and care must be taken regarding the format and literacy of the solutions. The
marking system will take ... attempted. MANAGERIAL FINANCE. PILOT PAPER ...
MANAGERIAL FINANCE
PILOT PAPER - COMMENCING APRIL 2008 NOTES:
Answer All Questions. ATTACHED: NET PRESENT VALUE AND ANNUITY TABLES.
TIME ALLOWED:
3 hours, plus 10 minutes to read the paper.
INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page.
You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted.
The Institute of Certified Public Accountants in Ireland, 9 Ely Place, Dublin 2.
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND
MANAGERIAL FINANCE PILOT PAPER - COMMENCING APRIL 2008
TIME ALLOWED: 3 hours and 10 minutes to read the paper.
ATTACHED: NET PRESENT VALUE AND ANNUITY TABLES.
1.
Answer All Questions.
Section A – Questions 1, 2 and 3 Candidates must attempt all three questions With respect to Question 3, candidates may attempt either part A or part B
Laserlabs, a medical practice wishes to develop a facility for eye laser surgery.
They have researched the options at a recent trade fair and are interested in a Florida based company’s technology. The financial proposal offered by the company seems to be more flexible and cost effective than it’s nearest rivals. Whilst the technology is cutting edge it remains untested in the marketplace. Laserlabs have met with the company’s European representative and have drafted an outline contract as follows: Legal Form and Duration: Purchase a three year licence at a one off cost of €600,000
Equipment Cost: the initial capital cost to purchase the hardware and operating software will be €500,000. The software and hardware will has no expected resale value at the end of the three years. Annual Software Licence: the annual licencing fee will be €50,000.
Royalty Payments: A royalty fee of €150 per eye treated must be paid. Volume Permitted: 10,000 eye surgery episodes per year.
Consumables: Laserlabs must purchase the surgical consumables from the Florida based supplier at a cost of €100 per eye treated. Laserlabs have researched their internal costs associated with providing the surgery. Their findings were as follows. Staffing A surgical ophthalmologist will be employed at a base salary of €150,000. The ophthalmologist will be paid an annual bonus of €50,000 in any year that the number of eyes surgery episodes exceeds 8,500.
A locum ophthalmologist will be employed for the four weeks that the full time surgeon is on annual leave. This will cost €10,000 per week.
A nurse will be employed at an annual cost of €35,000.
All permanent staff’s basic salary costs are expected to rise by 8% per annum commencing in year 3 of the project.
A contract has been agreed with a full time cleaning/maintenance firm. The quarterly cost will total €20,000 with a 5% annual uplift commencing in year 2 of the project. Laserlabs has researched the income potential of the venture. It sales projections are as follows:
Page 1
Private patients The forecast private patient referrals are as follows: Year 1 = 2,000 Year 2 = 3,000 Year 3 = 4,000
The charge per eye correction will be €750 which will remain fixed for the next three years.
Public Patients The local health board has indicated that it would be willing to enter into a three year contract for its patients, once the capability of the technology has been demonstrated. The health board intends to buy a block contract of 6,000 eye corrections at a fixed annual price of €1,000,000 with no inflation uplift over the three years. Other Information
Laserlabs assesses potential investments based on a combination of the following criteria: Payback Period minimum of 3 years. Delivers a positive Net Present Value (NPV) Laserlabs Limited has a cost of capital of 10%. Ignore Taxation
Required Prepare a report for the Board of Laserlabs Limited which: recommends whether or not to sign the draft contract based on a financial assessment.
(18 Marks)
considers three qualitative factors the management of Laserlabs should consider prior to making a final decision whether or not to sign the draft contract (6 Marks) Presentation mark
(1 Mark)
[TOTAL : 25 Marks]
Page 2
2.
A client, Fiona Sena has asked you for investment advice. She is planning to invest in a portfolio of shares. Details are as follows: Share 1 – Stella PLC a company in the construction industry. Expected annual returns are as follows: Annual Investment Return Probability of Occurrence 12% .4 .6 24%
Share 2 – Ginger Limited a company in the property development industry. Expected annual returns are as follows: Annual Investment Return Probability of Occurrence .3 10% 20% .7 You have calculated the co-efficient of correlation between the two shares which is +.75.
