Exam
SAMPLE FACE PAGE FOR EXAMINATION PAPERS NEWCASTLE UNIVERSITY _______________________ Practice Exam May 1 _______________________ INTRODUCTION TO MANAGEMENT ACCOUNTING AND FINANCE Time allowed - 2 hours Instructions to candidates:- a) You need to attempt any THREE questions out of the four available b) Marks for each question are clearly shown. You should use this as a guide to the time you need to spend on each question c) Approved calculators are allowed d) This is a closed book exam e) Full workings must be shown [Turn over] QUESTION 1. Rodger Ltd is a small company which wants to grow in terms of both size and reputation. To achieve this a new Finance Director has been appointed who will oversee a growth strategy and to review the way that the Board of Directors operate. Rodger Ltd has decided to invest £280,000 in equipment for one new project. The Finance Director has worked out the following projections for two potential investment opportunities: Project A £ Project B £ Cash flow in year 1 74,000 65,000 Cash flow in year 2 97,000 88,000 Cash flow in year 3 62,000 91,000 Cash flow in year 4 54,000 80,000 Cash flow in year 5 50,000 47,000 It is estimated that, irrespective of which project is chosen, the equipment used can be sold at the end of Year 5 for £75,000. Rodger Ltd’s cost of capital is 12%. Required: (a) Calculate the payback period for both projects. (2 marks) (b) Calculate the net present value (NPV) for both projects. (7 marks) (c) Calculate the internal rate of return (IRR) for the project with the highest NPV. (6 marks) (d) Explain the five main principles of corporate governance as discussed in this UK Corporate Governance Code as issued by the Financial Reporting Council to assist the new Finance Director in his goal to update the Board of Directors. (10 marks) Total 25 marks QUESTION 2. Jenny is planning to start her own business making scented candles. With the help of a friend who is training to be an accountant, she has established the following: 1. She will need about £30,000 initially so that she can buy all the equipment and materials she needs. 2. The selling price will be £6.50 per candle. 3. The cost per candle will be £3.50. 4. Her fixed overheads will be approximately £15,000 per year. Her friend has explained to Jenny that one of the most critical aspects to a successful business is controlling working capital. Her friend explained that working capital is made up of inventories, trade receivables and trade payables. Required: (a) Explain to Jenny the funding options open to her to raise £30,000. (6 marks) (b) Explain to Jenny why it is important to effectively manage each of the three elements within working capital. (11 marks) (c) Calculate the following: i. The break-even point in units. ii. The break-even point if a profit of £25,000 is required. (3 marks) (d) Explain to Jenny the limitations of break-even analysis. (5 marks) Total 25 marks QUESTION 3. Andle plc currently has 25,000,000 shares in issue. Each share is traded on the stock market at £2.80. Andle plc needs to raise £5,000,000 of new finance to invest and it plans to sell shares at £2.00 per share. Cassie is a shareholder in Andle plc and owns 500,000 shares. She cannot decide whether to take up the rights issue, or sell the rights to the rights issue. Andle plc currently uses the average cost method to value their inventory. The Managing Director is keen to explore alternative valuation policies for the inventory. Required: a) Calculate the theoretical ex-rights price following the new issue of shares. (6 marks) b) Calculate Cassie’s net wealth if she: i. takes up the rights issue ii. sells the rights to the rights issue. [Full workings must be shown] (7 marks) c) Explain why Cassie should not ignore the rights issue. (3 marks) d) Explain the respective advantages and disadvantages of the three methods of inventory valuation. (9 marks) Total 25 marks QUESTION 4. Willey plc has the following capital structure, based on its balance sheet: £ £1 Ordinary shares – at par 8,000,000 Reserves 14,300,000 10% debenture stock 5,500,000 27,800,000 The current market value of the shares is £4.10. The debenture stock is valued at £97 per £100 nominal value. Cost of equity is estimated at 14.2% and cost of debt is estimated at 11.7%. Willey plc has recently appointed a new Finance Director who wants to take a fresh look at Willey plc’s dividend policy as he feels that Willey plc has not considered this area for many years. Willey plc makes parts for the car industry. It has two production departments, one for each product to makes and a service department which maintains the machinery in both production departments. Expected overheads for the year ended 31 December 2019 are: £ All building costs 1,456,000 Depreciation of machinery 832,000 2,288,000 The additional information: Department: Manufacturing Department A Manufacturing Department B Service Department Floor area (sq meters) 3,800 5,600 1,000 Number of employees 40 60 5 Value of machines 5,000,000 8,000,000 The service department employees have an annual salary (inclusive of employer costs) of £27,200. In addition, there is a supervisor who is responsible for all three departments. The annual salary (inclusive of employer costs) is £51,450. The factory works for 37.5 hours per week for 46 weeks of the year. Required: (a) Calculate the weighted average cost of capital (WACC) based on both book value and market value. (6 marks) (b) Explain to the new Finance Director the five theoretical impacts on shareholder wealth of a company’s dividend policy. (10 marks) (c) Calculate the overhead absorption rate for each production department, based on labour hours. (9 marks) Total 25 marks END OF EXAM PAPER ACC1011 Page 7 of 8 1) 2) 3) Present Value Table Periods Discount Rate (r) (n) 5% 6% 7% 8% 9% 10% 11% 12% 1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 1 2 0.907 0.890 0.874 0.857 0.841 0.826 0.812 0.797 2 3 0.863 0.839 0.817 0.794 0.772 0.751 0.731 0.712 3 4 0.822 0.792 0.763 0.735 0.708 0.683 0.659 0.636 4 5 0.783 0.747 0.713 0.681 0.650 0.621 0.593 0.567 5 6 0.746 0.705 0.667 0.630 0.596 0.564 0.535 0.507 6 7 0.710 0.665 0.623 0.584 0.547 0.513 0.482 0.452 7 8 0.677 0.627 0.582 0.540 0.502 0.466 0.434 0.404 8 9 0.644 0.592 0.544 0.500 0.460 0.424 0.391 0.361 9 10 0.614 0.558 0.509 0.463 0.422 0.386 0.352 0.322 10 Periods Discount Rate (r) (n) 13% 14% 15% 16% 17% 18% 19% 20% 1 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1 2 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 2 3 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 3 4 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 4 5 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 5 6 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 6 7 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 7 8 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 8 9 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 9 10 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 10 Periods Discount Rate (r) (n) 21% 24% 25% 30% 1 0.826 0.806 0.800 0.769 1 2 0.683 0.650 0.640 0.592 2 3 0.564 0.524 0.512 0.455 3 4 0.467 0.423 0.410 0.350 4 5 0.386 0.341 0.328 0.269 5 6 0.319 0.275 0.262 0.207 6 7 0.263 0.222 0.210 0.159 7 8 0.218 0.179 0.168 0.123 8 9 0.180 0.144 0.134 0.094 9 10 0.149 0.116 0.107 0.073 10 END OF TABLE Page 2 of 2 Page 8 of 8