Financial Accounting

2020/2021- Semester 2 Financial Management II

THE COUNCIL OF COMMUNITY COLLEGES OF JAMAICA

BACHELOR’S DEGREE COURSEWORK

SEMESTER II – JANUARY 2021

PROGRAMME: BUSINESS ADMINISTRATION

COURSE NAME: FINANCIAL MANAGEMENT II

CODE: ACCT3501

YEAR GROUP: THREE

DUE DATE: APRIL 15, 2021

UNIT: 2 - 4

ASSESSMENT TYPE: INDIVIDUAL 15%

INSTRUCTION:

1. This is an individua l assignment.

2. A hard copy MUST be presented to the lecturer on the due date.

3. The APA format MUST be maintained, and a declaration of authorship must be made.

4. This assignment represents 15% of final grade

2020/2021- Semester 2 Financial Management II

Ins tructions : Ans we r ALL que s tions in this s ection.

QUESTION 1 Latherman’s Company Limited supplies meat, feed and fuel to the Caribbean market. The company has been aggressively pursuing a strategy of credit sales to expand market share. The

directors prefer to finance expansion using internal sources of funds, however, they have accessed low cost loans to support growth. Unfortunately, due to Covid-19 disruptions the company’s fuel production facility has been closed since September 2020.

2020 2019

$'000 $ '000

Revenue 22,446,902 24,623,315

Cost of sales (17,730,725) (20,662,325)

Gross Profit 4,716,177 3,960,990

Other operating income 105,994 110,902

Distribution cost (556,686) (479,865)

Admin. Expenses (2,183,773) (2,154,824)

Operating Profit 2,081,712 1,437,203

Finance costs (484,475) (433,476)

Taxation (284,436) (175,664)

Unrealized losses (570) (9,686)

Exchange differences 13,544 369,960

Net Income 1,325,775 1,188,337

Cents Cents

Earnings per share 109.47 69.05

Price per share $6.10 $5.15

Latherman's Company Limited

Income Statement for the year ended December 31, 2020

2020/2021- Semester 2 Financial Management II

Re quire d:

A. Calculate the following ratios:

i. Accounts receivable turnover (3 marks )

ii. Current ratio (2 marks )

iii. Average collection period (3 marks )

iv. Inventory turnover (3 marks )

v. Debt-equity ratio (3 marks )

vi. Return on asset (2 marks )

vii. Price-to-earnings ratio (2 marks )

2020 2019

$'000 $ '000

Non-Current Assets

Property, plant and equipment 6,414,590 6,580,143

Intangible asset 70,729 77,843

Investments 123,607 193,481

Deferred Income taxes 30,180 12,983

Post-Employment benefit assets 206,200 157,400

6,845,306 7,021,850

Current Assets

Inventories 2,617,645 3,748,371

Biological assets 885,999 810,935

Receivables 1,285,190 1,030,937

Taxation recoverable 5,494 13,977

Cash and short tern investment 1,282,938 785,596

6,077,266 6,389,816

Current Liabilities

Payables 1,480,602 1,546,793

Taxation payable 132,380 132,942

Dividends payable - 131,921

Borrowings 2,243,194 3,807,595

3,856,176 5,619,251

Net Current Assets 2,221,090 770,565

9,066,396 7,792,415

Stockholders' Equity

Share Capital 765,137 765,137

Capital Reserve 1071941 1058967

Retained Earnings 5046553 3973607

6,883,631 5,797,711

Non-Current Liabilities

Borrowings 1717023 1670410

Deferred income taxes 456542 316294

Post-emp. benefit obligations 9200 8000

9,066,396 7,792,415

Latherman's Company Limited

Balance Sheet for the year ended December 31, 2020

2020/2021- Semester 2 Financial Management II

B. The following table represents the industry averages for the selected ratios. Compare the

results of the ratios as computed in Part A with the ratios in the table and provide a brief

comment on the firm’s financial performance. (7 marks )

Indus try Ave rage

Account Receivable Turnover 15 times

Current Ratio 2.43

Average Collection 25 days

Inventory Turnover 4.48 times

Debt-to-Equity 0.55

Return on Asset 13.50%

Price-Earnings Ratio 8 times

2020/2021- Semester 2 Financial Management II

QUESTION 2

a) As an Investment Advisor, your client indicates that he wants to eliminate the risks in his

investment portfolio.

I. Differentiate between systematic and unsystematic risk. (2 Marks )

II. With the aid of a diagram, advise the client on as to the extent of his elimination

and how he can reduce the level of risk in his portfolio. (4 Marks )

b) Consider the following information

State of Economy Probability of

State of Economy

Digice l

Rate of Re turn

FLOW

Rate of Re turn

Boom 0.4 0.15 0.40

Average 0.2 0.09 0.10

Recession 0.4 0.05 -0.08

I. Compute the expected rate of return on each stock. (4 Marks )

II. Compute the Standard Deviation of each stock (4 Marks )

III. Which stock is most volatile? (3 Marks )

c) Brianna holds the portfolio shown below. Using the responses in B, calculate the

portfolio’s expected return. (3 Marks )

Digicel $400,000

FLOW $300,000

d) Brianna is seeking to expand her portfolio and thinks these two stocks are good value.

Assume a risk-free rate of 8% and a market rate of 12%, which stock should she add to

the portfolio? (5 Marks )

Stock Expe cte d Return Be ta

CIBC 13% 1.5

SCOTIA 19% 2.5

(Total 25 marks )

2020/2021- Semester 2 Financial Management II

QUESTION 3

Lego Ltd has an optimal capital structure of 25% debt; 10% preferred stock and 65% common

stock.

The company recently participated in the bonds market. They have sold an issue of 30-year

bond with an 10% coupon rate and realizes net proceeds (after flotation costs) of $950 for each

$1000 face value bond. During the same period the company also issued an 8% preferred stock

having a par value of $120, priced at $135 and a flotation cost of $8.00 per share. The risk-free

rate of equity is 6%; the expected return on market portfolio is 12% and beta for the company’s

stock is 1.2. Corporate taxes payable is at a rate of 30%.

Re quire d:

A. Calculate the after-tax cost of debt. (5 marks )

B. Calculate the cost of capital for preferred shares issued. (3 marks )

C. What is the cost of equity? (4 marks )

D. Calculate the weighted average cost of capital (WACC). (6 marks )

Lego Ltd’s ordinary share was last traded at $230 per share. The company just paid dividend of

$1.25 per share. The market expects the stock to grow by 5% per year into the foreseeable future.

Assuming the capital structure is revised to now 35% Bonds, 20% Preference Share and 45%

Ordinary Shares, what would be the company’s weighted average cost of capital (WACC)?

(7 marks )

(Total 25 marks )