Discussion

1. You have been provided Income Statement and Financial Position Statement of Oman Cement Company SAOG for the year 2018 and 2019 in separate columns. You are required to evaluate the Working Capital position of this company for the year 2018 and 2019 based on following calculations:

(i) Liquidity position of the company (current ratio and quick ratio). What is your view about status of liquidity position of Oman Cement Company?

(ii) Cash Operating Cycle in a tabular form (as shown in ppt slide number 10 of working capital management) and present Cash Operating Cycle in a diagram for both years separately (as shown in class ppt slide number 9 of working capital management).

2. “Hassen Constructions SAOG”, the company is situated in Al Khuwair. The organization is specialised in the manufacturing of building materials that are used in construction sites.

Currently the company’s capital structure (total capital) is ungeared. However, the owners of Hassen constructions is planning to change their capital structure into a leverage (geared) capital structure as they believe having a debt component in its capital structure will be beneficial to the organization.

The company total capital is RO 300 million which is an equity-based capital structure. The company has two share buyback options available to move into a leverage(geared) capital structure.

Option 1

The company has an option in converting 30% of its equity capital to debt capital at an interest rate of 7%.

Option 2

The company has an option of converting 50% of its equity capital to debt capital at an interest rate of 7.5%

To evaluate the impact on the alternative policies the financial accountant of the company has presented the following data to evaluate the impact on ROE in the current capital structure and the above two given options.

The financial accountant believes that based on the sales forecast the sales could be either weak, average or strong. The probability for the market to be weak is 0.3, average 0.5 and strong 0.2.

The profits before interest and tax (PBIT) , if the market is considered to be weak is RO 30 million, if the market is average the PBIT is 50% greater than the market is weak and if the market is considered to be strong it is 75% greater than if the market is average.

The current applicable tax rate is 25%

Required:

b) Calculate expected average annual return on equity (ROE) considering all options together.

c) Evaluate the benefits and drawbacks of Hassen constructions in to changing their capital structure from and equity based to leverage. And, advise which of the three options (current or option I or option II) that Hassan Construction SAOG should go for under a normal situation? And substantiate your advice with suitable reasons.

d) Evaluate the factors that Hassen construction should consider when evaluating its capital structure policy. (10 + 4 + 3 + 3) = Total 20 Marks)

3. Scenario analysis

(i) You are leading a role of Chief Financial Officer of a Cement Company in Oman. Your company has huge current profit of RO 10 million and presently having a plan to capital investment of RO 8 in the next financial year. The company is willing to continue capital structure of debt 25% and Equity 75% in the future. How much of the RO 10 million should your company pay out as dividends? And what would be the dividend payout ratio of your company?

(ii) In case you retain huge amount of profit of your company for long term investment, what financial decision do you take – to pay high cash dividend? Or to issue bonus share (stock dividend)? And explain why?

(iii) Presently, your company’s Face Value of Equity Share RO 10 and Market Value of your Share in MSM is RO 25 per share. In order to increase the trading volume and market liquidity of your company stock, will you suggest the management to go for stock split? Explain your management about concept of stock slip with the advantage of splitting the stock of your company with the current scenario.

(iv) Given the current scenario COVID 19 and its impact on Cement sector in the near future, what are the factors that you consider affecting the dividend policy of your company? Critically evaluate and justify.

(5 + 4+ 4 + 7 = Total 20 marks)

Section B- ONE question (compulsory) 40 marks weightage

4. Salalah Chemical Company is considering two proposals for long term investment. Both will operate for 5 years, but due to limitation on capital the company can accept only one out two projects. The following information is available relating to :

The company’s standard payback period is 2.5 years and standard ARR is 12%. The cost of capital is 10%?

Required:

(i) Calculate Accounting Rate of Return for both Methanol and Fertilizer project.

(ii) Calculate Payback Period of Project Methanol and Fertilizer.

(iii) Calculate the NPV of Methanol and Fertilizer project.

(iv) Calculate Profitability Index for both projects.

(v) Calculate IRR of Methanol and Fertilizer project

· NPV is negative RO 1,956 @ 40% for Menthol Project

· NPV is negative RO 5,359 @ 40% for Fertilizer Project

(vi) Present the overall results of above in a table and recommend one best proposal to management. Give recommendation for your recommendation.

(10+6+8+3+9+4 = Total 40 Marks)

Financial Management (UG 038) – OPEN BOOK EXAM – Spring 2020 Page 8