Masters in Business Administration (Finance)
August 2021 EXAMINATIONS
Module Code: B9AC103
Module Description: Corporate Financial Management
Examiner: Paul Lydon
Internal Moderator: Richard O Callaghan
External Examiner: Sean O Reilly
Date:
Time:
INSTRUCTIONS TO CANDIDATES
Time allowed is 3 hours
Question 1 is compulsory
Answer any 3 Questions from the remaining 5
Question 1 carries 34 marks, all other question carry 22 marks
Show ALL workings
Formulae and Mathematical Tables Attached
Question 1 (Compulsory)
Brief Encounter Ltd has recently been offered a contract to produce a specialised Paint for a large multinational company in Germany. The contract will involve producing 15,000 tonnes of the paint at a sale price of € 80.00 per tonne each year over a four-year contract period.
The management of the company are interested in taking the contract as they believe that it may open the way to further contract work in the multinational sector. However, the management of Brief Encounter Ltd. are uncertain as to the financial benefits of the contract so they have invited you, to review this proposal.
Following a preliminary meeting you sought some additional information about the company and its production process which has now been provided as follows:
(i) Incremental overheads relating to the contract are estimated to be €84,000 per annum.
(ii) New capital equipment costing €450,000 will be required immediately. At the end of the machine will have no scrap value.
(iii) The company can claim capital allowances on a straight-line basis at 25%
(iii) Five additional workers will be required to work on the new contract. Additional
labour costs are therefore estimated at €100,000 in the first year of the contract. Wage’s inflation will be running at 1.5% per annum from year 2 onwards.
(iv) Production of the paint will require 9000 tonnes of a certain chemical each year. The cost of the chemical is €28 per tonne.
(v) Production of the new paint will also require 11000 tonnes of special oil each year at a current cost of €50 per tonne each year. The special oil will have a price inflation rate of 5% per annum.
(vi) The tax rate is 10% and tax is paid in the year of the revenue.
Brief Encounter Ltd’s cost of capital is 8%.
Required:
(a) Calculate NPV to the nearest € and comment on the financial acceptability.
(26 marks)
(b) Calculate the IRR.
(8 marks)
Total (34 marks)
Question 2
(a) Managers and owners of business may not have the same objectives. Explain this statement, illustrating your answer with examples of possible conflicts of interest.
(9 marks) (b) In what respect can it be argued, that companies need to exercise corporate social responsibility?
(9 marks) (c) Explain the meaning of the term 'Value for Money' in relation to the management of publicly owned services/utilities.
(4 marks) Total (22 marks)
Question 3
The following information is available for Parrot plc:
Current Share price €3.10
Share capital €3m
Nominal value of each share 50c
Total par value of the 9% irredeemable debentures €10m
The company has recently paid a dividend of €0.22.
Ordinary dividends are expected to grow at 4% per annum for the foreseeable future.
The current market value of the irredeemable debentures is €110.00 ex-interest. The corporate rate of tax is 30%.
Required:
(a) Calculate the weighted average cost of capital of Parrot Co.
(15 marks) (b) Discuss the meaning of following:
• Cum div share price
• Ex div share price
• Why an adjustment must be made and to use the dividend valuation model when the share price is cum div.
(7 marks)
(Total: 22 marks)
Question 4
You are presented with the following information for Trusty Plc, a manufacturing company:
Balance Sheets as at 31st December 2021 2020
Fixed Assets €000 €000 €000 €000
Intangible 1,275 nil
Tangible 18,000 16,500
19,275 16,500
Current Assets
Stocks 21,000 19,500
Debtors 24,000 22,500
Bank and cash 750 750
45750 42,750
Total Assets 65,025 59,250
Current Liabilities 36,000 30,000
Creditors due after more than one year 9,000 8,250
Capital and reserves
Ordinary share capital 1,950 1,950
Share Premium 4,950 4,950
Revaluation Reserve 3,000 3,000
Profit and loss account 10,125 11,100
65,025 59,250
Profit & Loss Account for the Year Ended 31st December 2021 2020
€’000 €’000
Turnover 90,000 75,000
Cost of sales 63,000 51,000
Gross profit 27,000 24,000
Operating expenses 23,250 19,500
Operating Profit 3,750 4,500
Interest payable 3,300 1,950
Profit before taxation 450 2,550
Taxation (525) (900)
Profit on ordinary activities after taxation (75) 1,650
Less dividends paid and proposed (900) (900)
Retained profit for the financial year (975) 750
Required:
(a) Prepare a table of the following 8 ratios, calculated for both years, clearing showing the figures used in the calculations:
(i) Current Ratio;
(ii) Acid Test (Quick ratio);
(iii) Stock turnover in days;
(iv) Debtors days;
(v) Creditors days;
(vi) Gross profit %;
(vii) Net profit % (before tax);
(viii) ROCE
(16 marks)
(b) Discuss the trends of profitability and liquidity of the company indicated by the above results and comment on the limitations of your analysis.