Fiona plans to invest €600,000 in Stella PLC shares and the remaining €400,000 of her investment fund in Ginger Limited’s shares. You have ascertained the following additional information: Return on government bonds = 4% Return expected from the ISEQ = 10% Measure of risk of Market portfolio = 6%
Required: Prepare a briefing note for Fiona which advises on the following issues relating to her proposed investment: briefly explains the terms portfolio theory, systematic and unsystematic risk calculates the expected return from each share and her proposed portfolio calculates the standard deviation each share and the proposed portfolio using the CAPM formula, advise as to whether the portfolio is efficient or inefficient
3.
(a)
(6 (3 (6 (4
Marks) Marks) Marks) Marks)
Presentation Mark (1 Mark) [Total : 20 Marks]
Your client Mark Smyth has recently been appointed to a part time, voluntary position as Chairman of a local charity. Mark has no previous experience of the workings of a not-for-profit organisation such as this charity.
Required Prepare a briefing note for Mark Smyth that provides an overview of how the financial objectives of a not-for-profit organisation may differ from a commercial organisation (Total 15 Marks) (b)
Outline in detail the meaning and significance of any two of the following three terms. ● ● ●
venture capital as a source of finance price earnings multiple the business expansion scheme
(Total 15 Marks)
Page 3
4.
Section B – Questions 4 and 5 Candidates must attempt two questions With respect to Question 5, candidates may attempt either part A or part B
Multiple Choice Questions. Each question is worth 2.5 marks
Dingle Limited is a sports equipment supplier based in Ennis, Co. Clare. Dingle Limited’s audited Income Statements and Balance Sheets for the last two years are as follows: Dingle Limited Balance Sheet As at 30th April 2006 and 2007
Non Current Assets at NBV Property and Plant Other Assets
Total Non Current Assets
Current Assets Inventories Trade Receivables Cash and Cash Equivalents Total Current Assets Total Assets
2007 €000’s
3000 40
3775 440
3040
4215
640 190 170
800 530 0
1000
1330
2000 1100 350 3450
2000 1100 875 3975
280 30 280
420 60 190
4040
5545
4040
Equity and Liabilities
Equity Attributable to Equity Holders 1,000,000 Ordinary shares @ €2 each 20% Preference Shares @ €1 each Other Reserves (Retained Revenue Reserves)
Non Current Liabilities 5% Debentures redeemable at par on 30/4/2009 Current Liabilities Trade Payables Short Term Borrowings Current Portion of long term borrowings Total Current Liabilities Total Liabilities
2006 €000’s
0
590
5545
900
670
Revenue Less: Cost of Sales
Dingle Limited Summary Income and Expenditure Accounts for Years Ended 30th April 2006 and 2007 2006 €000’s 4700 3600
2007 €000’s 6700 4800
Net Profit after Tax
224
52
Gross Profit Less: Expenses Profit Before Tax Tax @ 30%
1100 -780 320 -96
Page 5
1900 -1150 750 -225
Q1)
Dingle Limited’s operating cash cycle for the year ended 30/4/2007 was: a) 48 days b) 58 days c) 68 days 78 days d)
Dingle Limited’s most expensive item of stock is a football goal. Relevant details are as follows:
Q2)
Q3)
Dingle Limited - Football Purchase Price Annual Demand Ordering Cost Annual Holding Cost
Goal €300 per unit 3,000 units €450 10% of purchase price
The Economic order quantity (EOQ) for the football goal product is : a) 100 units b) 200 units c) 300 units d) 400 units The annual cost of ordering the football net product is: a) €500 b) €50,000 c) €4,500 d) €10,000
Further relevant details relating to Dingle Ltd’s Balance Sheet as at 30/4/2007 are as follows:
● ● ●
●
● ● ●
●
Q4)
Q5)
Ordinary shares are presently trading at €4 cum-div. Preference shares have a cum-div market value of €1.60. Dingle Limited’s most recent board meeting agreed a dividend for the year of €.40c per ordinary share. This will be paid in two weeks time. Dingle Limited’s Board has indicated that they expect the average annual rate of growth in dividends to continue at 10% per annum. Debentures are presently trading at 82% of the value they were issued at. Debenture interest is paid annually. All payments relating to the y/e 30/4/2007 have been made in full. Preference dividends are paid half yearly. The dividend for the first half of the year ended 30th April 2007 has been paid. Corporation tax of 30% is payable on profits in the year in which profits are reported.
