Recent Question/Assignment

FIN303
Examination – January Semester 2014
Financial Management
Tuesday, 20 May 2014 10:00 am – 12:00 pm
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Time allowed: 2 hours
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INSTRUCTIONS TO STUDENTS:
1. This examination contains FIVE (5) questions and comprises SIXTEEN (16) printed pages (including cover page).
2. You must answer ALL questions.
3. ALL ANSWERS MUST BE WRITTEN IN THIS QUESTION PAPER ONLY.
THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS.
This examination is based on the case study on pages 13-16. You are allowed to detach the case study and need not submit the case study at the end of the exam.
You must answer ALL the questions. (Total 100 marks)
Question 1
(a) Compute the appropriate ratios for the year 2012. Please fill in the missing numbers in Table 1.
(10 marks)
Table 1 Ratios
(b) Analyse the financial performance of the company as of 2012.
(15 marks)
Question 2

(a) Calculate the cost of equity and the weighted average cost of capital for the company. Assume that the cost of bond is 4% and the debt ratio is 30%.
(b) Which of these costs of capital, cost of equity or weighted average cost of capital, should be used to discount the new project? Analyse your rationale for using this cost of capital.
(5 marks)
Question 3

Calculate the net present value of the new project, and advise OSIM whether the new product should be introduced. Please complete the missing figures shown in Table 2.
(25 marks)
Table 2 Project NPV
Question 4

OSIM is considering three options to raise the required funds for the new product.
Option 1: Issue convertible bond for $15 million with a coupon rate of 2.75% at nominal value of $1 per bond. The contracted interest rate on the bond is 2.75% per annum, but excluding the equity conversion option, the effective interest rate is 4% per annum. The bonds mature in 5 years from the issue date at the principal amount together with the unpaid interest unless converted to ordinary shares at the rate of $2.025 per share. The holder of convertible bond has the right to acquire the shares of company to redeem the bond three years from the issue of the bond.
Option 2: Issue a bond with no convertible option for $15 million with a coupon rate of 2.75% at a nominal value of $1 per bond. The effective interest rate in the market is 5% for these bonds. The bonds mature 5 years from the issue date at the principal amount together with the unpaid interest.
Option 3: Raise the required amount by issuing common shares at $1.80 per share.
Compare the three options listed above, and discuss which option OSIM should adopt.
(25 marks)
Question 5

For the company you work for, or, for a company you are familiar with, examine the types of factors that you would use to determine the most appropriate dividend policy.
(10 marks)
Case Study

OSIM was established by Ron Sim in 1979 as a trading company in household goods. The company’s products include massage chairs, slimming belts, head massagers, neck and shoulder massagers, fitness equipment, foot reflexology rollers, pulse and handheld massagers, and diagnostic equipment. OSIM is planning to acquire additional companies whenever there is an opportunity for growth and to provide for funds for these opportunities, OSIM continues to have high cash balances.
New Product Launch
OSIM is currently planning to launch a new massage chair. They have been doing research on this product for the past 2 years and have spent $2.5 million on R & D. They have also conducted market test of this product in Singapore and China at a cost of $2 million. The chairs will be ready to roll out by June 2013. The chairs will be priced at $6,500 each. The sales forecast for the next 4 years are shown below. OSIM believes that the life of this chair will be four years and by then a new modified chair will be introduced.
Year Sales (Number of Chairs)
2013 1,500
2014 2,500
2015 3,000
2016 3,500
The cost of sales is estimated as 60% of sales. Other expenses will be $500,000 a year. This project will require investment in equipment of $12,000,000. The working capital requirement for this project is 25% of next year sales and at the end of 4 years, the total amount of working capital will be recouped. The equipment will be depreciated on a straight line basis over a 5 year period and the estimated salvage value at the end of 4 years is $3,500,000. Introduction of this new chair will reduce the cash flow from the existing products by $5 million every year.
The risk free rate is 2.5% and the market risk premium is 7%. The beta of OSIM is 1.5. Assume a tax rate of 20%.
The financial statements of OSIM for the years 2009 to 2012 are shown in Exhibits 1, 2 and 3.
Exhibit 1 Income Statement for the Year Ending December 31 ($ in thousand)
2009 2010 2011 2012
Revenue 476,767 508,738 553,740 601,684
Cost of Sales (177,439) (176,328) (171,965) (180,076)
Gross Profit 299,328 332,410 381,775 421,608
Other Operating Income 12,348 15,415 13,082 14,130
Other Operating Expenses (180,545) (186,732) (196,785) (209,179)
Employee Benefits Expense (78,888) (79,404) (88,264) (99,283)
Depreciation and Amortisation
Expenses (13,233) (11,276) (11,472) (11,304)
Operating Profit Before Tax 39,010 70,413 98,336 114,840
Interest Expense (1,253) (961) (3,108) (5,714)
Interest Income 119 197 1,238 3,004
EBITDA 52,243 81,689 109,808 127,213
EBIT 39,010 70,413 98,336 115,342
EBT 37,876 69,649 96,466 114,840
Income Tax (14,006) (17,881) (28,110) (27,564)
Net Income 24,885 52,335 68,988 87,276

