlNG007: ENTREPRENEURIAL FINANCE

SAMPLE QUESTIONS FOR EXAMINATION PAPER

2011-12 Note: we await confirmation from external examiner of breakdown of marks.

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MSlNG007: Entrepreneurial Finance

SECTION A

Section A consists of ONE (l ) compulsory question. Question 1 (50 or 60 marks)


You are considering setting up a limited liability business called Watch & Date, an online dating service. Your funders would require annuar returns of 10%.

Pierre has investigated a range of matters and compired the following:

1.

The project would require up-front initial investment of f200,000 in lr equipment. The company already has these funds in its bank account. The project would have a likely operational life of 3 years; at the end of year 3, the equipment would be sold for its then book value of f20,000. The
equipment would be depreciated (straight line) over three years. ln year 1, cash sales revenues would be derived from customers accessing

2.

3.

the service on-line. Each customer would pay f 1,000. In year 1 2oo customers would use the service, with customers increasing in year 2 by 100, and in year 3 by a further 100.

4-

The project would require the use of specialist software costing a fixed annual payment of f20,000 plus 20 for each customer using the agency.

5. Annual staff salaries would be f 100,000. 6. On day 1 of year 1, you would acquire a three year lease oon premises for an
'up-front' payment of t36,000.

7. lnsurance costs would be f2,000 each year. 8. Marketing costs would be 2,000 each year. 9. Computer consumables would cost 20 for each customer.
10. A government scheme would see no tax payable on the profits.

CONTINUED

Required
Using the details shown above:

a) b)

Show the projected lncome Statement (Profit Statement) for Year 1. (As it is a service business there is no Gross profit.) (10 marks) For year 1, calculate the Break-Even Point and Margin of Safety in terms of customer numbers and sales revenues. Round down or up, as appropriate, to

MSlNG007:SAMPLE PAPER 201 1 -12

MSlNG007: Entrepreneurial Finance

nearest whole customer for customer numbers, and to the nearest

f for sales

values.
c)

(10 marks)

Undertake an investment appraisal for the proposed project. For the purposes of the apprasal assume the investment in the new equipment, and the purchase of the three year lease, are made before the first year of operations. Calculate:

i)
ii)

the non-discounted Payback period

the Net Present Value.

Round your calculations to the nearest

for NPV, and to the nearest day for


(30 marks)

Payback.
d)
advisory

Looking back over your calculations for a), b), and c) provide appropriate

comments

(10 marks)

Discount tables are shown at the end of this examination paper.

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MSlNG007:SAMPLE PAPER 201 1 -12

MSlNG007: Entrepreneurial Finance

SECTION B

section B consists of FouR (4) questions, from which you must answer ANy rwo (2). Each question in section B is worth rwENTy or TWENW FvE (20 or 25)
marks.

lf you answer more than TWO (2) questions, only the first answers relating to this section will be marked. Question 2 (20 or 25 marks)
Explain and illustrate how you would set about valuation of a business. ln so doing,

identify key

issues

e0 or 25 marks)

Question 3 (20 or 25 marks)


Below are shown the abbreviated financial statements for the latest financial year of Floater Limited.

ABBREVIATED INCOME STATEMENT

Floater Ltd.

t000
Credit sales
Cost of Sales 55,000 11,000 10,000 2,000 2,500 5,000 7,500 5,000 12,000

Staff costs
Rent Power

Various other expenses


Depreciation

Loan interest To Retained earnings ABBREVIATED BALANCE SHEET

Year

f000
Non-current assets at net book value lnventories 25,000 1,000 10,000 15,500 1,500 15,000 25,000

Trade receivables
Bank

Trade payables for suppliers Bank Loan (repayable in 2 years) Owner's Capital invested (with nominal share value: f 1 per share, and market value at year of f0.50 per share)
Retained earnings
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CONTINUED

10,000

MSlNG007: Entrepreneurial Finance

Using the information shown above:

a)

calculate the following ratios for each of the two years, using year end figures where appropriate: Asset Turnover, operating profit Margin, current, Acid Test, Trade Receivabres days, Trade payabres days, rnventory days, Gearing (Leverage). Eps, pE. use year-end figures where appropriate
average

figures.

and not

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b) calculate for each company

c)

the cash conversion cycre. Comment on the limitations implicit in the use of ratios when using them to assist in the appraisar of one or more businesses you are considering investing in, or divesting from.

