Download Methods for Assessing Projects - Financial Management - Exam and more Exams Financial Management in PDF only on Docsity!
Ollscoil na hÉireann, Gaillimh GX_____
National University of Ireland, Galway
Semester I Examinations 2008/
Exam Code 1DB
Exam Higher Diploma in Business Studies
Module Code AY 872
Module Financial Management I
External Examiner Professor B.O’Dwyer
Internal Examiners
Professor S. Collins Dr. E. Mulligan Dr. G. Robbins
Instructions:
Answer Question 1 in Section A
and Two of the three questions in Section B Separate answer books are not required
Present Value Tables, and a Table of Financial Formulae are attached
Duration 2½ Hours
No. of Answer books 1 Requirements: Handout
MCQ Statistical Tables Graph Paper Log Graph Paper Other Material
No. of Pages 11
Department Department of Accountancy and Finance
Section A
Obligatory
(Answer Question 1 in this section)
Question 1
Bikes Plc. produces and sells a range of bicycles for adults and children. The
company anticipates an increase in demand for bicycles by adults following
recent Government policy announcements which should encourage adults to
leave their cars at home and cycle to work instead. In response to this, Bikes
Plc has recently developed a prototype of a new bicycle with unique safety
features which is superior to bicycles being produced by competitors. The
company is considering commercial production of this new bicycle, and the
following information is available:
o Bikes Plc has spent €300,000 in development costs over the past two
years. This accumulated amount will be written off in the financial
accounts over the next four years on a straight line basis. Full tax relief
on this expenditure was obtained in past tax years.
o Production equipment costing €500,000 will be required for commercial
production. This capital cost will be depreciated for tax purposes on a
straight line basis over the five year life of the project, ignoring residual
value. This equipment is expected to have a cash residual value of
€40,000 in five years time.
o The annual contribution from production and sale of the new bicycle is
estimated at €200,000 for each of the first two years of production, and
€260,000 for each of the remaining three years of production.
o Fixed overheads attributable to the new production activity are
estimated at €38,000 per year, excluding depreciation.
o Whilst no increase in overall general administrative overheads is
anticipated, company policy dictates that an allocation of general
administrative overhead will be charged to all products. The allocation
to be charged to the new product line is estimated at €25,000 per year.
o If the new production equipment is purchased, some existing machines
will be sold immediately for an estimated €60,000. Otherwise, they will
be sold in five years time for €15,000. These machines are now fully
depreciated for tax purposes.
o The project requires an immediate investment in working capital
amounting to €100,000 and an additional investment in working capital
amounting to €20,000 at the end of year two.
Question 1 continued overleaf…
Section B
(Answer any TWO of the three questions in this section)
Question 2:
Wheels Ltd. produces a range of specialised components, supplying a wide
range of customers, all on credit terms. Having used generous credit policies
to encourage past growth, Wheels Ltd. now has to finance a substantial
overdraft and is concerned about its liquidity. Wheels Ltd. borrows from its
bank at an interest rate of 13% per annum. No further sales growth in
volume or value terms is planned for the next year. Debtors are currently
taking 81 days to pay.
In order to speed up collections from customers, Wheels is considering two
alternative policies.
Option 1
Wheels is considering factoring on a non-recourse basis, with the factor
administering and collecting payment from Wheels customers. This is
expected to generate administrative savings of €200,000 per annum and to
lower the average debtor collection period by 15 days. The factor will take a
service charge of 1% of Wheels turnover and also provide credit insurance
facilities for an annual premium of €80,000 payable by Wheels to the factor.
Option 2
Offering discounts to customers who settle their accounts early. The
amount of the discount will depend on the speed of payment as follows:
Payment within 10 days of invoice - 3% discount
Payment within 20 days of invoice - 1.5% discount
It is estimated that customers representing 20% and 30% of Wheels sales
respectively will take up these offers, the remainder continuing to take their
present credit period.
Extracts from Wheels most recent accounts are given below:
Sales (all on credit) 20,
Cost of Sales 17,
Operating Profit 3,
Current Assets:
Stock/Inventory 2,
Debtors/Trade receivables 4,
Cash NIL
Question 2 continued overleaf…
…Question 2 continued
Required:
(a) Calculate the net benefit of each proposed option of reducing debtors/
trade receivables, and recommend the most financially advantageous
policy. Comment on the results of your analysis.
(18 Marks)
(b) Discuss:
(i) how a firm can assess the credit-worthiness of its customers and
potential customers, and
(ii) the benefits and costs of holding inventory/stock.
(12 Marks)
[Total: 30 Marks]
Question 3
Pedals Ltd. has recently reported profits in excess of €1,000,000. The
company has today paid a dividend of €4.50 per share on its ordinary share
capital.
Next year’s dividend is confidently expected to be €5 per share. Profits are
expected to grow at 8% per annum for the subsequent three years, at 4% the
following year and thereafter at 3% per annum indefinitely. Pedals Ltd.
intends increasing dividend payments in line with profits growth.
Required:
(a) Calculate how much you would be prepared to pay for 2,500 shares in
Pedals Ltd. assuming that you are an investor with a 20% annual
required rate of return.
