Reference no: EM132298849
Management Accounting and Finance
Learning outcome:
Apply capital budgeting practices and evaluate investment decisions.
Apply knowledge of working capital to effectively manage a business for a given situation.
Compare and contrast financing options for a given situation and make recommendations.
Discuss the principles of capital structure and cost of capital, and calculate the cost of capital.
Apply management tools to assist in the planning and control of business operations.
Use management accounting information to assist decision-making in a given business situation.
Question 1:
Kelisen Ltd recently purchased a new dyeing machine for $100,000. Management expects the dyeing machine to generate the following additional revenues and expenses during its useful life.
Average incremental revenue $50,000 per year
Average incremental expenses (depreciation not included) $20,000 per year
The dyeing machine has an expected life of 6 years and is depreciated using the straight line method.
You are required to:
A. Prepare a schedule showing the incremental revenue, incremental operating expenses and incremental depreciation during each of the next 6 years.
B. Calculate the accounting rate of return on the dyeing machine, using the initial investment as the denominator.
Question 2:
Lenovo Ltd is planning to renting a factory on a four-year lease contract in the China province from 1 January 2014 to 2017, which is used to produce a new laptop model code-DL-GS8. Since the senior management worries the sustainable of the new plant, they have decided to assess the new product coming four years' manufacturing and sales life.
Under the lease, Lenovo Ltd will pay $100,000 annually in advance on 1 January. The plant is expected to cost $600,000. This will be bought and paid for on 1 January 2014 and is expected to be scrapped with ZERO proceeds on 31 December 2017. The company currently using straight-line method at 25% to depreciate all their fixed assets. They have no intention to change it.
Each unit of DL-GS8 is estimated to give rise to a variable labour cost of $200 and a variable material cost of $100. DL-GS8 manufacture will be charged with an annual share of the business's administrative costs, totalling about $15,000 a year. The manufacture and sales of DL-GS8 are expected to increase total administrative costs by $90,000 each year.
Following are estimated manufacture and sales of DL-GS8 for next four years:
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Year ending 31 December
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Units of DL-GS8
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2014
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400
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2015
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600
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2016
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500
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2017
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200
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The estimated selling price for DL-GS8 is $1,400 each.
The business will need to support the manufacture and sales of the product with working capital. This has been estimated at amount equivalent to $100 each unit of the product sold each year. The working capital need to be in place by the beginning of the relevant year of production and sales and reduced to zero at the end of 2017.
The business's accounting year is 31 Dec. The management has been decided to use a discount rate of 15%, after accessed given risk involved.
You are required to:
A. Identify the annual net relevant cash flows and use this information to assess the project on a net present value basis at 1 Jan 2014.
Estimate the internal rate of return of the project.
Question 3:
The following information is available for Healthy & Fresh Ltd:
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Ratios
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2012
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2013
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2014
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Current Ratio (times)
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2.61:1
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1.94:1
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1.32:1
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Average settlement period for debtors (days)
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37
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43
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47
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Average Settlement for creditors*
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8
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9
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31
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Inventory turnover period (days)
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48
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54
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65
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Non-current assets (indexed, 2012 as base)
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100
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118
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141
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Long-term finance (indexed, 2012 as base)
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100
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109
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115
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* Credit terms : 2% discount pay within 10 days. Normal credit term is 30 days.
Task: You are required to evaluate the management of working capital for Healthy & Fresh Ltd, based on above reveal, changes in its operating cycle and financing scheme.
Question 4:
The managing director of family owned business, Cando Franchise Ltd, believes that the business could earn an additional $800,000 in profit before interest and taxes each year by expanding its range of products. However, the business needs extra $4 million for growth and this amount could not be raised by the family. The managing director wishes to retain family control of the firm, but with no choice he has to consider issuing securities to outsiders. He is considering three alternatives financing plans.
Plan A is to borrow at 11% over five years.
Plan B is to issue 100,000 ordinary shares at $40 each.
Plan C is to issue 40,000 non-voting preference shares at $100 each, with each share entitled to an annual preference dividend of $8.80.
Cando Franchise Ltd has 500,000 ordinary shares issued. All three plans will raise the required amount,
$4 million.
* The income tax rate is 30%.
A. You, the financial manager of Cando Franchise Ltd, is asked for prepare an analysis of the three alternatives for the board members to consider.
Following format is suggested for you to use.
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Plan A
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Plan B
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Plan C
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Ordinary shares on issue
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Funds raised
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Annual: NPBIT
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Borrowing Interest
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NPBT
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Taxation (30%)
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NPAT
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Preference dividends
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Dividend available to Ordinary
shareholders
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Proportion of dividend available to
Existing shareholders
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Dividend to New shareholders
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B. As a financial manager, you are also expected to give your comments on above three alternatives.