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1

Finance

1. What is the ultimate goal of a firm? Is profit maximisation an acceptable goal?

2.Ba-Gode sales Nsima with Mbuzi at the Lusaka number one most famous eating place “Matebeto” were most people go to enjoy Nsima with a wide range of all native Zambian relish. Like most small business Ba-Gode, does not have a management accounting especially planning and budgeting. Competition is very fierce and you Palibe Kanthu you are a regular customer for eating nsima with mbuzi and you have been engaged Ba-Gode on a number of issues that he may consider in order to gain completive advantage. You have spoken to him on the concept of cost volume profit analysis and variance analysis not forgetting the need for his entity to keep production overheads low.

Ba-Gode has told you that his average selling price per plate of nsima is ZMW50 and 45% of the selling price is makes up direct costs. Every plate of nsima is comes with a 300mls glass of well fermented Zambian munkoyo which customers get for free as part African desert. This munkoyo is outsourced from Bana dyululu and she sells ZMW5 per every 300mls glass she suppliers Ba-Gode sold. He also pays a rental ZMW2,430.00 per month for the cooking utensils. The monthly rental cost for the place is ZMW 4,500 but he also pays to the Lusaka City Council a levy of ZMW1,200 per annum. He also pays Nyuma Ngoma a very beautiful cashier lady an annual salary of ZMW42,000.00. Ba-Gode has a monthly average daily demand of 45 plates sold. He opens at 09:00 am and closes at 17:00 pm (8 hours)

For the purpose of this question, today is 1st September 2020 and consider an average business month of 30 days for all the 12 months.

Required

  1. How many plates he needs to sale for him to recover all the period and unavoidable costs and advise Ba-Gode the date and estimated time on which he will neither make a loss nor a profit.    (2 marks)
  2. Advise Ba-Gode the monthly margin of safety both in form of number of plates and interpret both results.                                                                                                   (2 marks)
  3. Calculate the current month contribution ratio per plate and monthly profit.

(4 marks)

  1. Ba-Gode is planning to increase the monthly absolute contribution per plate by 10% in the next financial year, monthly fixed costs will go up by 8%. He also plans to begin monitor at the fixed costs closely and you have advised him that he may either Activity Based Costing (ABC) or Absorption Costing.
    1. Advise Ba-Gode what he must do to the cost elements in order to archive the 10% increase in the contribution per plate.

(5 marks)

  1. How may plates of Nsima (Ugali) should he sell in order for him to archive 20% increase in the annual profit for the next financial year under the new cost structure. (4 marks)
  2. Using facts in the case in question advise Ba-Gode which production overheads method will be more suitable for his business

(6 marks'

3.Explain the three financial decisions made by the financial manager. How are they interrelated?

4.How do you think of this paragraph?

We know that bonds are basically when companies or governments agencies need money to complete their projects, they will issue bonds to investors. The investor may recover the funds and receive the interest at the interest rate set at that time on the bond repayment date. In this world, in order to consider the needs of investors, companies or governments may develop different types of bonds in the market. So, it causes that the type of bonds is various, and they are including corporation bonds, government bonds, zero-coupon bonds, Coupon bonds, long and short-term bonds, and so on. Although it exists so many various types of bonds, their purposes are similar. In addition, we also know that bonds with high-interest rates are risker than bonds with lower interest rates. Therefore, due to the diversity of bonds, investors can consider their own needs to purchase appropriate bonds. For a simple example, the level of the United States government bond is “AAA”, so it means that these bonds are risk-free. In contrast to corporate bonds, investors need not worry about the risk of bankruptcy. Therefore, if investors want to purchase corporate bonds, they should evaluate the firms’ receivables and credit to reduce risk. For another simple instance, if we want to purchase bonds for one year, we can choose to purchase short-term bonds and vice versa. This is the reason why we need these heterogeneous bonds because we can select the most appropriate bonds by our own needs.

