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1998-07-25
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PRIFYSGOL CYMRU : UNIVERSITY OF WALES
ABERYSTWYTH
EXAMINATIONS 1994
SEMESTER 2
AC10210: INTRODUCTION TO MANAGEMENT ACCOUNTING AND FINANCE
Time: TWO Hours
This paper consists of THREE sections
Answer ONE question from each section.
ALL questions carry equal marks.
Explain any assumptions you need to make
You will be provided with:
i) Graph paper
ii) Mathematical, Statistical and Financial Tables for the Social
Sciences by Kmietowicz and Yannoulis
SECTION A
1. Frodo Ltd which manufactures curtains purchases all its raw
materials from a single supplier and uses two metres of the cloth
for each pair of curtains. Variable costs at output below 5,000
pairs per year are #42 per pair, of which #20 is the cost of the
cloth. However, the supplier offers a discount of 10% on all
purchases if Frodo buys at least 10,000 metres of cloth and a
further discount of #1.00 per metre on any additional purchases
above 16,000 metres per year. The selling price of the curtains
is #60 per pair and the fixed costs are #120,000 per annum.
REQUIRED:
(a) Calculate the contribution per unit at output levels
(i) less than 5000 units
(ii) 5,000 - 8,000 units
(iii) more than 8,000 units
(6 marks)
(b) Prepare a break even or profit volume chart for Frodo and indicate
any break even points.
(9 marks)
(c) Using your chart or otherwise, investigate the effect of raising
the selling price to #65.00.
(5 marks)
2. Gandalf plc produces one product: the "balrog". The standard
costs for the product for a recent period were as follows:
#
Direct labour (2.5 hours at #5.00 per hour) 12.50 per unit
Direct material (5.25kg at #6.50 per kg) 34.125 per unit
Variable overhead 4.00 per unit
Fixed overhead 30,000
The standard selling price of a balrog for the period was #80 and the
budgeted level of production was 4,000 units.
The actual results for the period have just become available and are
as follows:
# #
Sales (4,500 units) 337,500
Direct labour (12,500 hours) 65,625
Direct material (22,500kg) 135,000
Variable overhead 16,550
Fixed overhead32,500 249,675
-------
87,825
-------
REQUIRED:
(a) Prepare a statement reconciling the budgeted profit with the
actual profit, stating the variances in the way you think will be
most helpful to management. (12 marks)
(b) Write a report for the management drawing their attention to any
important features of the statement and recommending action where
appropriate. (8 marks)
SECTION B
3. You have recently been appointed to the position of finance
director of an international company, Williams Chocolate Biscuits
plc. One of your first tasks is to advise your boardroom
colleagues on which, if any, of three mutually exclusive
investment projects to implement.
The three projects have the following projected cash flows:
Project A: a cash outlay of #10,000 at t0 and net cash inflows of
#6,000, #5,000 and #3,000 at t , t and t
1 2 3
respectively.
Project B: a cash outlay at t0 of #32,000 and annual net cash
inflows starting at t1 of #5,500 in perpetuity.
Project C: a cash outlay of #35,250 at t0 and net cash inflows of
#18,000 #15,000 and #15,000 at t1, t2 and t3
respectively.
The appropriate cost of capital for all three projects is 16%.
REQUIRED:
(a) For each project calculate its net present value and internal rate
of return. Which project should the company invest in and why?
(10 marks)
(b) Using project C's anticipated cash flows, illustrate the economic
interpretation of its net present value and internal rate of
return. (6 marks)
(c) In addition to your answer to part (a) above, what other factors
should the company's directors consider before deciding which of
the projects to invest in. (4 marks)
4. Cymysg plc is a quoted company which is attempting to estimate its
cost of capital. The company has supplied you with the following
information:
The company has an issued share capital of 500,000 ordinary #1
(nominal value) shares, with a current market value, cum div, of
117p per share. The company also has #200,000 (nominal value) of
10% debentures which are redeemable at par in two years time and
have a current market value, ex int, of #95.30 per unit of #100
and 100,000 #1 (nominal value) 6% preference shares, with a
current market value, ex div, of 40p per share.
The total dividend payable to holders of the ordinary share will
be #60,000 this year, the share price will be quoted ex div from
tomorrow. The directors anticipate that the dividend will increase
by 5% per annum for the foreseeable future. The preference
dividend and the debenture interest will be paid shortly
Assume that the company pays corporation tax at the rate of 35%
Required:
(a) Calculate the company's cost of equity, preference and debenture
capital. (10 marks)
(b) Calculate the company's weighted average cost of capital.
(5 marks)
(c) What effect would an increase in the corporation tax rate have on
the company's weighted average cost of capital. (5 marks)
SECTION C
5. Explain carefully, giving examples, how the notion of 'relevant
costs' assists decision makers in choosing between alternative
courses of action. (20 marks)
6. Answer TWO of the following, each section carries equal marks
(i) What advantages do the discounted cash flow (DCF) methods of
investment appraisal have over the "traditional" methods?
(10 marks)
(ii) What conclusions do the "traditional view" and the "Modigliani
and Miller view" (MM) draw with respect to the capital structure
debate? (10 marks)
(iii) What conclusions can be drawn from the "Fisher-Hirshliefer Two
Period Investment Consumption Model"? (10 marks)