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1、UniSUNIVERSITY OF SURREYSchool of ManagementMScDATE:DURATION: 3 hoursInstructions to candidatesCandidates are required to answer four questions from eight and should show allcomputations and workings. All questions carry equal marks.All question papers and examination scripts must be collected by th

2、e Invigilator at theend of the examination.Additional Material Required:Formulae TablesStatistical TablesNon-programmable Calculators permittedflow statement for the year. However, the fixed asset remains in use in the business. Depreciation is over the period of its useful life. The original purcha

3、se of the fixed asset has no impact on the profit and loss account, but the periodic charges for depreciation do have an impact, in that they reduce profit. The effect of the fixed asset purchase, therefore, is reflected in a single transaction in one year in the cash flow statement. However, the pr

4、ofit and loss account is affected throughout the assets useful life because of the depreciation charge.Question 8Students will be awarded marks according to their demonstration of understanding the implications of gearing ratios for the earnings per share and discussing the components of risk. The f

5、ollowing table gives the calculations:No of shares5,000,0004,000,0003,000,000Profits before interest and taxInterest (7.5%)Taxable NetIncomeIncome Tax (25%)Net Income AfterTaxesEPSProfits before interest and taxInterest (7.5%)Taxable NetIncomeIncome Tax (25%)Net Income AfterTaxesEPS800,000800,000200

6、,000600,0000.12800,00075,000725,000181,250543,7500.14800,000150,000650,000162,500487,5000.16M& M arguments, mention of the tax shield etcQuestionlNiteday make a nightlight for which is budgeted to sell at 5.00 per unit .It is made by taking a budgeted 0.5 kg of material, budgeted to cost 3.00/kilogr

7、am and the budgeted labour time is 15mins at a budgeted cost of 5.00 per hour.Other Budgeted items:Monthly Fixed overheads6,000Budgeted output for September5,000 unitsThe actual results for September were:Sales (5,400 units)26,460Materials (2830 kg)(8,770)Direct Labour (1,300 hours)(6,885)Fixed Over

8、heads(6：350)Actual Operating Profit4,455No stocks were available at the beginning of the month or were left at the end of the month.Calculate the variances for September and reconcile the budgeted and actual profit figures.(18 marks) b) What are the benefits and drawbacks of using standard cost regi

9、me?(7 Marks)Question 2The Deltoid Company has a maximum capacity of 150,000 units per year. It currently plans to produce 100,000 units.The draft budget shows costs as follows:Materials80,000Production Labour120,000Management Salaries75,000Rent and other overhead240,000Variable overheads50,000The sa

10、les price is expected to be 7.50 per unitRequireda) What is the breakeven point in i) units and ii) pound sales?(6 marks)How many units must be sold to earn a target profit of 300,000 per year and how does effect the planned production schedule?(4 marks)If production can be maximised how much flexib

11、ility can there be on the pricing if there is requirement that if the plant runs to full capacity a minimum profit of 400,000 must be achieved.(5 marks)Discuss the benefits and drawbacks of CVP costing over using an absorption method in the context of enhancing management decision making.(10 marks)Q

12、uestion 3Assume a company has a corporate-wide debt/equity ratio of 1:2, cost of debt is 7%, and a cost of equity capital of 15%. The directors are considering undertaking a foreign project and estimate that the debt capacity of the project is the same as for the company as a whole, but its systemat

13、ic risk is such that the required return on equity is estimated to be about 12%; and the cost of debt is expected to remain at 7%. Assume that the firms marginal tax rate is 40%.(a) Show calculations of the projects weighted average cost of capital and compare it with the parents Weighted Average Co

14、st of Capital (WACC).(12marks) b) The calculation of the WACC is straightforward in theory, but in practice it is not an easy task. Outline the possible difficulties that might be(13marks)(13marks)experienced when trying to calculate the WACC.Question 4Below are the accounts for Fashionl Plc a Leeds