5.A firm that pays a dividend

Select one:

a. Should grow more quickly than an identical firm that pays no dividend

b.
Should grow more slowly than an identical firm that pays no dividend

c. Should grow at the same rate as an identical firm that pays no dividend

d. None of the given answers

6. Project Evaluation. This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $5 million after taxes. In five years, the land will be worth $5.3 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $19.5 million to build. The following market data on DEI’s securities are current:

Debt:

Common stock: Preferred stock: Market:

60,000 6.2 percent coupon bonds outstanding,
25 years to maturity, selling for 95 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
1,250,000 shares outstanding, selling for $97 per share; the beta is 1.15.
90,000 shares of 5.8 percent preferred stock outstanding, selling for $95 per share.
7 percent expected market risk premium; 3.8 percent risk-free rate.

DEI’s tax rate is 34 percent. The project requires $825,000 in initial net working capital investment to get operational.

  1. Calculate the project’s Time 0 cash flow, taking into account all side effects.

  2. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project.

  3. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $2.1 million. What is the aftertax salvage value of this manufacturing plant?

  4. The company will incur $3,500,000 in annual fixed costs. The plan is to manufacture 13,000 RDSs per year and sell them at $10,800 per machine; the variable production costs are $9,900 per RDS. What is the annual operating cash flow, OCF, from this project?

  5. Finally, DEI’s president wants you to throw all your calculations, all your assumptions, and everything else into a report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return, IRR, and net present value, NPV, are. What will you report?

7.

Liquidity ratios provide information about a firm's

Select one:

a. Long-term solvency

b. Short-term solvency

c. Short- and long-term solvency

d. They focus not on solvency, but rather on the ability to raise cash

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1.The ultimate goal of a firm is increased shareholder value. Profit Maximization is not an acceptable goal because it is very short sighted. Suppose if a firm can increase their profits by not paying attention to environment and not following the proper standards. This will ensure good profits in the short term but in the long term, the firm might tarnish their image and it can lead to loss of trust between the firm and stakeholders. Hence, instead of profit Maximization, the firm must focus on Value Maximization for shareholders.

2. please see the attached file.

    Per Unit Units Monthly
  Selling Price 50 45 Daily
1350 monthy		 67500
         
Variable cost Selling Expenses 22.5    
  300 Ml Mnkoyo 5    
         
  Total VC 27.5 1350 37125
Contribution SP- TVC 22.5 1350 30375
         
Fixed Cost Rent utensils     2430
  Rent palace     4500
  Levy(1200/12)     100
  Salary (42000/12)     3500
         
  Total FC     10530
         
  Profit     19845

a) No of Plates required to cover up all period and unavoidable fixed cost.

10530/22.5 = 468 Plates

45 Plates sold daily so Hourly sold = 45/8= 5.625 Plate per hour

So 468 plates will complete in 468/5.625= 83.2 hours , which is 10 days 3.2 hours and If today is 1st Sept, the required plates will complete on 11th Sept Between 12pm to 1 pm.

b) Margin of Safety in Units= Actual Sale - Break even sale= 1350-468=882 Plates

Margin safty in % = Margin safefty units x Selling price / total sales

882x45/67500 = 58.8%

Both these tell how business margnins are safe i.e higher the better. 882 plates or 58.8% tell that after recovering all fixed cost our business additional sell 882 plates to generate direct contribution. It also tells our business will not incurr loss if this 882 plates not sold or drop in sales by 58.8%.

c) Contribution ratio= Contribution / sales

30375/67500= 45%

Monthly Profit = 19845 as per above Table.

D)

i) To increase 10% contribution i.e. 22.5 x 10%= 2.25 per unit. you need to lower down the variable cost by 2.25 per unit Either from Variable selling expenses or 300ML Monkoyo or from both combinly.

ii) No. of plates to achieve 20% Increase in annual profit with revised cost structure.

iii) ABC analysis is useful for the organization whose productio is scattered in different department and we need proper allocation base for aborpotion of costing. but in the given there is restaurent and no many activities are there to apply ABC so Absorpotion costing would be better. Absorb cost with hours worked or no. of plates sold.

Please comment if further clarification needed.

3.There are three main Financial Decision that a Financial manager makes:

(i). Investment Decision (ii). Financing Decision and (iii). Dividend Decision.

(i). Investment Decision: This type of Financial decision is also known as Capital Budgeting Decision, where a financial manager makes decision about the company's assets and where to invest, which project will be good for the company and will bring more cashflows for the company. Manager makes the careful selection of assets where funds can be invested.

There are certain factors which affects investment decisions:

(a). Cashflow of the firm.

