Reference no: EM131772898

Learning outcomes:

L1: Understand the role of financial management in the performance of organisations and critically appraise alternative sources of finance for business firms.

L2: Critically analyse the financial position and performance of an organisation using key ratios.

L3: Apply advanced decision making techniques in a range of short-term and long- term situations. This assignment is worth 50% of this 30 credit module. The written part of this assignment must not exceed the maximum of 2500 words. Figures; tables and numerical analysis are not included in the word count.

You are required to answer ALL questions

Question 1
Shah Trading Ltd. is an established private company located in Muscat engaged in the manufacture and distribution of drilling equipment. The owners of the company, who are also the directors, are considering selling their business in order to pursue other interests. They have now begun a search for organisations interested in buying the company.

Summary of Profit & Loss Accounts and Balance Sheets for Shah Trading Ltd. are shown below:

Shah Trading Ltd
Statement of Comprehensive Income for the year ended on 31st December

 

	2015 OMR 000's	2016 OMR 000's
Turnover (Sales)	1,855	1,830
Cost of goods sold	(1,330)	(1,370)
Gross Profit	525	460
Other expenses	(347)	(294)
Profit before interest &tax	178	166
Interest payable	(35)	(38)
Corporation tax	(43)	(38)
Profit after tax	100	90
Dividends paid	(45)	(45)
Retain Profit	55	45

Shah Trading Ltd
Statement of Financial Position as on 31st December

 

NON CURRENT ASSETS	2015 OMR 000's		2016 OMR 000's
Land & buildings	590		568
Plant& equipment	257		280
Motor vehicles	55		50
	902		898
CURRENT ASSETS
Inventories		260		210
Accounts Receivable		150		172
Cash	8		3
	418		385

 

CURRENT LIABILITIES	(227) (38)	(224) (34)
Accounts Payable Provision for Taxation
Net Current Assets	153	127
Total Assets less Current Liabilities	1,055	1,025
Long term loan (secured on property)	400	425
	655	600
Net Assets
CAPITAL & RESERVES:
Share Capital
(100,000 Ordinary shares of OMR 1)	100	100
Retain Earning	125	170
Reserves	430	330
Shareholders' Funds	655	600

Required:

a) Compute accounting ratios for the year ended on 31st December 2015 & 2016 which provide insights into Shah Trading Ltd's financial statements as follows:

i. Profitability
ii. Working capital control (activity and liquidity ratios) and
iii. Financial risks
iv. Earnings per share & dividend per share, dividend pay-out ratio
Note: Answers should be expressed to one place of decimals with complete working

b) Critically analyse the answers of Part A.

c) The face value of the Equity shares of Shah Trading Ltd. is OMR 1.000 and the current market price OMR 2.500. The company issues right shares at the rate of 3 equity shares for every 5 existing equity shares held, the right shares being priced at OMR 1.800. Calculate the value of 'Right'.

Question 2
"Sultanate of Oman is in a developing stage and currently, its government is focusing on the growth of Small and Medium Enterprises (SMEs) to strengthen the overall economic system of a country. SMEs have a great impact on the economic condition of any country because almost 95% of the economy depends on these businesses. To promote SMEs, the government of Oman has provided a lot of training and guidance to its management so that these businesses will grow and strengthen the economy in a desired manner. For the development and sustainability of SMEs, it is important to study the issues and challenges which they are facing in the growth stage of their business"

Critically evaluate the measures that could overcome the different issues and challenges in order to facilitate the development and the sustainability of SMEs.

Question 3
Jadeeda LLC wishes to raise additional finance of OMR 1,000,000 for meeting its investment plans. It has OMR 210,000 in the form of retained earnings available for investment purposes. The following are the further details.

Debt / Equity mix: 30% / 70%
Cost of debt:
Up to OMR 180,000 10% (before tax)
Beyond OMR 180,000 16% (before tax)

Earnings per share                             OMR 4

Dividend payout                                  50% of earnings

Expected growth rate in dividend       10%

Current market price per share           OMR 44

Tax rate                                              50%

Required:
A) Determine the pattern for raising the additional finance.
B) Determine the post - tax average cost of additional debt.
C) Determine the cost of retained earnings and cost of equity.
D) Estimate the overall weighted average after tax cost of additional finance.