Dingle Limited’s cost of Equity is: a) 12.22% b) 16.22% c) 18.22% d) 22.22%
Dingle Limited’s cost of Preference Shares is: a) 13.33% b) 14.33% c) 15.33% d) 16.33%
Page 6
Q6)
Dingle Limited’s approximate cost of debentures is: a) 4.5% b) 14.5% c) 24.5% 34.5% d)
Dingle Limited has recently been concerned about availability of the rubber and silicone commodities to produce its basketball and baseball products. Both commodities are in short supply for next year. The inputs of each required to produce each basketball are as follows: Commodity Rubber Silicone
Contribution per product
Basketball Inputs Baseballs 2 4 10
Basketballs 4 6 20
Only 10,000 KGs of rubber and 20,000 KGs of silicone are available to Dingle Limited next year.
Q7)
Q8)
5.
(a)
Let x = the quantity of baseballs produced and sold. Let y = the quantity of basketballs produced and sold.
The algebraic expression for the silicone constraint is as follows: a) 6y + 4x = 20,000 b) 4x + 6y = 20,000 c) 4x + 6y ≤ 20,000 d) 4x + 6y ≥ 20,000 The objective function can be stated as follows: a) Minimise 20x + 10y b) Maximise 20x + 10y c) Minimise 10x + 20y d) Maximise 10x + 20y
It is the 1st September 2007, your client Cologne Limited’s Financial Director, Sylvia Laudenberg has just been informed that the finance manager of Cologne Limited’s Gorey factory has gone on long-term sick leave. She is immediately concerned that the first draft budgets for the year ended 31st December 2008 for the Gorey factory are due for submission by month end (30th September 2007). The Gorey factory manufactures one product a wooden horse. Sylvia has asked you to travel to Gorey with the urgent brief of submitting a quarterly cash budget for the year ended 31st December 2008. You have spent the last two days at the Gorey factory. During this time you have inspected the budget working files and had discussions with key staff. You have discerned the following information relevant to the preparation of the requisite budgets.
Review of Budgeting Working File the variable cost per unit is estimated at €10 ● budgeted quarterly fixed production costs for the year 2008 are €2,575,000. This includes annual depreciation on plant and machinery of €100,000. ●
Discussions with Sales Manager The sales demand projected for each quarter of 2008 are as follows:
Projected Sales Demand Quarter Demand (units) 1 40000 2 52000 3 48000 4 54000
Page 7
●
●
the price per horse has been set at €120 for the first six months of the year, increasing by €30 per unit for the remainder of the year 2008. Sales in both quarter 3 and 4 of 2007 are forecast at 35,000 horses per quarter at a sales price of €100 each
Discussions with Production Manager horses are manufactured on a just in time basis ● each horse requires two units of component Zee costing €8 per component. ● materials are purchased on a just in time basis ● two hours of direct labour are required for the production of each unit of finished product. Labour currently costs €10 per hour and is subject to a pay award of 20% effective from 1st October 2008. ●
Discussions with the Factory Bookkeeper All sales are on credit. Debtors take three months to settle their accounts. ● Materials are paid for six month’s after the date of purchase ● Wages and all overheads (fixed and variable) are paid in the quarter in which they are incurred ● On 1st January 2008 motor vehicles will be purchased at a cost of €50,000. It will be paid for in full in September 2008. ● Corporation Tax owing on 31st December 2007 must be paid in July 2008. ●
The Forecast Balance Sheet as at 31st December 2007 is as follows:
Cologne PLC - Gorey Plant Projected Balance Sheet as at 31st December 2007
ASSETS
€
Non Current Assets Land & Buildings Plant & Equipment at Net Book Value Current Assets Trade Receivables Cash and Cash Equivalents
2,000,000 200,000 3,500,000 0
Total Assets
5,700,000
EQUITY AND LIABILITIES
€10 Ordinary Shares Accumulated profits Current Liabilities Trade payables Corporation Tax Short Term Borrowings/Overdraft
Total Equity and Liabilities Note: The trade payable figures can be broken down as follows: Quarter 3 purchases = €650,000 Quarter 4 purchases = €700,000
1,000,000 3,200,000
1,350,000 70,000 80,000 5,700,000
Required; Prepare a quarterly cash flow forecast for year ended 31st December 2008
(19 Marks)
Presentation Mark (1 Mark) [Total : 20 Marks]
Page 8
(b)
A client company Frog Limited has recently launched a new product, a porcelain doll. It is now 4th February 2008, a few days after Frog Limited’s first month of production and sale of the doll. Frog Limited operates a standard marginal costing system. The standard cost card for the porcelain doll is as follows: Standard Cost Card – Porcelain Doll Direct Materials 2 Kg @ €5 per Kg Direct Labour 1 hour @ €8 per hour Variable Overhead 1 hour @ €2 per hour Standard Marginal Cost per Doll Budgeted Selling Price per Doll Standard Contribution per Doll
= = = = = =
€10 €8 €2 €20 €30 €10
Frog Limited budgeted to produce and sell 10,000 dolls during January 2008. There was no opening or closing stocks of raw materials or finished goods. The actual results for the month ended 31st January 2008 were as follows: 12,000 Dolls were produced and sold for a total of €336,000 22,000 Kgs of raw material were purchased and used costing €132,000 13,000 labour hours were worked costing €7 per hour Variable overheads incurred totalled €26,000
A discussion with staff has indicated the following issues arose during January 2008 relating to the production of the dolls: ● As a result of market shortages, Frog Limited’s buyers had to buy a more expensive grade of material than that incorporated into the standard cost ● management had to employ semi-skilled workers during the month due to an inability to attract skilled workers for the €8 hourly rate of pay offered ● a penetration price of €28 was adopted for January 2008 to help achieve a successful market entrance Management have asked you to present a report on the performance of the doll for the month ended 31st January 2008.
