All numerical / number questions fin303 assignment 2 – individual

 

 

 

 

 

 

 

 

 

FIN303

Financial Management

 

Assignment 2 – Individual Assignment/TMA02

 

July 2016 Presentation

 

 

 

 

 

 

 

Individual Assignment

 

This assignment is worth 25% of the final mark for FIN303 Financial Management.

 

The cut-off date for this assignment is 24 October 2016, 2359hrs.

 

In this assignment, you are expected to:

 

              Compute and interpret financial ratios

              Evaluate investment proposals

              Apply knowledge to decide appropriate financing plan and dividend policy

___________________________________________________________________________

 

 

Alpha Limited manufactures and sells marine equipment. Its income statement for the year 2015 and balance sheet as of December 2015 are shown below:

 

Income statement for the year 2015

Sales

5,000,000

Cost of Goods Sold

3,000,000

Gross profit

2,000,000

Selling and Admin Expenses

800,000

Depreciation

500,000

EBIT

700,000

Interest

100,000

Earnings before tax

600,000

Tax (20%)

120,000

Net Income

480,000

Dividends paid

360,000

Addition to retained earnings

120,000

 

Balance Sheet as of December 31, 2015

Cash

1,000,000

inventory

600,000

receivables

500,000

Total Current assets

2,100,000

Gross Fixed Assets

14,000,000

less: Accumulated depreciation

5,500,000

Net Fixed Assets

8,500,000

Total Assets

10,600,000

 

 

Accounts payables

300,000

Notes Payables

700,000

Total Current Liabilities

1,000,000

Long Term debt

1,000,000

Common Stock

6,000,000

Balance Sheet as of December 31, 2015

retained earnings

2,600,000

Total Liabilities and Equity

10,600,000

Number of shares outstanding

1,000,000

Market price per share

$12

 

___________________________________________________________________________

 

 

Question 1

 

Assess the amount of new equity to be issued if:

              Sales are expected to increase by 20%.

              Cost of goods sold, Selling and Administrative Expenses, Inventory, Receivables, and Accounts Payables will increase in the same proportion as sales.

              New fixed assets will be purchased for $1 million which will be depreciated over 4 years to zero salvage value.

              The cash balance will be maintained at $ 1 million by the end of 2016.

              The amount of long-term and notes payable will remain the same and so will the interest payment.

              Additional financing will be provided by issue of new equity.

              Assume that the dividend pay out ratio remains constant.

(20 marks)

 

 

 

 

Question 3

 

As part of its overall planning, the company prepares its cash budget every month. The details for the 3 months, July, August and September are shown below:

 

 

Jun

Jul

Aug

Sep

Sales

180,000

200,000

220,000

180,000

Purchases Cash

 

70,000

80,000

60,000

Purchase Credit

30,000

40,000

30,000

40,000

Operating expenses

 

30,000

30,000

30,000

Interest

 

10,000

10,000

10,000

Capital expenses

 

100,000

 

 

Cash Balance as of July 1

 

44,000

 

 

 

One quarter of the firm’s sales are for cash and the balance is received one month later. All credit purchases are paid for with one month delay. 

 

Prepare cash budget for July to September.

(20 marks)

 

 

Question 4

 

Alpha Limited is considering a project to supply 25,000 tons of machine screws annually to its major customer. It requires an initial $3,600,000 investment to get the project started. This project will last for 5 years. It is estimated that annual fixed costs will be $850,000 and that variable costs will be $185/ton. The fixed assets will be depreciated using straight line depreciation to zero salvage value over 5 years. The estimated salvage value at the end of 5 years is $500,000.

 

The marketing department estimates that the selling price will be $280 per ton. It is estimated that the net working capital of 10% of sales will have to be provided at the beginning of the project which will be recovered at the end of the project. 

 

The beta of Alpha Limited is 1.2. The risk free rate is 5% and the market risk premium is 7%.

 

Estimate the relevant cash flows and calculate the net present value and recommend the decision about this project.

(20 marks)

 

 

Question 5

 

Alpha limited plans to raise the needed funds of $3,600,000 through issue of new shares in the form of rights. The company plans to set the subscription price 10% below its current market price of $12 per share. The number of shares outstanding is 1 million.

 

Apply the technique of rights issue by calculating:

 

(a)                The number of new shares to be issued

(b)               The number of rights to be issued to buy a new share

(c)                Value of right

(15 marks)

 

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