Reference no: EM132733062

GSFM7514 Accounting & Finance For Decision Making - UNITAR International University

Question 1

On July 5th, 2020 Encik Norman, a chief financial officer for Pearl Berhad, contacted the firm's bank regarding a loan. The loan was to be used to repay notes payable and to finance current assets. Encik Norman wanted to repay the loan plus interest in one year. Upon receiving the loan request, the bank asked the firm to submit its complete financial statements for the past two years. These statements are presented below:

Pearl Berhad: Balance Sheet as at 30th June

	2020(RM)	2019(RM)
Assets
Cash and marketable securities	171,264	115,200
Accounts receivable	1,756,000	702,400
Inventories	3,432,960	1,430,400
Total current assets	5,360,224	2,248,000
Gross fixed assets	2,394,320	982,000
Less: Accumulated Depreciation	760,240	292,400
Net fixed assets	1,634,080	689,600
Total assets	6,994,304	2,937,600
Liabilities and equity
Accounts payable	873,600	291,200
Notes payable	600,000	400,000
Accruals	816,000	272,000
Total current liabilities	2,289,600	963,200
Long-term bonds	800,000	646,864
Total debt	3,089,600	1,610,064
Common stock (100,000 shares)	3,442,352	920,000
Retained earnings	462,352	407,536
Total common equity	3,904,704	1,327,536
Total liabilities and equity	6,994,304	2,937,600

Pearl Berhad: Incbme Statements for the year ende
	2020(RM)	2019(RM)
Net sales	35,178,000	17,160,000
Cost of goods sold	29,379,960	4,320,000
Other expenses	2,750,000	1,793,360
Total operating expenses excluding depreciation	32,129,960	16,113,360
Earnings before interest, taxes, depreciation, and amortization	3,048,040	1,046,640
Depreciation	584,800	94,500
Earnings before interest and taxes (EBIT)	2,463,240	952,140
Less interest	350,040	219,140
Earnings before taxes (EBT)	2,113,200	733,000
Taxes (40%)	845,280	293,200
Net Income	1,267,920	439,800

a) Compute the following financial ratios for the past two years.

i. Current Ratio

ii. Quick Ratio

iii. Total debt Ratio

iv. Debt to Equity Ratio

v. Time Interest Earned

vi. Inventory Turnover

vii. Receivable Turnover

viii. Return on Assets

ix. Return on Equity

x. Earnings Per share

b) Discuss the performance for 2020 as compared to 2019.

c) Comment on Pearl's strengths and weaknesses by ratio category.

d) Based on the bank officer finding in (a) would he grant the loan to Pearl Berhad? Why or why not?

Question 2

As a new assistant financial analyst at Arnani Berhad, you were called to attend a meeting by Mr Rashad, the CEO of the company. The purpose of the meeting was to make a capital budgeting decision with respect to the introduction and production of a new product, an air purifier called Coal Blast. In the face of increased competition and innovation, Arnani Berhad spent large amount of time and money researching and developing a new highly reliable air purifier. The company felt that Coal Blast have many obvious advantages over competitors' products.

Besides the CEO, the meeting participants included Puan Annie, Director of Marketing, Miss Serene, Vice President in charge of the new products, Mr Lim, Controller and Mr Steve from Quality Department. Miss Serene started the meeting with a presentation related to the cost and cash flow for the new product. In order to keep things clear, she passed out copies of the projected cash flows to those present as per Table 1. She also provided some insights as to how these calculations were determined. Miss Serene proposed that the initial cost for Cool Blast included RM500,000 for the market testing and RM2,000,000 for a new specialized equipment and packaging facilities. The estimated life for the facilities was 15 years, after which they would have no salvage value and the opportunity cost on funds was 10 percent.

Year	Cash flows (RM)	Year	Cash flows (RM)
1	280,000	9	350,000
2	280,000	10	350,000
3	280,000	11	250,000
4	280,000	12	250,000
5	280,000	13	250,000
6	350,000	14	250,000
7	350,000	15	250,000
8	350,000

Mr Lim then questioned the fact that no costs were included in the proposed cash budget for plant facilities that would be needed to produce the new product. Miss Serene replied that at the present time, they only using 60 percent of capacity and since these facilities were suitable for use in the production of Cool Blast, no new plant facilities would be needed. Puan Annie then asked if there had been any consideration of increased working capital needs to operate the investment project. Miss Serene answered that there had, the project requires RM200,000 of additional working capital; however, as this money would never leave the firm, it was not considered an outflow.

Mr Steve argued that this project should be charged something for its use of current excess plant facilities. His reasoning was that if another firm had space like that, they could generate income from rental out the area. However, Arnani Berhad had a strict policy that prohibit renting or leasing any of its production facilities to any party outside the firm.

Required:

a) If you were in the place of Miss Serene, would you argue for the cost of market testing to be included in a cash outflow?

b) State your opinion on how to deal with the question of working capital?

c) Would you suggest that the product be charged for the use of excess production facilities and building space? Why?

d) If debt were used to finance this project, should the interest payments associated with this new debt be considered cash flows? Why?

e) Calculate the NPV of this project. Would you accept or reject this project?