Question 1: X Ltd is a new company in the electronics industry. The directors are very competent in their own fields of electronics, marketing and human resources however they do not have experience in the accounting side of running a company.
They feel particularly uncomfortable with dealing with the financial side of their customers, as they want to build friendly professional relationships using their own expertise.
The human resources director has heard of factoring but is unsure of what it involves. She has been told that they will offer payment of invoices within 20 days of issue and they charge 2% factor fee applied to the turnover. If X Ltd takes on a factoring company, it will avoid having to set up its own credit control department at a cost of £50,000 per annum.
The director has been told that if a non-recourse factoring is offered it will cost an extra £10,000 per annum, although she is unsure what this actually means. They believe that turnover in the first year could be as much as £1.5 million. They are going to offer their customers 55 days to pay, which is higher than the industry norm but they are trying to build the company and feel it is important to offer a longer credit period.
A competitor’s financial statements has shown a figure for bad debts that represents 1% of total credit sales. It is believed that this is a fair figure for the bad debts that X Ltd may experience. An overdraft has been agreed at a cost of 9% per annum.
a) Explain fully to the Board of Directors the services offered by a factoring company. (There is a word limit of 150 words for this part a of the question. You do not HAVE to write this amount – it is a limit rather than a target.) (5 marks)
b) Calculate the net cost/saving offered by the factoring company and recommend whether factoring should be undertaken. (10 marks)
The industry average of inventory days in the electronics industry is 45 and for payable days it is 53. c) Assuming that the factoring company is employed, what is the length of the Cash Operating Cycle? Discuss whether this should be maximised or minimised. (10 marks)
Total 25 marks
Question 2: Accen Plc has a share price of £5.15 on the London Stock Exchange for each of its 2 million ordinary shares. The Finance Director feels that this is undervalued and that the share price should be £5.75.
Required: a) Explain to the Finance Director why it is believed that the listed share price is a true representation of the value of a share. (Note: bring the Efficient Market Hypothesis into your explanation).
(There is a word limit of 150 words for this part a of the question. You do not HAVE to write this amount – it is a limit rather than a target.) (5 marks)
b) Explain four methods that can be used to value the equity of a company, including the advantages and disadvantages of each method. (There is a word limit of 350 words for this part b of the question. You do not HAVE to write this amount – it is a limit rather than a target.) (10 marks).
Accen Plc reported a Profit After Tax this year of £765,000 which is expected to be repeated next year. The company has just paid a dividend of £500,000. Its return on assets is on average 8%. The financial statements show net assets of £4.5 million but the Finance Director is in the process of revaluing the non-current assets with an increase of £200,000. Its main competitor, Biba Plc which is a similar size, has a P/E ratio of 15 and a beta of 1.2. The risk free rate is 3% and the market premium is 4%.
Required: c) Calculate three alternative equity valuations for Accen Plc based on the above information. Which value would you recommend if the company was facing a takeover situation and why? (10 marks)
Total 25 marks
Question 3: Cada Plc has an investment opportunity which will cost £750,000. To raise the money, it will create a rights issue at a discount of 20% on the current share price of £3.75. There are 1,000,000 ordinary shares in issue at the moment.
Required: a) Calculate the Theoretical Ex Rights Price after the rights issue takes place. (6 marks)
b) Show the calculations of the monetary value of 10,000 shares owned by Shareholder X before the rights issue. Compare this to the value after the rights issue if: i) X sells his rights; ii) X takes up his rights; iii) X does nothing. (10 marks)
c) Explain the three different policies for funding Working Capital, with regards to the different types of assets available to a company. (There is a word limit of 350 words for this part c of the question. You do not HAVE to write this amount – it is a limit rather than a target.) (9 marks)
Question 4: Exor Ltd has the following information taken from their statement of financial position:
Required; a) Calculate the market value weighted average cost of capital of Exor Ltd. (14 marks)
b) Calculate the book value weighted average cost of capital of Exor Ltd. (4 marks)
c) Compare the two weighted average cost of capital values and explain the difference. (3 marks) d) State when it is acceptable that the weighted average cost of capital is used as a discount factor. (4 marks)
Total 25 marks