Required Prepare a month-end briefing note for the management of Frog Limited which: ● presents a operating statement that reconciles the budgeted contribution for January 2008 to the actual profit (14 Marks)
comments on the January 2008 performance and identifies the likely cause of the variances reported and recommend actions management may take to address the causes of the variances and improve performance in January 2008 (6 Marks)
●
[Total : 20 Marks]
END OF PAPER
Page 9
SUGGESTED SOLUTIONS SOLUTION 1
MANAGERIAL FINANCE PILOT PAPER - COMMENCING APRIL 2008
Report
To: Board of Directors, Laserlabs Limited From: Accountant Date: 20th June 2007 Subject: Financial Assessment – Laser Eye Surgery Proposal
Introduction This report considers the potential financial results and the non financial factors to be considered relating to your proposal to enter the eye laser surgery market. Financial Analysis
Approach As the proposed licence lasts for three years I have used the technique of discounting to allow for the time value of money over the five years. I have discounted each year’s net cash-flows at 10% your company’s cost of funds to arrive at the Net Present Value (NPV) of each proposal. Detailed workings and supporting notes can be found at Appendix 1 to this report. I have also determined the year in which the proposal pays back its initial investment.
Results and Conclusion The proposal delivers a positive Net Present Value of €325,616 and achieves a payback period within the required three years. Thus, on financial grounds the contract should be signed. Other Considerations ● can Laserlabs attract the staff and capability to carry out and support such surgery? ● when will the technology be tested and licenced ? ● how long will the health board require to prove the efficacy of the technology ● can Laserlabs agree an early exit clause in the event that the anticipated sales volume does not materialise? ● can Laserlabs increase the permitted volume in the event that demand is higher than anticipated? ● what will be the potential to extend the licence beyond the three year initial duration. ● can we buy an option to extend the licence and/or extend the annual volume ? Appendix 1
Net Present Value - Eye Laser Surgery Proposal Details Initial Licence Cost Hardware & Software Cost Annual Software Licence Royalty Payment (See Notes) Consumable Costs (See Notes) Ophthalmologist Cost Ophthalmologist Bonus Nurse Salary Locum Ophthalmologist Cleaning Contract Income - Private Patients (See Notes) Income - Health Board Contract Net Annual Cash Flows
Yr 0 -600000 -500000
-1100000 Page 10
Yr1
Yr 2
Yr 3
-50000 -1200000 -800000 -150000
-50000 -1350000 -900000 -150000 -50000 -35000 -40000 -84000 2250000 1000000 591000
-50000 -1500000 -1000000 -162000 -50000 -37800 -40000 -88200 3000000 1000000 1072000
-35000 -40000 -80000 1500000 1000000 145000
Investment Criterion - Net Present Value (NPV) Net Annual Cash Flows -1100000 Discount Factor @ 10% 1 Present Values -1100000 Net Present Value Net Annual Cash Flows Cumulative Net Annual Cash Flows Payback Period
-1100000 -1100000
Notes to Financial Projections Forecast Unit Sales Private Patients Health Board Block Contract Total Eye Surgeries Royalty Payment (€150 per episode) Consumable Cost (€100 per episode) Notes to Financial Projections Forecast Unit Sales Private Patients Cost Per Eye Surgery Total Eye Surgeries
Yr 1
145000 0.9091 131820
591000 0.8264 488402
145000 -955000
591000 -364000
Yr 2
1072000 0.7513 805394 325616
1072000 708000 3rd Year
Yr 3
2000 6000 8000
3000 6000 9000
4000 6000 10000
1200000 800000 Yr 1
1350000 900000 Yr 2
1500000 1000000 Yr 3
2000 750 1500000
3000 750 2250000
4000 750 3000000
SOLUTION 2
Briefing Note To: Fiona Sena From: G Khali, Financial Accountant Date: 30th July 2007 Subject: Portfolio Investment and Diversification
Purpose This briefing note explains some of the key terms related to portfolio investment and to assess the risk and return of your proposed investment portfolio.