(6 marks)
(Total: 22 marks)
Question 5
(a) Briefly analyse Markowitz’s Portfolio Theory, your answer should include its application and the assumptions that underpin it.
(7 marks)
(b)
You have been asked to evaluate the risk of the following 2 asset portfolio:
Asset 1 Asset 2
Value €27,000,000 €31,000,000
Scenario Probability Return Probability Return
Best Case 0.1 14% 0.3 17%
Worst Case 0.5 11% 0.4 15%
Most Likely 0.4 7% 0.3 10%
Required
i. Calculate the Variance and Standard Deviation of each of Asset 1 and Asset 2.
8 Marks
ii. Calculate the Standard Deviation of the portfolio if the covariance of the portfolio has been calculated to be 0.77.
7 Marks
(Total: 22 marks)
Question 6
Philm Co sells stationery and office supplies on a wholesale basis and has an annual revenue of €4,000,000. Cost of sales for the year amounted to €3,200,000. The company employs four people in its sales ledger and credit control department at an annual salary of €12,000 each. All sales are on 40 days’ credit with no discount for early payment. Bad debts represent 3% of revenue and Philm Co pays annual interest of 9% on its overdraft. The most recent accounts of the company offer the following financial information:
Philm Co: Statement of financial position as at 31 December 2020
€000 €000
Non-current assets 17,500
Current assets
Inventory 900
Receivables 550
Cash 120
–––––
1,570
––––
Total assets 19,070
––––
Equity and liabilities
Ordinary shares 3,500
Reserves 11,640
–––––
Total equity 15,140
Non-current liabilities
12% loan notes due 2029 2,400
Current liabilities
Trade payables 330
Bank overdraft 1,200
–––––
1,530
–––––
Total equity and liabilities 19,070
Current sector averages are as follows
Inventory days: 90 days
Receivables days 45 days
Payables days 60 days
Required:
(a) Calculate the length of Philm’s cash operating cycle and the current sector average cash operating cycle and comment on your findings.
(14 marks) (b) Outline the problems that may arise by reducing operating cycle to the minimum possible period.