15、 based retail fashion company. Write a report on the financial performance of this company over the past year using this published information. Include in your commentary an indication of what further information would be useful for your analysis.(25 Marks)Consolidated Profit & Loss Account for the

16、year 2004 2003Ended Dec 31stTurnoverCost of salesGross ProfitOperating ExpensesOperating Profit million million1871.7-1308.1563.6-305.0258.61588.5-1110.3478.2-265.7212.5Profit before interest and taxationNet interest receivable (payable)Profit on ordinary activities before taxationTax on profit on o

17、rdinary activitiesProfit on ordinary activities after taxationDividendsRetained profitConsolidated Balance SheetFixed assetsTangible AssetsInvestmentsTotal Fixed AssetsCurrent assetsStockDebtors due within one yearCash at bank and in handTotal Current AssetsCreditors: Amounts falling due within one

18、yearNet Current Assets (liabilities)Total assets less current liabilities258.6 213.87.24.6265.8 218.4-76.0 -60.8189.8 157.6-89.0 -73.7100.8 83.9258.6 213.87.24.6265.8 218.4-76.0 -60.8189.8 157.6-89.0 -73.7100.8 83.9296.5 287.638.139.4334.6 327.0174.7 174.0278.6 269.0201.4 104.2654.7 547.2-403.2 -346

19、.6251.5 200.6586.1 527.6Creditors: Amounts falling due after more than one year -20.4 -18.5Provisions for liabilities and chargesNet assetsCapital and reservesCalled-up share capitalShare premiumOther reservesProfit and loss accountEquity shareholders funds18.89.4546.9 499.733.133.73.83.819.919.6490

20、.1 442.6546.9 499.718.89.4546.9 499.733.133.73.83.819.919.6490.1 442.6546.9 499.7Question 5Corporate Governance has occupied the minds of CEOs for much of the past decade The Economist Jan 2005.Why has this been the case and has corporate governance improved? Illustrate your answer with reference to

21、 changing regulation and examples.(25 marks)Question 6The directors of Resource Management are examining the feasibility of the following projects; the returns are predicted to be similar but depending on how they are run there are different outflows.YearInflows0123456(000)12,00014,50013,90014,500 1

22、2,600 11,300Outflows Project 1(000)45,5001,600800Project 2(000)41,5003,0001,8006001,2004,200a) Decide which project is the best to adopt. Assuming the weighted average cost of capital is 8%.(18marks)b)In practice describe what further numerical work you would carry out(7 Marks)(7 Marks)and explain t

23、he reasons for this.Question 7Julies a restaurant chain has the following results for the year ending 31 May 2006:SalesCost of sales Opening stock PurchasesLess: closing stockGross profit Interest received Expenses Net profit310,040 3,866,130 4,176,170(367,600) 3,808,5704,927,0001,118,4308,040 (627,

24、340) 499,130These expenses include 9630 of interest paid and 48200 of depreciation.In addition to the information in the profit and loss account, the balance sheet it can be noted that Debtors have decreased by 21,880 between 1 June 2005 and 31 May 2006 and Creditors have decreased by 34,340 between

25、 1 June 2005 and 31 May 2006.Produce the initial part of the cash flow statement showing the net cash inflow or outflow from operating activities for Julies.(15 marks)Explain why the effect of purchasing a fixed asset for cash is not the same in the cash flow statement as in the profit and loss acco

26、unt(10 marks)Question 8a) Suppose that a new firm, Ivy Limited, estimates its net operating income (NOI) for the next year to be 800,000 and is faced with three mutually exclusive alternatives for financing its investments:(i) Issuing 100% equity represented by 5 million ordinary shares.(ii) Issuing

27、 4 million in ordinary shares and 1 million in 7.5%debentures.(iii) Issuing 3 million in ordinary shares and 2 million in 7.5% debentures.Assume that the rate of Corporation Tax is 25%. Write a report for the management showing your calculations, including Earning Per Share (EPS) ratios for the thre