Portfolio Theory A portfolio is a collection of different investments that comprise an investor’s total holding. Such a portfolio may include different types of investments e.g. property, equities and government bonds. Portfolio theory is concerned with setting guidelines for selecting a portfolio of investments and the measurement of risk and return of a portfolio and, understanding the impact that investment diversification will have on the risk and return of a portfolio.
Systematic and Unsystematic Risk Systematic Risk – This is the risk of the market as a whole, caused by variable factors affecting the whole of the market e.g. macro-economic. Systematic risk cannot be reduced through portfolio diversification. Systematic risk must be accepted by the investor. Unsystematic Risk – This is risk that is specific to a specific investment/industry. Some investments are considered to be more risky than others. An example would be that the property development industry would probably be considered more risky compared to the retail industry. Unsystematic risk can be diversified away by investing in a portfolio of investments in different industries. Co-efficient of Correlation This measures the relationship between two (or more) investments in a portfolio. In this case the property development and construction industries are closely related as the have an ‘r’ score of +.75. This indicates that the financial fortunes of both industries are likely to follow similar trends. To further reduce overall portfolio risk through diversification the relationship between the new investments in the portfolio should be of an inverse (negative) nature. Thus the fortunes of one industry will be the opposite to the other. Page 11
Risk and Return of Proposed Portfolio The annual return expected from your investment in Stella PLC is 19.2% and the risk attaching thereto measured by standard deviation is 5.88%. They are calculated as follows: Investment in Stella PLC
% x 12 24 Expected Value (EV)
Return p 0.4 0.6
Probability x*p 4.8 14.4 19.2
Expectation x - EV -7.2 4.8
Probability x*p 3 14 17
Expectation x - EV -7 3
Deviation S Deviation = Squared Square Root p(x-EV)2 p(x-EV)3 20.736 13.824 34.56 5.88
Deviation (x-EV)2 51.84 23.04
The annual return expected from your investment in Ginger Limited is 17% and the risk attaching thereto measured by standard deviation is 4.6%. They are calculated as follows:
Investment in Ginger Limited % x 10 20 Expected Value (EV)
Return p 0.3 0.7
Deviation (x-EV)2 49 9
Deviation S Deviation = Squared Square Root p(x-EV)2 p(x-EV)3 14.7 6.3 21 4.6
The overall expected return form your proposed portfolio is 18.32%. This is a weighted average of the expected return of both investments in the proposed portfolio, using the proportion of the investment in each share as the respective weights.
Expected Portfolio Return
Investment share % Stella PLC Ginger Limited Expected Return(EV)
Expected Return 0.192 0.17
Weighted Investment 60% 0.4
Expected Portfolio Return 0.1152 0.068 18.32%
The risk of the proposed portfolio (as measured by standard deviation) is 5.06% calculated as follows: √(W1)²( 1²) + (W2)²( 2²) + (2)(W1)(W2)(r)( 1)( 2)
= √(.6)²(.0588)² + (.4)²(.046)² + (2)(.6)(.4)(.75)(.0588)(.046) = √25.57 = 5.06
CAPM based return Risk free return (Rf) Plus: Risk Premium B(Rm-Rf) Beta factor (note 1) *Rm- Rf = (10%-4%)
0.843 6%
CAPM Based Return
4.00% 5.06%
9.06%
Expected Return
Note 1)Determination of Beta Factor for Portfolio Risk of Market Portfolio Risk of Proposed Portfolio Portfolio Beta Factor =5.06%/6% Portfolio Beta Factor 0.843
18.32%
6.00% 5.06%
The proposed portfolio is efficient. I.e. the expected return there from exceeds by 9.26% (18.32% - 9.06%) the return which would have been expected using capital Asset Pricing Model (CAPM) principles to assess risk and return. Page 12
SOLUTION 3 (a)
Briefing Note To: Mark Smyth From: A. Dee, Accountant Subject: Not-For Profit Organisation Date: 20th July 2007
Introduction This purpose of this briefing note is to provide an overview of a not-for-profit organisation.
