three questions, please see the attachment. This is my revision questions for the end of year exams. If i can get the solution after two weeks , i will be pleased. thanks flora

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Q t" 1 (38 k ) " ..- ,- I. , ~._H " \ ..•.-ues Ion mar, s-~~'" .~_.-,. ..:.c-.___ \; , 1. Meatcan Canning Company Ltd is considering expansion of its facilities, Its current

income statement is as follows:

Sales Variable expenses Fixed expenses EBIT Interest at 10% Earnings before tax (EBT) Income tax at 30% Earnings after tax

N$ 5,000,000

(2,500,000) (1,800,000)

700,000 (200,000)

500,000 (150,000)

350,000

Shares of common stock outstanding 200,000

Earnings per share (EPS)

The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of N$10). In order to expand the facilities, the director of the company, estimates a need for N$2 million in additional funds. The company's investment banker has laid out three alternatives to be considered.

1. Sell N$2 million of debt at 13 percent interest 2. Sell N$2 million of common stock at N$20 per share. 3. Sell N$1 million of debt at 12 percent interest and N$1 million of common stock

at N$25 per share.

Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to N$2 300 000 per year. The director is not sure how much this expansion will add to sales, but he estimates that sales will rise by N$1 million per year for the next five years.

The director is interested in the thorough analysis of the company's expansion plans and methods of financing and consults you to help him.

Required a) Determine the break-even point before and after expansion in sales dollars (4

marks) b) Calculate the degree of operating leverage before expansion (2 marks) c) Calculate the degree of operating leverage after expansion at sales of N$6

million (2 marks) d) Calculate the degree of financial leverage before expansion (2 marks) e) Calculate the degree of financial leverage after expansion for all three

alternative financing plans at sales of N$6 million (12 marks) f) Calculate EPS under all three financing plans after expansion at N$6 million in

sales (12 marks)

2. Milton Ltd expects cash flows of N$6 million each year. Its corporate tax rate is 35 percent, and its unlevered cost of capital is 15 percent. The firm also has outstanding debt of N$19.05 million, and it expects to maintain this level of debt permanently.

Required a) Calculate the value of Milton Ltd without leverage (2 marks) b) Calculate the value of Milton Ltd with leverage (2 marks)

_~uestion 2 (23 marks) p) The Falcon Ltd has been reviewing its credit policies. The credit standards it has been ; applying have resulted in annual credit sales of N$5 million. Its average collection

period is 30 days, with a bad debt loss ratio of 1 percent. Because persistent inflation has caused deterioration in the financial position of many of its customers, Falcon Ltd is considering a reduction in its credit stapdards. As a result it expects incremental credit sales of N$400 OOC on which the average collection period would be 60 days and on which the bad debt ass would be 3 percent. The variable cost ratio to sales for Falcon Ltd is 70 .oercent, The required return on investment in receivables is 15 percent.

Required Advise Falcon Ltd if it should reduce its credit standards (use 365-day year) (8 marks)

b) Instead of relaxing its credit standards, Falcon Ltd is considering simply lengthening the credit terms from net 20 to net 50, a procedure that would increase the average collection period from 30 days to 60 days. Under the new policy, Falcon Ltd expects incremental sales to be N$500 000 and the new bad debt loss to rise to 2 percent on all sales.

Required Should FalconLtd lengt~n its credittermS?~1~~:-~s~" Jl. " Question 3 (19 marks).tlm GO Ct I tlCtl11) I} 1.:J L 1.1) ??

. Starve Ltd has estimated Its sales and purchase requirements for the last half of the coming year. Past experience indicates that it will collect 20 percent of its sales in the month of the sale, .so percent of the remainder 1 month after the sale, and the balance in the second month following the sale. Starve Ltd prefers to pay for half its purchases in the month of purchase and the other half in the following month. The labour, expense for each month is expected to equal 5 percent of that month's sales, with cash payment being made in the month in which the expense is incurred. '

Depreciation expense is N$ 5 000 e:r month; miscellaneous cash expenses are N$4 000 Pel Ill.Qflth and are paid in the month incurred. General and administrative expenses ot N$50 OOQ are recognised and paid monthly. A N$60 000 truck is to be purchased in August and is to be depreciated on a straight line basis over 10 years with no expected salvage value. The company is also expected to pay a N$9 000 cash dividend to its shareholders in July. The company feels that a minimum cash balance of N$30 ooo should be maintained. Any borrowing will cost 12 percent annually, with interest paid in the month following the month in which the funds are borrowed. Borrowing takes place at the beginning of the month in which the need for funds arises. Cash on hand as on June 30 was N$30 000. Actual and estimated sales and purchases are shown as follows:

2

Month Sales (N$) Purchases (N$) Actual May 100000 60000 June 100000 60000 Estimated July 120 000 50 000 August 150000 40000 September 110000 30000

Required \ __\\ Prepare a cash budget for Starve Ltd for the months of July and August.