MOD003577 SFManagement_ Alternative Assessment _122021 Accounting

Anglia Ruskin University

Cambridge Chelmsford Peterborough

Alternative Assessment

Examination period	DEC 2021
Faculty	Business and Law
Discipline	Finance
Module Code	MOD003577
Module Title	Strategic Financial Management
Level & credit volume	5; 30
Number of questions	4
Number of pages	6 (including cover)
Name of module leader	Dr Ying Wang

Materials allowed in this assessment are as follows

Books/statutes/case studies or formulae tables to be provided by the University	N/A
Are students permitted to bring their own books/statutes/ case study	No
Graph paper	No
Calculator	Yes Type permitted basic/standard or scientific
Any other additional stationery or materials permitted	No

Instructions to Candidates

1. Students are supposed to answer ALL sections of the alternative assessment

2. The use of financial calculators is allowed for this exam (in line with ACCA regulations)

3. All workings must be clearly shown in the answer sheet

4. For mitigation circumstances, see academic regulation below

Mitigation – Academic Regulations (Twelfth Edition August 2019) 6.112 - 6.122

6.118 Claims for mitigation are submitted by the student, or in exceptional circumstances (e.g. when a student has been hospitalised) by a Director of Studies or Student Adviser on behalf of the student, no later than five working days after the published (or extended) submission deadline for the assessment task or the date on which an examination was held.

( Statements of financial position as at 30 June 2014 2015 £'000 £'000 £'000 £'000 Non-current assets Current assets 820 1,000 Inventory 340 420 Receivables 360 570 Cash 10 710 990 Total assets 1,530 1,990 Equity & liabilities Ordinary shares {25p) 400 400 Retained earnings 450 530 Total equity 850 930 Non-current liabilities Current liabilities 200 200 Overdraft 140 250 Trade payables 280 510 Other payables 60 100 Total current liabilities 480 860 1,530 1,990 Income statements for the years ending 30 June 2014 2015 £'000 £'000 Revenue 1,800 2,900 Gross profit 210 260 Profit before tax 120 160 Income tax expense 30 40 Profit for the period 90 120 Dividends 40 40 Retained profit for the period 50 80 Inflation during the last year was 5%. )Question 1

Woolpit Co is a manufacturing company based in the West Country of the UK. Summarised accounts for the last two years are presented below:

-

Required:

(a) Illustrating your answer using the above financial data, fully explain what is meant by overtrading, what are the implications and discuss how it might be recognised in a company.

{10 marks)

(b) One of Woolpit's managers has suggested that the company would be more efficient if it reduced its operating cycle to the minimum possible period of time.

(i) Explain what is meant by the operating cycle of a company, explain the significance and calculate it for 2015.

{8 marks)

(ii) ( ( )Discuss how a company could try to reduce the operating cycle and whether it should always be reduced to the minimum possible period.

(7 marks)

(Total 25 marks)

Question 2

Funtime Co manufactures safety surfacing for children's playgrounds. The main raw material required is rubber particles and these are currently purchased from an outside supplier for

$3.50 per tonne, fixed for the next four years. If the contract is terminated within the next two years, Funtime Co will be charged an immediate termination penalty of $150,000, which will not be allowed as a tax deductible expense.

The directors are considering investing in equipment that would allow Funtime Co to manufacture these particles in-house by using recycled tyres. The machine required to process the tyres will cost $400,000, with a residual value of $50,000 after 4 years.

The costs associated with the new venture are as follows:

· Variable costs (per tonne produced) $0.80 Fixed costs (per annum) $192,500

The additional fixed costs include maintenance costs of $40,000 and the additional depreciation charge (calculated on a straight-line basis over the life of the asset) relating to the machine.

All of the above figures are quoted in current day terms. Inflationary increases are expected as follows:

· Variable costs: 3% per annum Maintenance costs: 5% per annum Other fixed costs: 2% per annum

The annual demand for the particles (based on the sales forecasts of the company) is:

	Year 1	Year 2	Year 3	Year 4
Demand (in tonnes)	100,000	110,000	130,000	160,000

Corporation tax of 30% per year will be payable one year in arrears. Tax-allowable depreciation on a 25% reducing balance basis could be claimed on the cost of the equipment, with a balancing allowance being claimed in the fourth year of operation when the machine is disposed of.

Required:

(a) Using 15% as the after-tax discount rate, advise Funtime Co on the desirability of purchasing the equipment. {Your workings should be shown to the nearest $000.)

(20 marks)

(b) Explain the advantages of the payback method of investment appraisal over discounting methods (NPV and IRR) and suggest in what situations payback might be preferred.

(5 marks)

(Total 25 marks)

Question 3

Norton Co, whose home currency is the New Zealand Dollar (NZD), trades regularly with customers and suppliers in a number of different countries and currencies. As well as other transactions, the company expects pay EUR 500,000 to a French supplier in six months' time. Current exchange rates between the New Zealand Dollar and the Euro are as follows:

Spot exchange rate: NZD 1 = EUR 0.6105 - 0.6443

3-month forward exchange rate: NZD 1 = EUR 0.5955 - 0.6260 6-month forward exchange rate: NZD 1 = EUR 0.5810- 0.6100

Interest rates in. New Zealand and the Eurozone for the next year are expected to be as follows:

New Zealand 2.3% - 2.5%

Eurozone 0.5% - 0.7%

As well as considering the use of money market products and derivatives to hedge the risk exposure presented by payments and receipts in different currencies, the treasurer of Norton Co is looking at 'internal' methods such as invoicing all customers in NZD, insisting that suppliers invoice them in NZD and leading and lagging.