(14 Marks)
(b) Explain how each of the following changes in circumstances, taken
independently, would affect your valuation:
[i] Interest rates in the economy increase, causing investors to
require a higher rate of return from investments generally.
[ii] You hear that a US competitor of Pedals Ltd. intends entering
the Irish market next year. The result of this competitive action
will be a reduction in sales and profits in the future.
Question 3 continued overleaf…
Present Value Interest Factors (PVIF)
Period
Discount Rate
Page
Future Value Interest Factors (FVIF)
Period
Interest Rate
Future Value Interest Factors for an Annuity
(FVIFA)
Period Interest Rate
- 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 2. - 2. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 3. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 3. - 4. - 4. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 3. - 4. - 4. - 4. - 5. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 4. - 4. - 4. - 5. - 5. - 6. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 4. - 4. - 5. - 5. - 6. - 6. - 7. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 4. - 4. - 5. - 5. - 6. - 7. - 8. - 8. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 3. - 3. - 3. - 4. - 4. - 5. - 6. - 6. - 7. - 8. - 9. - 10. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 3. - 3. - 4. - 4. - 5. - 6. - 7. - 7. - 9. - 10. - 11. - 12. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 3. - 3. - 4. - 4. - 5. - 6. - 7. - 8. - 9. - 10. - 11. - 13. - 15. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 3. - 3. - 4. - 5. - 6. - 7. - 8. - 9. - 10. - 12. - 14. - 16. - 18. - 1. - 1. - 1. - 1. - 2. - 2. - 3. - 3. - 4. - 5. - 5. - 6. - 7. - 9. - 10. - 12. - 14. - 16. - 19. - 22. - 1. - 1. - 1. - 2. - 2. - 2. - 3. - 3. - 4. - 5. - 6. - 7. - 9. - 10. - 12. - 14. - 16. - 19. - 22. - 26. - 1. - 1. - 1. - 2. - 2. - 3. - 3. - 4. - 5. - 6. - 7. - 8. - 10. - 12. - 14. - 16. - 19. - 23. - 27. - 31. - 1. - 1. - 1. - 2. - 2. - 3. - 3. - 4. - 5. - 6. - 8. - 9. - 11. - 13. - 16. - 19. - 23. - 27. - 32. - 38. - 1. - 1. - 1. - 2. - 2. - 3. - 4. - 5. - 6. - 7. - 8. - 10. - 13. - 15. - 18. - 22. - 27. - 32. - 38. - 46. - 1. - 1. - 1. - 2. - 2. - 3. - 4. - 5. - 6. - 8. - 9. - 12. - 14. - 17. - 21. - 26. - 31. - 38. - 45. - 55. - 1. - 1. - 1. - 2. - 3. - 3. - 4. - 5. - 7. - 8. - 11. - 13. - 16. - 20. - 24. - 30. - 37. - 45. - 54. - 66. - 1. - 1. - 2. - 2. - 3. - 4. - 5. - 6. - 7. - 9. - 12. - 15. - 18. - 23. - 28. - 35. - 43. - 53. - 65. - 79. - 1. - 1. - 2. - 2. - 3. - 4. - 5. - 6. - 8. - 10. - 13. - 17. - 21. - 26. - 32. - 40. - 50. - 62. - 77. - 95. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 0. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 2. - 5. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 6. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 3. - 3. - 3. - 3. - 7. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 3. - 3. - 8. - 8. - 7. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 9. - 8. - 8. - 8. - 7. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 4. - 4. - 10. - 9. - 9. - 8. - 8. - 7. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 4. - 11. - 10. - 9. - 9. - 8. - 8. - 7. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 4. - 12. - 11. - 10. - 9. - 9. - 8. - 8. - 7. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 4. - 4. - 13. - 12. - 11. - 10. - 9. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 4. - 13. - 12. - 11. - 11. - 10. - 9. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 4. - 14. - 13. - 12. - 11. - 10. - 10. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 4. - 15. - 14. - 13. - 12. - 11. - 10. - 9. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 4. - 4. - 16. - 14. - 13. - 12. - 11. - 10. - 10. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 17. - 15. - 14. - 13. - 12. - 11. - 10. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 18. - 16. - 14. - 13. - 12. - 11. - 10. - 9. - 9. - 8. - 7. - 7. - 7. