FIN303<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />____________________________________________________________________________________Time allowed: 2 hours____________________________________________________________________________________You must answer ALL the questions. (Total 100 marks)Question 1 You recently joined a Multi-National Enterprise as amanagement trainee. Although your role is not specifically in finance, you arerequired to be familiar with the financial affairs of the firm. As such, yourboss has asked you to assist on several matters in preparation for a meetingwith senior management next week.The 3-year summary financial statements have been furnishedto you.Income Statement FY 2014 FY 2013 FY 2012 $’000 $’000 $’000Revenue 7,882 7,962 8,010Cost of goods sold -5,036 -5,133 -5,073Gross profit 2,846 2,829 2,937Operating expenses -2,389 -2,216 -2,050Net operating profit 458 613 888Interest expense -46 -45 -24Income before tax 412 568 864Income tax -270 -253 -346Net income 143 315 518Statement of Financial Position FY 2014 FY 2013 FY 2012 $’000 $’000 $’000Current assetsCash and bank 951 1,300 1,494Inventory 788 898 848Trade receivables 305 317 278 —————————————————- 2,044 2,515 2,620Non-current assets:Property, plant and equipment 1,876 1,599 1,623Other non-current assets 243 159 168 ————————————————- 2,119 1,758 1,791Total assets 4,163 4,272 4,411Current liabilitiesTrade payables 503 386 296Accruals 630 580 631Other current liabilities 84 171 43 ——————————————— 1,217 1,136 970Non-current liabilitiesBorrowings 541 455 471Other non-current liabilities 25 94 257 ————————————————— 566 549 728EquityShare capital 1,419 1,343 1,228Reserves 961 1,244 1,485 ———————————————————— 2,380 2,587 2,713Total liabilities and equity 4,163 4,272 4,411Some financial ratios have been calculated by yourcolleague.

You are required to take over from where she left off and then moveon to analyse the firms performance.(a) Compute the missing financial ratios using the tableprovided below.(10 marks) FY 2014 FY 2013 FY 2012LiquidityCurrent ratio 2.21 2.70Quick ratio 1.03 1.82ProfitabilityGross profit margin 36.1% 36.7%Operating profit margin 5.8% 7.7%Asset UtilisationAverage inventory days 57 61Average collection period 15 13Average payment period 36 27Cash conversion cycle 35 51 52Fixed asset turnover 4.2 4.9LeverageInterest-bearing debt to equity 0.25 0.17 Interest coverage ratio 10.1 13.6 (b) Comment on thefirms financial performance.(15 marks)Question 2Your boss wishes to calculate the firms weighted cost ofcapital (WACC) and the following information has been given to you: Number of ordinary shares = 5 million Book value of 6% bond maturing in 2020 (in 5 years time)= $0.5 million Yield-to-maturity of bond is currently 4.85% Market price of ordinary shares = $0.65 Market price of bond (with a face value of $100) = $105 Beta = 1.3 Risk-free rate = 3.0% Market risk premium = 5.5% Tax rate = 17%Additionally, she needs you to explain the circumstancesunder which WACC can be used for investment appraisal.(a) Calculate the firms WACC.(20 marks) (b) Discuss thecircumstances under which WACC can be used in appraising an investment(15 marks)Question 3The firm has a new product (PLY 55) which has performed wellin test marketing trialsconducted recently by the research and development (R&D)department. The R&Dcosts were estimated to be about $200,000. The businessdevelopment team hasprepared the financial projects as follows:Year 1 2 3 4 5Sales 220,000 310,000 450,000 410,000 340,000Cost of sales -77,000 -108,500 -157,500 -143,500 -119,000Gross profit (50%) 143,000 201,500 292,500 266,500 221,000Operating expenses -60,000 -61,800 -63,000 -65,300 -67,500Depreciation -100,000 -100,000 -100,000 -100,000 -100,000EBIT -17,000 39,700 129,500 101,200 53,500Tax @ 17% 2,890 -6,749 -22,015 -17,204 -9,095Net income -14,110 32,951 107,485 83,996 44,405Net working capital required 33,000 46,500 67,500 61,500 51,000The initial investment in plant and equipment for thisproject is $500,000. The plantand equipment is fully depreciated over its useful lifeusing the straight line method.Due to the nature of the product life cycle, this productwill be rendered obsolete at theend of five years. At which time, the working capital willbe fully recovered and plantand equipment can be sold for about $100,000.Your boss is unsure if the firm should proceed with thisinvestment. Therefore, sheneeds you to evaluate this proposal. Assume a discount rateof 9% and tax rate of 17%.If this project proves to be financially viable, she needsto know whether equity or debtis suitable for financing this investment.(a) Calculate the free cash flows to firm for Years 0 to 5for the proposedinvestment in the new product (PLY 55).(17 marks)Free Cash Flow to FirmYear 0 1 2 3 4 5Initial investmentOperating cash flowsCash flow impact ofNWCTerminal valueFree cash flow to firmFree cash flow to firmDiscount rateDiscount factorNPV (b) Calculate the netpresent value (NPV). Recommend whether this potential investment is financiallyviable.(8 marks)Question 4Analyse and discuss whether a rights issue or an issue ofbonds is a suitable way of raising finance for the proposed investment.