Faculty of Business and Law

Alternative Exam Assignment

Canvas Submission Deadline: Thursday, 9th June 2022 by 2pm

Requirements:

Answer any FOUR questions.

Total available is 25 × 4 = 100 MARKS

THE UNIVERSITY’S REGULATIONS CONCERNING CHEATING, COLLUSION AND PLAGIARISM APPLY TO THIS
EXAMINATION

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Question 1

The following has been extracted from the financial statements of Rowett:

Statement of profit or loss extracts

£000 £000
Revenue 12,000

Cost of sales:

Raw materials 5,800

Labour 3,060

8,860

Gross profit 3,140

Administration/distribution 1,680
Profit before interest and tax 1,460

Financial position statement extracts

£000 £000
Current assets:

Inventory of raw materials 1,634

Inventories of finished goods 2,018

Trade receivables 1,538

Cash and bank 500 5,690

Current liabilities:

Trade payables 1,092

Overdraft 300
Other expenses 76 1,468

Powell, a factoring company, has offered to take over Rowett’s debt administration and credit control
on a non-recourse basis for an annual fee of 2 per cent of sales. This would save Rowett £160,000 per
year in administration costs and reduce bad debts from 0.5 per cent of sales to nil. Powell would
reduce trade receivables days to 40 days and would advance 75 per cent of invoiced debts at an
interest rate of 10 per cent.

Rowett finances working capital from an overdraft at 8 per cent.

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(a). Calculate the length of Rowet’s cash conversion cycle and discuss it significance to the company.

(12marks)

(b). Using the information given, assess whether Rowett should accept the factoring service offered
by Powell. What use should the company make of any finance provided by the factor?

(13 marks)

Question 2

Better plc is comparing two mutually exclusive projects, whose details are given below.

The company’s cost of capital is 12 per cent.

Project A Project B

£m £m
Year 0 (150) (152)

Year 1 40 80

Year 2 50 80

Year 3 60 50

Year 4 60 40
Year 5 80 30

(a). Using the net present value method, which project should be accepted?

(10 marks)

(b). Using the internal rate of return method, which project should be accepted?

(10 marks)

(c). If the cost of capital increases to 20 per cent in year 5, would your advice change?

(5 marks)

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Question 3

Hanging Valley plc has issued share price of 2m ordinary shares, nominal value £1. The board of the
company has decided it needs to raise £1m, net of issue costs, to finance a new product.

It has been suggested that additional finance raised by means of a 1 for 4 rights issue.

The issue price will be at a 20 per cent discount to the current market price of £2.75 and issue costs
are expected to be £50,000.

Required:

Calculate and explain the following:

(a). the theoretical ex-rights price per share;

(b). the net cash raised;

(c). the value of the rights.

(12 marks)

(d). critically discuss the advantages and disadvantages of rights issue.

(13 marks)

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Question 4

You are given the following information about Jordan plc:

Financial position statement at January 2017

£000 £000
Non-current assets 1,511

Current assets 672

Total assets 2,183

Equity finance

Ordinary shares (50p) 200

Non-current liabilities

7% preference shares 300

9% bonds (redeemable after 8 years) 650

9% bank notes 560

Current liabilities 323

Total liabilities 2183

You are also given the following information:

• Yield on Treasury bills 7%

Required:

(a). calculate the company’s weighted average cost of capital (WACC) using market weightings.

(12 marks)

(b). critically discuss whether you consider that companies, by integrating a sensible level of gearing
into their capital structure, can minimise their weighted average cost of capital.

(13 marks)

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Question 5

(a) Planet has just announced an ordinary dividend per share of 20p. The past four years’
dividends per share have been 13p, 14p, 17p and 18p (most recent dividend last) and
shareholders require a return of 14 per cent. What is a fair price for Planet’s shares?
( 10 marks)
(b) Planet now decides to increase its debt level, thereby increasing the financial risk associated
with its equity shares. As a consequence, Planet’s shareholders increase their required rate of
return to 15.4 per cent. Calculate a new price for Planet’s shares.
(7 marks)
(c) Outline any problems with using the dividend growth model as a way of valuing shares.
( 8 marks)

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Question 6

Deciding how much earnings to retain and how much to return to ordinary shareholders is a key part
of dividend policy. Drawing on the dividend policy literature critically discuss some of the factors that
need to be considered by senior managers of a listed company when deciding on:

a) the size of the annual dividend to return to its shareholders and the practical issues that need
to be considered when deciding on the size of the dividend payment.
(10 marks)

Squeezeco is currently deciding on the level and form of its next dividend. It is considering
three options:

i. A cash dividend payment of 15p per share

Extracts form the company’s financial statements are given below

£m £m
Operating profit 24.5
Taxation 7.8
Distributable earnings 16.7
Non-current assets 75
Current Assets
Trade receivables 27
Inventory 24
Cash 46 97
Total Assets 172
Equity Finance
Ordinary Shares (50p) 26
Reserves 108 134
Current Liabilities 38
Total liabilities 172
b) If the current cum dividend share price is 432p, calculate the
effect of the three options on the wealth of a shareholder owning
1250 shares in Squeezeco.
(15 marks)

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