Not-for–profit (NFP) organisations Not-for-profit organisations such as charities, NGOs and local authorities will have their own objectives, generally concerned with the efficient use of resources in the light of specified targets.
Business strategy issues are just as relevant to a not-for-profit organisation as they are to a business operating with a profit motive. The tasks of setting objectives, developing strategies and controls for implementation can all assist in improving the performance of not-for-profit organisations. There are many reasons why not-for profit organisations differ from commercial organisations, including:
● ●
●
● ●
●
NFP organisations will often have different legal status to commercial organisations e.g. charitable status Relatively few not-for –profit organisations’ investments are made with the intention of earning a financial return There is no overall profit motive i.e. the prime objectives of not-for-profit organisations will often be nonfinancial in nature e.g. the efficient use of resources, the effective relief of poverty etc. Priorities may change rapidly e.g. to respond to natural disasters Not-for profit organisations will often consider the social cost and benefits of investments before considering the strict financial return there from The cost of capital for non-commercial organisations may often differ from a commercial rate of return
Conclusion I trust that this information contributes to your success as Chairman of the charity.
(b)
Venture Capital as a Source of Finance Venture capital is a source of medium to long term finance. It typically takes the form of a combined package of both equity and debt finance. A venture capitalist provides such finance. Venture capitalists typically take the form of a department of an established financial services organisation or as private wealth/asset managers e.g. Hibernia Capital Partners. Venture capital finance is commonly associated with new and developing businesses Venture Capitalist’s carefully vet funding proposals. Only those businesses that are operationally and technologically feasible, have market appeal and are financially viable are likely to be backed by the Venture Capitalist. Venture Capitalists typically will require board representation in order to help protect their interest by having influence (voting rights) over policy and strategic decision-making. Venture Capitalists do not expect to retain interest in businesses they back for the long term. A typical ‘get-out’ to liquidate their investment would be in the form of ‘going public’.
Price Earnings Multiple This is a way of determining the worth of a share/a business. It is normally used in the context of an acquisition whereby the target company is valued at a multiple of its profit before tax. It is a widely recognised indicator of value by the investment community. The multiple which will be used in each case is normally industry dependent. For example an IT based industry may have a different P/E multiple than the retail industry, given the differences in the two industries such as; risk profile, life cycle stage etc. In practice, the final agreed multiple paid would be influenced greatly by the negotiation skills of both parties. It should be noted that using the P/E multiple is not the only way in which shares/business can be valued. Other methods include asset-based valuations.
Page 13
Business Expansion Scheme (BES) As part of The Irish Government’s job and industry creation strategy a tax incentive was created for individuals to invest in growing businesses. BES investments are subject to many conditions including the type, size and activities of companies which can raise finance through the scheme and, the investment limits and minimum timescales that must be observed by investors. The scheme has raised significant finance for expanding companies in qualifying business sectors.
Page 14
SOLUTION 4
Part 1 = B Dingle Limited Operating Cash Cycle Ended 30th April 2007 Indicator Stock Days Debtor Days Creditor Days Operating Cash Cycle
30th April 2007 Days 61 29 -32 58
Formulae Closing Stock/Cost of Sales * 365 Closing Debtors/Sales * 365 Closing Creditors/Cost of Sales * 365
Part 2 = C Dingle Limited - Football Goal - EOQ = 2*450*3000 = 300*10% = Sq Root 90000
Part 3 = C Dingle Limited - Annual Ordering Cost = Annual Demand EOQ = 3000 300 Part 4 = D
= =
2700000 30 300 units
*
Order Cost
* =
€450 4500
Part 5 = A
Part 6 = B Part 4)Cost of Equity (Gordon’s Growth Model) [.40*(1+.1)/(4.- .40)] +.1 =
22.22%
Interest Payable/Ex Div. Market value = 20/(160-10) * 100 =
13.33%
Part 5)Cost of Preference Shares
*€2 @ 10% = 20 cent dividend per annum of which 10c has yet to be paid.