28、e financing options being considered.(13 Marks)The cost of equity capital invariably exceeds the cost of debt capital.” In the light of this statement is there a case for arguing that all companies should be funded mostly by debt.(12 marks)SolutionsQuestion 1VolumePriceMaterialsPrice5250-6150,27000

29、- 26,460900540Usage Labour Rate Variance Efficiency Var.Overhead2830 x 3 - 8,770 (5,400 x 0.5)- 2830) x 3(1,300 x5) - 6885 (5,400x0.25) -1300)x5280390385250UnitsSales25,00027000(1,35026460Labour62506750hr)6885(1300 hr)Materials7,5008,100(2,700kg)8770(2,830 kg)Fixed OH600060006350Profit5,2506,1504,45

30、5500054005400OriginalFlexedActualVariances Sales6000 - 6350350795Many businesses do not have direct relationships between inputs and outputs, expenses can be discretionary. Standards change quickly and factors outside control of management can be influential.Question 2Variable costMaterials80,000Pro

31、duction Labour120,000Variable overheads50,000250,000Variable cost per unit2.5Total OverheadManagement Salaries75,000Rent and other overhead240,000315,000Contibution7.52.55Sales PriceVariable cost per unitBreak Even NumberValueBreak Even NumberValue6300047250060000435000 Profit60000435000 ProfitAddit

32、onal Units required for 300K profitFull production givesSo current contiibtion has 35,000 excess over 150000 units Contribution can drop by7.26667 per unit 7.266672.54.7666766083.9New break even d) Students should address benefits of CVP in the treatment of fixed costs compared to the allocation of

33、fixed costs by absorption methods and the inherent issues of choice of method. But recognise assumptions such as linearity and then outline the drawbacks of CVP such as linear assumptions, sales discounts and variations that may occur to a range of variable costs. Stepped fixed costs increased activ

34、ity may change these. Multi-product businesses , the effects of sales etc on other products , identification of fixed costs between activities. short termism and difficulty with mixed lines. (10 marks)Question 31/3x7(1-0.4)WACC +2/3*151.410WACC11.41/3x7(1-0.4)WACC +2/3*121.48WACC9.4Students should s

35、how an understanding of the elements of the WACC model and the problems that arise. Shares may not be traded regularly, market price difficult to obtain, especially with private companies similarly with bonds, convertibles . leasing , swap agreements. Accuracy of model dividend growth and the issues

36、 that arise with CAPM beta, appropriate Rf rate, noise etc.Question 4A reasonable array of ratios and some trend analysis is required. It should cover profitability and operational efficiency mostly as there is limited investment data.Question 5A range of issues can be brought into an answer here, C

37、ritically, it is the quality of the discussion and the use of a range of sources that should provide the core of the marks. Some background as to why Governance has been an issue and the responses over time to the problems it raises. Why SOX originated and some understanding of the criticisms (cost

38、etc) levelled against it should be part of the discussion.Question 6OutflowslOutflows2InflowsNetFlowlNetFlow2Dis RateDCF1DCF2045,50041500-45,500-41,5001-45500-415001300012,00012,0009,0000.92592611111.118333.333218001450014,50012,7000.85733912431.4110888.236001390013,90013,3000.79383211034.2710557.97

39、4160012001450012,90013,3000.735039481.8859775.897580042001260011,8008,4000.6805838030.8825716.89961130011,30011,3000.630177120.9177120.91713710.4810893.22Candidates should discuss the nature of sensitivity analysis and the use of target IRRS as aids to decision making. Better ones may mention MIRR.,

40、 Tax elements.Question 7Expenses excluding interest paid = 627,340 - 9,630 = 617,710Operating profit = gross profit - expenses = 1,118,430 - 617,710 = 500,720Cash flow statement 2006 Operating profit500,720Add back: depreciation48,200548,920Changes in working capitalStock - increase (367,600 - 310,040)(57,560)Debtors - decrease21,880Creditors - decrease(34,340)Net cash inflow from operating activities478,900The purchase of a fixed asset for cash involves a cash outflow from the business for the whole purchase price. This will be reflected as capital expenditure in the cash