Exhibit 2 Balance Sheet as of December 31 ($ in thousand)
2009 2010 2011 2012
Cash & Cash Equivalent 63,234 73,157 193,813 238,056
Receivables 40,644 46,554 51,457 54,313
Inventory 57,601 46,735 52,303 55,406
Others 4,968 2,309 24,986 24,986
Current Assets 166,447 168,755 322,559 372,761
Fixed Assets 19,555 18,635 19,872 20,269
Associate & JV 11,846 12,592 44,344 46,250
Intangible Assets 22,952 16,648 16,543 16,273
Long Term Investments 7,596 13,428 17,459 42,459
Others 2,296 9,104 10,299 10,299
Long Term Assets 64,245 70,407 108,517 135,550
Total Assets 230,692 239,162 431,076 508,311
Payables 56,798 74,957 78,497 83,570
Short Term Debt 34,918 15,278 16,260 16,260
Other Current Liabilities 31,015 36,567 45,799 45,799
Current Liabilities 122,731 126,802 140,556 145,629
Long Term Debt 402 119 117,117 142,117
Others 3,251 2,309 4,896 4,896
Long Term Liability 3,653 2,428 122,013 147,013
Total Liability 126,384 129,230 262,569 292,642
Shareholders' Equity 96,679 108,124 165,458 212,120
Minority Interest 7,659 1,808 3,049 3,549
Total equity 104,338 109,932 168,507 215,669
Total Liability & SH
Equity 230,722 239,162 431,076 508,311
Number of Shares
Outstanding 662,516,431 714,916,514 732,650,701 710,530,000
Exhibit 3 Cash Flow Statement ($ in thousand)
2010 2011 2012
Operating Cash Flows
Net Income 52,335 68,988 87,276
Add Depreciation 11,276 11,472 11,304
Change in Working Capital
Inventory 10,866 (5,568) (3,103)
Receivables (5,910) (4,903) (2,856)
Other Current Assets 2,659 (22,677) $0
Payables 18,159 3,540 5,073
Other Current Liabilities 5,552 9,232 0
Net Change in Working Capital 31,326 (20,376) (886)
Net Operating Cash Flows 94,937 60,084 97,694
Investment Cash Flows
Fixed Assets (10,356) (12,709) (11,701)
Associates and JV (746) (31,752) (1,906)
Intangible Assets 6,304 105 270
Long-term Investments (5,832) (4,031) (25,000)
Others (6,808) (1,195) 0
Net Investment Cash Flows (17,438) (49,582) (38,337)
Financing Cash Flows
Short-term Debt (19,640) 982 0
Long-term Debt (283) 116,998 25,000
Others (942) 2,587 0
Dividends Paid (40,860) (11,654) (40,614)
Change in Minority Interests (5,851) 1,241 500
Net Financing Cash Flow (67,576) 110,154 (15,114)
Net Cash Flow 9,923 120,656 44,243
Beginning Cash Balance 63,234 73,157 193,813
Ending Cash Balance 73,157 193,813 238,056
Change in Cash Balance 9,923 120,656 44,243
----- END OF PAPER -----

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