Reference no: EM131489741

1. (i) The board of a company decides that the strategic objectives of the company should be:

- to become established as the best in its field
- to be the largest in its market.

Comment briefly on what the length of time should be to achieve these objectives.

(ii) State how the strategic and sometimes medium term objectives of a company may differ in an important aspect from operational planning. Give some examples of strategic planning activities and operational planning.

(iii) State briefly how the type of business a company is engaged in might determine the importance of the type of planning that would be required for:

(a) an oil exploration company

(b) a clothing retailer.

2. Carling Ltd is a manufacturer of industrial drills. It has £1M earmarked for capital investment in the current year and the Board has identified two projects (each requiring an initial outlay of £1M) from which it will choose.
The company's capital structure at present is:

	£M
Ordinary shares 5%     Preference shares 10%    Debentures	3   4   7
Total capital	14

The two rival projects have anticipated costs and income flows as follows:

	Project 1   £'000	Project 2   £'000
Cost	1000	1000
Income - Year 1	600	100
Year 2	200	150
Year 3	150	750
Year 4	250	450
Year 5	350	150
Year 6	200	200
Total income	1750	1800

(a) The Board is considering funding the investment by either a £1M shares issue or a £1M 10% debenture issue. You are asked to explain which method you would choose.

(b) You are asked to evaluate the two projects using:

(i) the payback method (by plotting the data)
(ii) the DCF/NPV technique (assume a 12% cost of capital).

(c) A Board member asks whether risk and uncertainty should be taken into account. You are asked to write a brief report outlining the arguments for and against the suggestion.

3. Using the data from TABLES 1, 2 and 3 below, plot the following graphs:

(i) On one set of axes plot the 2 curves of:

- ‘total sales revenue' against ‘volume of sales'

- ‘total costs' against ‘volume of sales'.

The ‘volume of sales' should be on the x-axis (values from 20 to 26).

(ii) On a second set of axes plot the 3 graphs:

- ‘marginal cost' against ‘volume of sales'

- ‘marginal revenue' against ‘volume of sales'

- ‘price' against ‘volume of sales'.

Again the ‘volume of sales' should be on the x-axis (values from 20 to 26).

Price £	Volume of Sales	Total sales revenue £	Marginal revenue £
80	20	800
76	21	836	36
72	22	864	28
68	23	884	20
64	24	896	12
60	25	900	4
56	26	896	-4

TABLE 1

Price £	Volume of Sales	Total costs £	Marginal cost £
80	20	720
76	21	728	8
72	22	740	12
68	23	756	16
64	24	776	20
60	25	800	24
56	26	828	28

TABLE 2

Price £	Volume of Sales	Total sales revenue £	Total cost £	Profit £
80	20	800	720	80
76	21	836	728	108
72	22	864	740	124
68	23	884	756	128
64	24	896	776	120
60	25	900	800	100
56	26	896	828	68

TABLE 3

(a) From your graphs determine the maximum profit and optimum volume of sales.

(b) What do you notice about:

- the marginal cost and marginal revenue lines

- total cost and total revenue curves at maximum profit.

4. (i) Imagine you are the manager of a pension fund that invests large amounts of money in companies, most of which are listed on the London Stock Exchange. Returns on your investments provide the funds to pay the pension beneficiaries. State the proportions of fixed interest securities (i.e. debentures, preference shares, etc.) and ordinary shares you would choose with a view to minimising the risk to funds and maximising returns. State briefly the reasons for your investment strategy.

(ii) State a source from which you would get information on which to base your investment strategy.

(iii) State a possible consequence of other fund managers thinking in a similar vein to yourself.

(iv) Select 5 listed London Stock Market companies from different sectors (such as Banking, Information Technology, Media, Chemicals, Construction, Retailers, Transport, Mining, Oil & Gas, Pharmaceuticals, Property, etc.) in which you intend to invest substantial amounts of capital with a view to seeking a return on your investment. Briefly give reasons for your selections.

5. Prepare a cash budget for January 2006 to March 2006 with the following information given.

	Oct.	Nov.	Dec.	Jan.	Feb.	Mar.	Apr.
Sales	1400	1000	800	1000	1000	1200	1000
Production	1250	1200	1000	800	1500	1750	1400

Cash balance at 1 January 2006 = £5500

Selling price = £16.00 1/2 received in the production month
being considered.
1/2 received two months later
(e.g. in January receive 1/2 of January's plus 1/2 of November's)
Direct labour = £5.00 paid same month of production
Direct materials = £5.00 paid the month before production
Variable costs = £4.00 1/2 paid in the month before production
1/2 paid in the month of production
(e.g. for January, pay 1/2 in December plus 1/2 in January)
Fixed costs = £1500 per month.

Use the grid on page 8 to illustrate your answers.

	January	February	March
Opening balances
Receipts (1)
Receipts (2)
TOTAL INCOME
Direct labour
Direct materials
Variable costs (1)
Variable costs (2)
Fixed costs
TOTAL COSTS
NET TOTAL FOR MONTH