(b). Profits.

(c). Investment Criteria.

(ii). Financing Decision: It is very crucial decision which a Financial manager makes, from where we have to get funds for the company, what would be the cost of acquiring, right capital mix for the firm.

Factors affecting Financing Decision:

(i). Cost

(ii). Risk

(iii). Cashflow position

(iv). Control

(v). Condition of the market.

(iii). Dividend Decision: It is the decision which pertains to the distribution of profits earned by the organisation. The major decision is about whether to retain the earnings or to distribute the profits.

Factors affecting Dividend Decision:

(a). Earnings

(b). Dependability in earnings

(c). Balancing dividends

(d). Development opportunity

There are links between these three decisions and a financial manager has to make decision about where to get funds for the investment in the assets and how to make dividend decisions for the shareholders.

4.From the above paragraph it is understood that types of bonds to be issued by various governments/ corporates should cater as per needs of an investors.

1) We can divide the investors in bond market on the basis of period of investment as follows :

1) Long term Investors

2) Medium term Investors

3) Short term Investors

1) Long term investors usually invest in bonds having maturity period over 12 years. These investors will invest in infrastructure bonds issued by government example National Highway Authority of India(NHAI). They need only long term yeld on their investments. They are not bother about any short term gains.

2) Medium Term Investors usually invest in bonds having maturity period between 5 Years to 12 Years.

3) Short term Investors : They invest in bods having maturity period between 1 year to 5 years. usually they invest in corporate deposit. these investors will get very lesser returns.

2) On the basis of risk we can divide the investors in bond market as below :

1) Risk Takers

2) Risk Averse

1) Risk Takers : These investors will invest in BB and B Rated Bonds having more risk securities. These investors are ready to take risk in order to maximize their overall returns But risk element is involved while repayment of principal and interest to investors.These issuers of bonds (corporate)  having very poor receivable management and credit quality and repayment track.

2) Risk Averse : These Investors will invest in AAA and AA rated bonds having highest safety in repayment of interest and principal by issuer. These investors are not ready to take risk hence they expect less returns than risk takers. These issuers of bonds (corporate)  having very good receivable management and credit quality and repayment track.

From the above explanations it is concluded that in bond market has various types of investors are exist in the market hence it is the need of the hour the corporate / government must issue bond instruments which must cater needs of an bond investors. They can come out with various innovative products like hybrid bonds, Green Bonds extra... which fulfill needs of an investors at large in the bond market.

There is inverse relationship exist between Rate of interest and Risk Rating. If Rate of interest high usually corporate having lesser credit rating like BB or B and bad credit quality. Hence in order to attract the investors to invest in their corporate bonds hence they will offer higher interest to bond investors.

If Rate of interest is low usually corporate having higher credit rating like AAA, A and their having high credit quality and liquidity. Hence they need not attract the investor due to it provides already very good safety cushion to investors by way of higher credit rating .

Therefore cooperates must issue bonds to investors as per their needs and their investment objective.

5.A firm that pays a dividend

Select one:

a. Should grow more quickly than an identical firm that pays no dividend

b.
Should grow more slowly than an identical firm that pays no dividend

c. Should grow at the same rate as an identical firm that pays no dividend

d. None of the given answers

Answer : a. Should grow more quickly than an identical firm that pays no dividend

Explanation :

Studies have found that high earnings growth is correlated with higher dividend rates rather than low dividend, which means that current dividend payouts have a correlation that is directly proportional to future earnings of the company

6.Please use this google drive link to download the answer file.       

https://drive.google.com/file/d/13EV_VYs9Cj4UlvdUDLzGb-H66zaHP2Xa/view?usp=sharing

Note: If you have any trouble in viewing/downloading the answer from the given link, please use this below guide to understand the whole process. 

https://helpinhomework.org/blog/how-to-obtain-answer-through-google-drive-link \

7.Liquidity ratios provide an idea about the ability of the company to pay out its current debtors or current obligations. Current obligations are short-term debts or current liabilities.

The liquidity ratios are :

  1. Current ratio
  2. Quick ratio or acid test
  3. Absolute liquidity ratio

These ratios are always compared to current liabilities so they give us an idea about the tendency to clear the short-term debts.

So the answer will be option B.

 

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