Question 4 (20 or 25 marks) Required comment criticaily on the proposition that non-financiar experts do not fuily understand that the calculation of financial figures used in measuring profit and loss, and in valuing assets and liabilities is based on a framework involving judgement rather than scientific formurae. ilrustrate your comments
appropriatery.

(20 or 25 marks)

Question 5 (20 or 25 marks) Required

a)
b)

ldentify and comment critically on the factors potential a funder of a new small business would take account of. ldentify potential sources of funding for small businesses and comment comparatively on their characteristics. ldentify and discuss critically the issues to be taken account of in deciding whether to incorporate a business.

c)

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CONTINUED

\
MSlNG007: Entrepreneurial Finance

EISCSUNT TAsLE
Present vaiue of

{i+rJ" unlil receipt/payment.'


Perbds
(n)

j,l : j-

where r -- discount rate and y: fe?rs

Dscaunt ra.tes (r)

1% 2% 3% 4% 5% 6% 7% E% g%
0.943 0.890 0.840 0.792 0.747

t0%

1 2 3 4 5 6 7 8 s 10 fl 1? 13 14 15
Peiods
(n)

0.990 0.980 0.971 0.982 0.S52 0.s80 0.961 0.94] 0,925 0"907 a.971 0.942 0.915 0.889 0.364 0.961 0,s24 0.888, 0.855 0.823 0.951 0.906 0.863 A.822 0.784 A.942 0.888 0.837 0.790

0.935 0.9?6 0.9.t7 0.909 0.873 0.857 0.842 0.826 0.816 0]94 A"772 A.751 0.763 0,735 0.708 0.683 A.713 0.681 0.650 0.621

0.93i] 0.923 s.914 0.905

0.871 0.813 0.760 0.853 0.789 0.731 0.837 0_766 0.703 0.80 0.744 0.676

A"7e5 0.666 0.S30 0.596 0.5& 0.711 0.665 0.623 0.583 0.547 0.513 A"677 A.627 0.582 0.540 0.502 0.467 0.645 0.592 A.544 0.500 0.460 0.424 0.614 0"558 0"508 0.463 0.422 0.386

0j46

0.896 A.8U 0.722 0.650 0.585 A.527 0-475 0,887 0.788 A302 0.925 0.557 0.497 0"444 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.870 0.758 0.66.t A.577 0.505 0.442 0.388 0.86J 0.743 A.642 0.555 0.481 A.417 0.362

0.429 0.388

0.350

0.3S7 0.356 0.319 0.368 0.36 0.290

0.340 0.299 0.e63 0,315 0.275 0.239


200/o

1'%

12%

t3% 14% t5% t6% 17% 1B% 19%

1 0.901 0.893 0.885 0.877 0"A70 0.862 0.855 0.84? 0"840 0.833 2 A.2 0.797 0"783 0.769 0.756 0-743 0.731 0.718 0"706 0.6S4 3 0.731 0.712 0,693 0.675 0.658 0.641 0-624 0.60$ 0"593 0.579 4 0.659 0.636 0.613 A.552 Q.572 0.552 0"534 0.516 0.499 0.482 5 0.5SS 0.567 0.Sr 0.51s A.497 0.476 0.456 0.437 A.S Q.4A2 6 0.535 0.507 0.480 0.456 0.432 0.410 0.990 0.370 0.352 0.335 7 A.482 A.452 Q,425 0.400 0.376 0"354 0.393 0.314 A_296 A.ns B C.434 0.404 0.376' 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.S9S 0.308 a,284 0.263 A.243 A-225 0.209 0.194 10 as52 a322 0.295 A.270 A.247 0.227 0.208 0.191 0.176 0.162 11 A.A7 o.zw 0.261 0.237 0.215 0"195 0178 0.12 0.148 0.135 12 0.286 0"257 0.231 0.208 0.187 0.168 At52 0..t37 A.124 0.112 13 0.258 229 A.2A4 0.182 0.163 0.145 0.130 0.1.t6 0.104 0.093 14 A.232 0.205 0.181 0.160 0.141 0"125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.1S0 0,140 0.123 0.-t0B 0.095 0.084 0.074 0.065

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