(15 marks)—– END OF PAPER —–FIN303<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />____________________________________________________________________________________Time allowed: 2 hours____________________________________________________________________________________You must answer ALL the questions. (Total 100 marks)Question 1You recently joined a Multi-National Enterprise as amanagement trainee. Although your role is not specifically in finance, you arerequired to be familiar with the financial affairs of the firm. As such, yourboss has asked you to assist on several matters in preparation for a meetingwith senior management next week.The 3-year summary financial statements have been furnishedto you.Income Statement FY 2014 FY 2013 FY 2012 $’000 $’000 $’000Revenue 7,882 7,962 8,010Cost of goods sold -5,036 -5,133 -5,073Gross profit 2,846 2,829 2,937Operating expenses -2,389 -2,216 -2,050Net operating profit 458 613 888Interest expense -46 -45 -24Income before tax 412 568 864Income tax -270 -253 -346Net income 143 315 518Statement of Financial Position FY 2014 FY 2013 FY 2012 $’000 $’000 $’000Current assetsCash and bank 951 1,300 1,494Inventory 788 898 848Trade receivables 305 317 278 —————————————————- 2,044 2,515 2,620Non-current assets:Property, plant and equipment 1,876 1,599 1,623Other non-current assets 243 159 168 ————————————————- 2,119 1,758 1,791Total assets 4,163 4,272 4,411Current liabilitiesTrade payables 503 386 296Accruals 630 580 631Other current liabilities 84 171 43 ——————————————— 1,217 1,136 970Non-current liabilitiesBorrowings 541 455 471Other non-current liabilities 25 94 257 ————————————————— 566 549 728EquityShare capital 1,419 1,343 1,228Reserves 961 1,244 1,485 ———————————————————— 2,380 2,587 2,713Total liabilities and equity 4,163 4,272 4,411Some financial ratios have been calculated by yourcolleague. You are required to take over from where she left off and then moveon to analyse the firms performance.(a) Compute the missing financial ratios using the tableprovided below.(10 marks) FY 2014 FY 2013 FY 2012LiquidityCurrent ratio 2.21 2.70Quick ratio 1.03 1.82ProfitabilityGross profit margin 36.1% 36.7%Operating profit margin 5.8% 7.7%Asset UtilisationAverage inventory days 57 61Average collection period 15 13Average payment period 36 27Cash conversion cycle 35 51 52Fixed asset turnover 4.2 4.9LeverageInterest-bearing debt to equity 0.25 0.17 Interest coverage ratio 10.1 13.6 (b) Comment on thefirms financial performance.(15 marks)Question 2Your boss wishes to calculate the firms weighted cost ofcapital (WACC) and the following information has been given to you: Number of ordinary shares = 5 million Book value of 6% bond maturing in 2020 (in 5 years time)= $0.5 million Yield-to-maturity of bond is currently 4.85% Market price of ordinary shares = $0.65 Market price of bond (with a face value of $100) = $105 Beta = 1.3 Risk-free rate = 3.0% Market risk premium = 5.5% Tax rate = 17%Additionally, she needs you to explain the circumstancesunder which WACC can be used for investment appraisal.(a) Calculate the firms WACC.(20 marks) (b) Discuss thecircumstances under which WACC can be used in appraising an investment(15 marks)Question 3The firm has a new product (PLY 55) which has performed wellin test marketing trialsconducted recently by the research and development (R&D)department. The R&Dcosts were estimated to be about $200,000. The businessdevelopment team hasprepared the financial projects as follows:Year 1 2 3 4 5Sales 220,000 310,000 450,000 410,000 340,000Cost of sales -77,000 -108,500 -157,500 -143,500 -119,000Gross profit (50%) 143,000 201,500 292,500 266,500 221,000Operating expenses -60,000 -61,800 -63,000 -65,300 -67,500Depreciation -100,000 -100,000 -100,000 -100,000 -100,000EBIT -17,000 39,700 129,500 101,200 53,500Tax @ 17% 2,890 -6,749 -22,015 -17,204 -9,095Net income -14,110 32,951 107,485 83,996 44,405Net working capital required 33,000 46,500 67,500 61,500 51,000The initial investment in plant and equipment for thisproject is $500,000. The plantand equipment is fully depreciated over its useful lifeusing the straight line method.Due to the nature of the product life cycle, this productwill be rendered obsolete at theend of five years. At which time, the working capital willbe fully recovered and plantand equipment can be sold for about $100,000.Your boss is unsure if the firm should proceed with thisinvestment. Therefore, sheneeds you to evaluate this proposal. Assume a discount rateof 9% and tax rate of 17%.If this project proves to be financially viable, she needsto know whether equity or debtis suitable for financing this investment.(a) Calculate the free cash flows to firm for Years 0 to 5for the proposedinvestment in the new product (PLY 55).(17 marks)Free Cash Flow to FirmYear 0 1 2 3 4 5Initial investmentOperating cash flowsCash flow impact ofNWCTerminal valueFree cash flow to firmFree cash flow to firmDiscount rateDiscount factorNPV (b) Calculate the netpresent value (NPV). Recommend whether this potential investment is financiallyviable.(8 marks)Question 4Analyse and discuss whether a rights issue or an issue ofbonds is a suitable way of raising finance for the proposed investment.(15 marks)—– END OF PAPER —–