Required:

(a) Discuss the different types of foreign exchange risk exposure Norton Co is facing.

(6 marks)

(b) Calculate the gain or loss compared to its current NZD value which Norton Co will incur by taking out a forward exchange contract for the future EUR payment to the French supplier.

(5 marks)

(c) Calculate the payment in NZD if Norton uses a money market hedge to hedge the payment to the French supplier in 6 months' time.

(5 marks)

(d) Based on the expected movement in the NZ dollar and the Euro, if Norton Co decides against hedging, explain with reasons whether a leading or lagging action should be taken to minimise exchange losses. Include any underpinning theory in your explanation.

(5 marks)

(e) Briefly discuss any implications of the proposal to invoice customers and receive supplier invoices in NZ dollars

(4 marks)

(Total 25 marks)

Question 4

Wetherby Co is a listed company with 10 million $1 shares in issue. The shares are currently trading at $1.69. Historic dividend growth has been 4% per year, and this is expected to continue in the future. The most recent dividend was 18.45 cents per share.

The company is also financed by two different types of bonds, with details as follows: 50,000 (x $100) Redeemable bonds, with a market value of $105. The coupon rate is 6% and redemption is in 5 years at the par value of $100.

50,000 (x $100) Convertible bonds, with a market value of $90. The coupon rate is 5% and the bond holder can choose to convert each $100 nominal value bond into 80 shares in 3 years' time, or to redeem the bond at its par value.

The company's tax rate is 25%.

Required:

{a) What is the cost of debt associated with the redeemable bonds?

(10 marks)

{b) What is the value of the conversion option of the convertible bonds? State any assumptions.

(4 marks)

{c) What is the company's cost of equity?

(3 marks)

{d) The after tax cost of the convertible bonds has been calculated as 22.5%. Using this, and your answers in {a) and {c) above, calculate the company's weighted average cost of capital.

(4 marks)

{e) Briefly explain the two conditions that would be necessary for the company to use its existing companyweighted average cost of capital {WACC) as a discount rate for a new project appraisal?

(4 marks)

(Total 25 marks)

[END OF THE ALTERNATIVE ASSESSMENT]

Present Value Table
Year	1%	2%	3%	4%	5%	6%	7%	8%	9%	10%
1	0.990	0.980	0.971	0.962	0.952	0.943	0.935	0.926	0.917	0.909
2	0.980	0.961	0.943	0.925	0.907	0.890	0.873	0.857	0.842	0.826
3	0.971	0.942	0.915	0.889	0.864	0.840	0.816	0.794	0.772	0.751
4	0.961	0.924	0.888	0.855	0.823	0.792	0.763	0.735	0.708	0.683
5	0.951	0.906	0.863	0.822	0.784	0.747	0.713	0.681	0.650	0.621
6	0.942	0.888	0.837	0.790	0.746	0.705	0.666	0.630	0.596	0.564
7	0.933	0.871	0.813	0.760	0.711	0.665	0.623	0.583	0.547	0.513
8	0.923	0.853	0.789	0.731	0.677	0.627	0.582	0.540	0.502	0.467
9	0.914	0.837	0.766	0.703	0.645	0.592	0.544	0.500	0.460	0.424
10	0.905	0.820	0.744	0.676	0.614	0.558	0.508	0.463	0.422	0.386
	11%	12%	13%	14%	15%	16%	17%	18%	19%	20%
1	0.901	0.893	0.885	0.877	0.870	0.862	0.855	0.847	0.840	0.833
2	0.812	0.797	0.783	0.769	0.756	0.743	0.731	0.718	0.706	0.694
3	0.731	0.712	0.693	0.675	0.658	0.641	0.624	0.609	0.593	0.579
4	0.659	0.636	0.613	0.592	0.572	0.552	0.534	0.516	0.499	0.482
5	0.593	0.567	0.543	0.519	0.497	0.476	0.456	0.437	0.419	0.402
6	0.535	0.507	0.480	0.456	0.432	0.410	0.390	0.370	0.352	0.335
7	0.482	0.452	0.425	0.400	0.376	0.354	0.333	0.314	0.296	0.279
8	0.434	0.404	0.376	0.351	0.327	0.305	0.285	0.266	0.249	0.233
9	0.391	0.361	0.333	0.308	0.284	0.263	0.243	0.225	0.209	0.194
10	0.352	0.322	0.295	0.270	0.247	0.227	0.208	0.191	0.176	0.162
	21%	22%	23%	24%	25%	26%	27%	28%	29%	30%
1	0.826	0.820	0.813	0.806	0.800	0.794	0.787	0.781	0.775	0.769
2	0.683	0.672	0.661	0.650	0.640	0.630	0.620	0.610	0.601	0.592
3	0.564	0.551	0.537	0.524	0.512	0.500	0.488	0.477	0.466	0.455
4	0.467	0.451	0.437	0.423	0.410	0.397	0.384	0.373	0.361	0.350
5	0.386	0.370	0.355	0.341	0.328	0.315	0.303	0.291	0.280	0.269
6	0.319	0.303	0.289	0.275	0.262	0.250	0.238	0.227	0.217	0.207
7	0.263	0.249	0.235	0.222	0.210	0.198	0.188	0.178	0.168	0.159
8	0.218	0.204	0.191	0.179	0.168	0.157	0.148	0.139	0.130	0.123
9	0.180	0.167	0.155	0.144	0.134	0.125	0.116	0.108	0.101	0.094
10	0.149	0.137	0.126	0.116	0.107	0.099	0.092	0.085	0.078	0.073