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 18. - 17. - 15. - 14. - 12. - 11. - 10. - 10. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 5. - 5. - 5. - 5. - 4. - 19. - 17. - 15. - 14. - 13. - 12. - 11. - 10. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 4. - 20. - 18. - 16. - 14. - 13. - 12. - 11. - 10. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 4. - 21. - 18. - 16. - 15. - 13. - 12. - 11. - 10. - 9. - 8. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 4. - 22. - 19. - 17. - 15. - 14. - 12. - 11. - 10. - 9. - 9. - 8. - 7. - 7. - 6. - 6. - 6. - 5. - 5. - 5. - 4. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 1. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 2. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 3. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 4. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 5. - 6. - 6. - 6. - 6. - 6. - 6. - 6. - 7. - 7. - 7. - 7. - 6. - 6. - 6. - 6. - 6. - 6. - 7. - 7. - 7. - 7. - 7. - 8. - 8. - 8. - 8. - 8. - 9. - 9. - 9. - 9. - 7. - 7. - 7. - 7. - 8. - 8. - 8. - 8. - 9. - 9. - 9. - 10. - 10. - 10. - 11. - 11. - 11. - 12. - 12. - 12. - 8. - 8. - 8. - 9. - 9. - 9. - 10. - 10. - 11. - 11. - 11. - 12. - 12. - 13. - 13. - 14. - 14. - 15. - 15. - 16. - 9. - 9. - 10. - 10. - 11. - 11. - 11. - 12. - 13. - 13. - 14. - 14. - 15. - 16. - 16. - 17. - 18. - 19. - 19. - 20. - 10. - 10. - 11. - 12. - 12. - 13. - 13. - 14. - 15. - 15. - 16. - 17. - 18. - 19. - 20. - 21. - 22. - 23. - 24. - 25. - 11. - 12. - 12. - 13. - 14. - 14. - 15. - 16. - 17. - 18. - 19. - 20. - 21. - 23. - 24. - 25. - 27. - 28. - 30. - 32. - 12. - 13. - 14. - 15. - 15. - 16. - 17. - 18. - 20. - 21. - 22. - 24. - 25. - 27. - 29. - 30. - 32. - 34. - 37. - 39. - 13. - 14. - 15. - 16. - 17. - 18. - 20. - 21. - 22. - 24. - 26. - 28. - 29. - 32. - 34. - 36. - 39. - 42. - 45. - 48. - 14. - 15. - 17. - 18. - 19. - 21. - 22. - 24. - 26. - 27. - 30. - 32. - 34. - 37. - 40. - 43. - 47. - 50. - 54. - 59. - 16. - 17. - 18. - 20. - 21. - 23. - 25. - 27. - 29. - 31. - 34. - 37. - 40. - 43. - 47. - 51. - 56. - 60. - 66. - 72. - 17. - 18. - 20. - 21. - 23. - 25. - 27. - 30. - 33. - 35. - 39. - 42. - 46. - 50. - 55. - 60. - 66. - 72. - 79. - 87. - 18. - 20. - 21. - 23. - 25. - 28. - 30. - 33. - 36. - 40. - 44. - 48. - 53. - 59. - 65. - 71. - 78. - 87. - 96. - 105. - 19. - 21. - 23. - 25. - 28. - 30. - 33. - 37. - 41. - 45. - 50. - 55. - 61. - 68. - 75. - 84. - 93. - 103. - 115. - 128. - 20. - 22. - 25. - 27. - 30. - 33. - 37. - 41. - 46. - 51. - 56. - 63. - 70. - 78. - 88. - 98. - 110. - 123. - 138. - 154. - 22. - 24. - 26. - 29. - 33. - 36. - 40. - 45. - 51. - 57. - 64. - 72. - 80. - 91. - 102. - 115. - 130. - 146. - 165. - 186. - 23. - 25. - 28. - 31. - 35. - 39. - 44. - 50. - 56. - 64. - 72. - 81. - 92. - 104. - 118. - 134. - 153. - 174. - 197. - 225. - 24. - 27. - 30. - 34. - 38. - 43. - 49. - 55. - 62. - 71. - 81. - 92. - 105. - 120. - 137. - 157. - 180. - 206. - 236. - 271. - 25. - 28. - 32. - 36. - 41. - 46. - 53. - 60. - 69. - 79. - 91. - 104. - 120. - 138. - 159. - 183. - 211. - 244. - 282. - 326. - 26. - 30. - 34. - 39. - 44. - 50. - 58. - 66. - 76. - 88. - 102. - 118. - 136. - 158. - 184. - 213. - 248. - 289. - 337. - 392. - 28. - 32. - 36. - 41. - 47. - 54. - 63. - 73. - 84. - 98. - 114. - 133. - 155. - 181. - 212. - 249. - 292. - 342. - 402. - 471.
Financial Formulae
PV 0 = FVN / (1 + i)N
- Present Value of a Perpetuity:
PV 0 = CF / i
- Present Value of a Growing Perpetuity:
PV 0 = CF 1 / (i – g)
PV(Ordinary Annuity) x (1 + i)
- Value of a Debt Security:
N P 0 = Σ Int / (1 + Kd)t^ + M /(1 + Kd)N t = 1
- Value of a Irredeemable Preference Share: N Po = Σ Div / KP t = 1
- Dividend Valuation Model with Constant Growth:
P 0 = Div 1 / (KE - g)
- Cost of Equity using Constant Growth Dividend Valuation Model KE = (Div 1 / P 0 ) + g
- Net Present Value
N NPV = - NINVo + Σ CF (^) t / (1 + K)t t = 1
- Capital Asset Pricing Model:
E(RJ) = RF + β (^) j ( E(RM ) - RF)
Carrying Cost
*****^2 OrderCostDemand Q =
- Weighted Average Cost of Capital:
KO = KE (E/V) + KP (P/V) + KDT (D/V)
Page 11