(8 marks)
(Total 22 marks)
END OF EXAMINATION
Present Value Tables
Present value of 1, i.e. (1 + r)-n Where r = discount rate n = number of periods until payment
Periods Discount rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
1 0.826 0.820 0.813 0.807 0.800 0.794 0.787 0.781 0.775 0.769
2 0.683 0.672 0.661 0.650 0.640 0.630 0.620 0.610 0.601 0.592
3 0.565 0.551 0.537 0.525 0.512 0.500 0.488 0.477 0.466 0.455
4 0.467 0.451 0.437 0.423 0.410 0.397 0.384 0.373 0.361 0.350
5 0.386 0.370 0.355 0.341 0.328 0.315 0.303 0.291 0.280 0.269
6 0.319 0.303 0.289 0.275 0.262 0.250 0.238 0.227 0.217 0.207
7 0.263 0.249 0.235 0.222 0.210 0.198 0.188 0.178 0.168 0.159
8 0.218 0.204 0.191 0.179 0.168 0.157 0.148 0.139 0.130 0.123
9 0.180 0.167 0.155 0.144 0.134 0.125 0.116 0.108 0.101 0.094
10 0.149 0.137 0.126 0.116 0.107 0.099 0.092 0.085 0.078 0.073
11 0.123 0.112 0.103 0.094 0.086 0.079 0.072 0.066 0.061 0.056
12 0.102 0.092 0.083 0.076 0.069 0.063 0.057 0.052 0.047 0.043
13 0.084 0.075 0.068 0.061 0.055 0.050 0.045 0.040 0.037 0.033
14 0.069 0.062 0.055 0.049 0.044 0.039 0.035 0.032 0.028 0.025
15 0.057 0.051 0.045 0.040 0.035 0.031 0.028 0.025 0.022 0.020
Annuity Table
1 – (1 + r)-n
Present value of an annuity of 1, i.e. r
Where r = discount rate n = number of periods
Periods Discount rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367
15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606
11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
1 0.826 0.820 0.813 0.806 0.800 0.794 0.787 0.781 0.775 0.769
2 1.509 1.492 1.474 1.457 1.440 1.424 1.407 1.392 1.376 1.361
3 2.074 2.042 2.011 1.981 1.952 1.923 1.896 1.868 1.842 1.816
4 2.540 2.494 2.448 2.404 2.362 2.320 2.280 2.241 2.203 2.166
5 2.926 2.864 2.803 2.745 2.689 2.635 2.583 2.532 2.483 2.436
6 3.245 3.167 3.092 3.020 2.951 2.885 2.821 2.759 2.700 2.643
7 3.508 3.416 3.327 3.242 3.161 3.083 3.009 2.937 2.868 2.802
8 3.726 3.619 3.518 3.421 3.329 3.241 3.156 3.076 2.999 2.925
9 3.905 3.786 3.673 3.566 3.463 3.366 3.273 3.184 3.100 3.019
10 4.054 3.923 3.799 3.682 3.571 3.465 3.364 3.269 3.178 3.092
11 4.177 4.035 3.902 3.776 3.656 3.543 3.437 3.335 3.239 3.147
12 5.278 4.127 3.985 3.851 3.725 3.606 3.493 3.387 3.286 3.190
13 4.362 4.203 4.053 3.912 3.780 3.656 3.538 3.427 3.322 3.223
14 4.432 4.265 4.108 3.962 3.824 3.695 3.573 3.459 3.351 3.249
15 4.489 4.315 4.153 4.001 3.859 3.726 3.601 3.483 3.373 3.268
FORMULAS
Capital asset pricing model
rj = rf + ß(rm - rf)
Dividend valuation model (no growth – finding the value of equity)
P0 =
D1
Ke
Dividend valuation model (no growth – finding the cost of equity)
Ke = D1
P0
Dividend valuation model (with growth – finding the cost of equity)
Ke = D0(1 + g)
P0
+ g
Dividend valuation model (with growth – finding the value of equity)
P0 =
D0(1 + g)
Ke - g
Interpolation (IRR)
IRR rate = Rate 1 +
( NPV 1 )
(NPV 1 - NPV 2) *(Rate 2 – Rate 1)
Irredeemable debt (market value of debt)
D = i
Kd
Irredeemable debt (cost of debt)
Kd =
i(1-t)
D
Preference share (cost)
KP =
D1
Pp
Redeemable bonds (market value)
P0 =
I1
-----------
I2
+ -----------
+ … … +
Rn
-----------
(1 + Kd) (1+Kd)2 (1+Kd)n
Redeemable bonds (cost/return)
I1
Kd = P0
+
(R – P0)/n
P0
Redeemable debt at current market prices (cost)
i(1-t)
MV
Non-tradeable Debt (cost)
Kdt = i(1 - t)
Weighted average cost of capital (WACC)
WACC =
E(Ke)
(D + E)
+
D(Kd(1-t))
(D + E)
Portfolio Theory
Expected return of a Single Asset Portfolio
E(r) = p1r1 + p2r2 + p3r3 + ... + pnrn
Expected return of a Multi-Asset Portfolio
E(r) = w1r1 + w2r2 + w3r3 + … + wnrn
Risk of a Portfolio (Variance of a portfolio)
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Standard Deviation of a 2 Asset Portfolio
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Covariance
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Correlation
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?? =
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