Part 6)Cost of Debentures (IRR Calculation) Year Value Interest €000s €000s 0 -738 1 45 2 45 Year
0 1 2
Discount @ 10% Net C flow €000s -738.00 31.50 931.50 Net Present Value +
D factor
1 0.9091 0.8264 60.43
Tax Relief €000s
Redeem €000s
-13.5 -13.5
900
Discount @ 15% PV Net C flow D factor €000s €000s -738.00 -738.00 1 28.64 31.50 0.8696 769.79 931.50 0.7561 Net Present Value
IRR (Cost of Debentures)=10%+[60.43/(60.43+6.30)]*(15%-10%) = 14.53%
Part 7 = C.
Part 8 = D.
4x + 6y ≤ 20,000
Maximise 10x + 20y Page 15
Net C flow €000s -738.00 31.50 931.50 PV €000s -738.00 27.39 704.31 -6.30
Solution 5 (a)
Cologne PLC - Gorey Plant
Projected Cash Budget - Year Ended 31st December 2008 Details Receipts From Debtors
Payments To raw material suppliers Direct Wages Variable Overheads Fixed Overheads – Cash Corporation tax Purchase of motor vehicles
Net in Month Cash Movement Opening Cash Balance Closing Cash Balance
Quarter 1 3500000
Quarter 2 4800000
Quarter 3 6240000
Quarter 4 7200000
-650000 -800000 -400000 -2475000
-700000 -1040000 -520000 -2475000
-832000 -1296000 -540000 -2475000
-825000 -80000 -905000
65000 -905000 -840000
-640000 -960000 -480000 -2475000 -70000 -50000 1565000 -840000 725000
2057000 725000 2782000
Quarter 1 3500000
Quarter 2
Quarter 3
Quarter 4
40000 120 4800000
52000 120 6240000
48000 150 7200000
Quarter 2
Quarter 3
Quarter 4
Cologne PLC - Gorey Plant Projected Cash Budget (Note 1) - Sales Receipts Details C/f Debtors from 31/12/08
Previous Quarter Sales Units Unit Price Sales Receipts
3500000
Cologne PLC - Gorey Plant Projected Cash Budget (Note 2) - Payments to Creditors Details Quarter 1 C/F creditors quarter 3 of y/e 31/12/07 650000 C/F creditors quarter 4 of y/e 31/12/08 Q1 Purchs 2008 @ 80000units @€8 per unit Q2 Purchs 2008 @ 104000units@€8 per unit Creditor Payments 650000 Cologne PLC - Gorey Plant Projected Cash Budget (Note 3) - Wages Payments
700000
700000
640000
640000
832000 832000
Details Quarterly Production Direct Labour Hours Per Unit Total Direct Labour Hours Wage Cost Per Hour Total Wage Payment
Quarter 1 40000 2 80000 10 800000
Quarter 2 52000 2 104000 10 1040000
Quarter 3 48000 2 96000 10 960000
Quarter 4 54000 2 108000 12 1296000
Details Quarterly Production Variable Overhead Per Unit Total Variable Overhead Payment
Quarter 1 40000 10 400000
Quarter 2 52000 10 520000
Quarter 3 48000 10 480000
Quarter 4 54000 10 540000
Cologne PLC - Gorey Plant Projected Cash Budget (Note 4) - Variable Overhead Payments
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Cologne PLC - Gorey Plant Projected Cash Budget (Note 5) - Fixed Overhead Payments Details Total Monthly Overhead Less:Non-Cash Item (depreciation) Total Wage Payment
Quarter 1 2575000 -100000 24750000
Quarter 2 2575000 -100000 2475000
Quarter 3 2575000 -100000 2475000
Quarter 4 2575000 -100000 2475000
(b)
Briefing Note
To: Board of Directors, Frog Limited From: A. Hobbs, Accountant Subject: Porcelain Doll – Performance Review for Month Ended January 2008 Date: 8th February 2008 Introduction The purpose of this note is to brief management on the financial performance of the porcelain doll for the month ended January 2008. Performance Review – Porcelain Doll – January 2008
Overview During January 2008 Frog Limited earned €13,000 less contribution than budgeted from producing and selling the porcelain doll. Full details of performance are provided in the following operating statement which reconciles the budgeted contribution for the month to the actual contribution achieved for the month. Frog Limited - Operating Statement Month Ended January 2008
Details Budgeted Contribution
Variances Sales Price Sales Volume Direct Materials Price Direct Materials Usage Direct Labour Rate Direct Labour Efficiency Variable Overhead Expenditure Variable Overhead Efficiency Sub Totals Net Variance
Actual Contribution
Note 1 2 3 4 5 6 7 8 9 10
Favourable
20000
10000 13000
0
43000
Variances Adverse
Total 100000
-24000
-22000
-8000 0 -2000 -56000
-13000 87000
Commentary on Performance
Volume Increases - €20,000 additional contribution During January 2008 12,000 dolls were sold, a 2,000 increase on the budgeted sales. As a direct result Frog Ltd. earned €20,000 additional contribution above that budgeted. A major contributory factor in achieving the sales volume increase is likely to be that we sold each doll at €2 less than budgeted. It is also a tribute to our sales staff for achieving this level of performance on the first month of the product’s sales.
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Labour Rate Savings - €13,000 saving During January 2008 we actually paid €7 per labour hour. This was €1 lower than the budgeted hourly rate. The total saving as a result was €13,000 favourable. This is likely to be as a result of employing semi skilled staff rather than skilled.
Efficient Direct Materials Usage - €10,000 saving An average of 1.83KG of direct material was used to produce each doll. This compares favourably with the standard expected input of 2Kg per doll. The resulted in a saving of 2,000 Kgs/€10,000. It is likely that this variance is a direct result of buying a higher grade material than originally included in the standard. Adverse Performance
Inefficient Labour Efficiency - €10,000 overspend. During January 2008 our direct labour was inefficient. We worked 1,000 more hours than expected, resulting in a labour efficiency overspend of €8,000. This is likely to be as a result of employing semi skilled staff rather than skilled as referred to above. As a direct result of this inefficiency additional variable overhead costs were incurred. This resulted in additional overspend of €2,000 for the month.
Direct Materials Price - €11,000 overspend. During January 2008 the average cost per KG of direct material purchased was €6. This represents a €1 increase on the budgeted Kg cost of €5. The impact of this cost increase was an overspend of €22,000. The likely reason for this cost is that a higher grade of material was used with a consequent higher cost. This was due to unavoidable reasons as there was a market shortage of the material planned to be used in the standard cost. Sales Price - €24,000 adverse Each doll was sold at €28. This is €2 less per doll than budgeted. This deliberate price reduction was required in order to achieve market penetration for this new product. As a direct result we underecovered €24,000 in income for the month. This price reduction is likely to have been a major contributory factor in the ability to sell 2,000 more dolls than budgeted for the month.
Recommended Actions ● Management should send a memo to all sales staff recognising their effort during the month in achieving 2,000 extra unit sales. ● Management must attempt to employ skilled labour in future months to reduce the efficiency overspends. ● Management should revert to the original standard material.
Conclusion January 2008 has been a month in which actual contribution fell short of budgeted contribution. The main cause of this improvement has been the increased unit sales.
However, there are a number of cost and efficiency overspends which management must address urgently in order to correct performance over the coming months.
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Frog Limited : Supporting Notes
Note 1) Budgeted Contribution Budgeted Unit Sales * Standard Contribution Per Unit 100000 10000 * 10 =
Note 2) Sales Price Variance (Actual Unit Price - Budgeted Unit Price ) * Actual Units Sold (28 - 30) * 12000 = -24000 Adverse Note 3) Sales Volume Variance (Actual Units Sold - Budgeted Unit Sales ) * Standard Profit Per Unit (12000-10000) * 10 = 20000 Favourable
Note 4) Direct Materials Price Variance (Standard Unit Cost - Actual Unit Cost ) * Actual Units Purchased (5 - 6) * 22000 = -22000 Adverse Note 5) Direct Materials Usage Variance (Standard Unit Usage (for the actual level of production)- Actual Units Used) * Standard Cost Per Unit (24000 - 22000) * 5 = 10000 Favourable Note 6) Direct Labour Rate Variance (Standard Hourly Rate - Actual Rate Per Hour ) * Actual Hours Worked (8 - 7) * 13000 = 13000 Favourable Note 7) Direct Labour Efficiency Variance (Standard Hours (for the actual level of production)- Actual Hours Worked) * Standard Rate Per Hour (12000 - 13000) * 8 = -8000 Adverse Note 8) Variable Overhead Expenditure Variance (Standard Hourly Cost - Actual Cost Per Hour ) * Actual Hours Worked (2 - 2) * 13000 = 0 Note 9) Variable Overhead Efficiency Variance (Standard Hours (for the actual level of production)- Actual Hours Worked) * Standard Cost Per Hour (12000 - 13000) * 2 = -2000 Adverse Note 10) Actual Contribution Actual Sales Revenues Less: Actual Costs Incurred Direct Materials Direct Labour Variable Overheads Total Costs
336000 132000 91000 26000
Actual Contribution
249000
87000
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