B7AF100

QQI
BA (HONS) ACCOUNTING & FINANCE
BA (HONS) FINANCIAL SERVICES

SECOND SITTING 2021 EXAMINATIONS

Module Code: B7AF100

Module Description: Financial Management

Examiner: Therese Martin

Internal Moderator: Aida Salina Jailani

External Examiner: Jennifer Mullally

Date: 26 July 2021

Time: 9.30 am–12.30pm

INSTRUCTIONS TO CANDIDATES
Time allowed is 3 hours
Answer any 5 questions
All questions carry equal marks
Calculators are allowed

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Question 1

You work as an investment appraisal manager at Surface plc, and have been asked to
evaluate an investment proposal for Surface plc as they have no internal financial manager.
The proposal involves manufacturing a new product that has recently been developed by
Surface plc.

Selling price (current price terms) €18.75 per unit

Suggested operating inflation 6%
Selling price inflation 4%
Fixed operating costs (current price terms) €140,000 per year
Per unit variable cost €10
Initial Investment €1.6 million

The sales team has prepared the below demand forecast based upon initial interest
expressed by their full client base:

Year 1 2 3 4 5
Demand (units) 55,000 65,000 130,000 65,000 55,000

The Production manager has confirmed that all units produced have to be sold as they there
is no capacity to store additional inventory. The procurement manager has confirmed a zero
residual machine scrap value. For investment appraisal Surface plc has suggested a discount
rate of 12% and a target return on capital employed of 20%.

The CEO believes that a higher rate will mean a greater NPV return and has suggested that if
this project does not reach the ROCE rate of 20% it should be rejected.

Required:

a) Calculate using following investment appraisal techniques

i. Net present value. (9 marks)
ii. Internal rate of return. (6 marks)

b) Discuss if you agree with the CEO’s view and provide additional calculations to
support your discussion.
(5 marks)

(Total 20 marks)

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Question 2

You have been given the below information for PITSTOP Ltd for year ending 31st December
2020.

Sales €525,200
Cost of Sales 2020 €425,350
Credit Purchases 2020 €378,000
Receivables €54,950
Payables €39,120
Open Inventory €32,500
Closing Inventory €44,100

Required:

A) Prepare the following calculations:

i. Inventory days (average).

(3 marks)
ii. Payable days (credit purchases).
(3 marks)
iii. Receivable days.
(3 marks)
iv. Operating cycle for PITSTOP Ltd.
(3 marks)

B) Explain “overtrading” and discuss THREE indicators that an organisation may be

experiencing signs of overtrading.

(8 marks)

(Total 20 marks)

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Question 3

Click plc runs a chain of tech accessory stores throughout the EU. The following information
is available from Click plc’s balance sheet as of 31st May 2020. Corporation tax rates of 25%
apply to Click plc.

Statement of Financial Position (Extract)

Equity & Liabilities €

Ordinary Share Capital 2,000,000
Retained Earnings 650,000

Non-Current Liabilities
9% Bonds 1,500,000
11% Preference Shares 1,400,000

Additional information

i. Click plc has €0.80 ordinary shares which are currently being traded at €2.50 and
shareholders expect a 14% return.
ii. Click plc uses market value for both debt and equity.
iii. The 9% bond (€1,000 par) is redeemable in 2 years and is currently trading at a
premium of 20%.
iv. Preference shares originally had a €0.75 nominal share and are currently trading at
€1.24.

Required:

a) Calculate the Weighted Average Cost of Capital (WACC) for Click plc.
(14 marks)

b) If Click wished to raise new term-long finance, recommend specific options available,
giving reasons for your answer.
(4 marks)

c) Give TWO reasons when it is appropriate for an organisation to use WACC as the
discount factor for investment appraisal.
(2 marks)

(Total 20 marks)

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Question 4

Connect plc and Photoprint plc are two companies operating in the same sector. You have
an average market return being paid on risky investments as 10%. With a government bonds
delivering 4%.

BETA
Connect plc has a beta of 1.7
Photoprint plc has a beta of 0.6.

Required:

A) Using the Capital Asset Pricing Model (CAPM) calculate cost of equity for the both
companies and explain any differences.

(6 marks)

B) There are two important opposing theories regarding capital structure, identify both
and explain both in sufficient detail.

(10 marks)

C) Identify the 4 disadvantages that we can associate with WACC.

(4 marks)

(Total 20 marks)

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Question 5

Poppy Ltd is looking to consider whether they should take the advantage of the suggested
discount by its supplier Haymaker Ltd

The following information is available about Poppy Ltd:

 Poppy Ltd normally pay their main supplier after 45 days.

 Haymaker Ltd is offering a discount of 1.75% for payment in 10 days.
 A bank overdraft is available at an annual cost of 12%.
 Poppy Ltd purchased €15,000 of goods from its supplier Haymaker Ltd.

Requirement:

A) Advise whether they should take advantage of the discount on offer for this purchase.
(6 marks)

B) “Inflation is where you have a general increase in prices. Resulting in where Inflation
causes a general decline in the real value of money.”
As a result, Investors will require a return made up of two elements, identify both of
these elements and explain.
(2 marks)

C) DT100 Ltd is evaluating a project, which requires an initial investment of €50,000.

Expected net cash flows are €20,000 p.a. for four years at today’s prices.
However, these are expected to rise by 5.5% pa because of inflation.
The firm’s money cost of capital is 15%.

Find the NPV by using:

(i) The real method

(6 marks)
(ii) The nominal/money method
(6 marks)

(Total 20 marks)

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Question 6

A) Explain the two main objectives of working capital management and giving
examples, explain how there is conflict between the two.

(4 marks)

B) Storm Ltd has total credit sales for 2020 of €830,000 and at the moment is offering
customers credit terms in line with industry average of 30 days. You have just been
appointed Accounts receivable manager and would like Storm Ltd to offer customer
a 3% discount for early payment. Early payment has been set at 15 days. It is
estimated that 50% of customers will take the discount.

Your current source of short term finance costs 12% per annum.

Future sales will remain at €830,000 as you do not believe that this will act as an
incentive for more sales.

Required:

Advise the finance manager if Storm Ltd should proceed with offering the discount
providing calculations to support your recommendations?

(11 marks)

C) Explain the concept ‘operating cash cycle’ and list the four key aspects of credit
policy.

(5 marks)

(Total 20 marks)

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Question 7

“Expected return’ is a forecast of the return that an asset will earn over a period of time.”

A) There are three different approaches for calculating an assets expected return,
identify and explain all three approaches.
(9 marks)

B) Measuring the risk of an asset, you have two types of risk to consider. Identify and
explain both risks.
(6 marks)

C) You have €12,000 to invest, and you decide to put the money into two different
assets. You put €4,000 into Asset 1, which has an expected return of 9%, and €8,000
into Asset 2 with an expected return of 11%.

Calculate the expected return on the portfolio?

(5 marks)

(Total 20 marks)

END OF PAPER

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FORMULAE

PRESENT VALUE OF A SHARE (Dividend Valuation Model)

Po = Div0 (1+g)
(Ke – g)

COST OF EQUITY CAPITAL

Ke = [Do (1+g)] + g
Po

CAPITAL ASSET PRICING MODEL

Ke = rf + β [E(rm) – rf]

WEIGHTED AVERAGE COST OF CAPITAL AFTER TAX (WACC)

WACC = Ke x E + Kd x (1-T) x D
E+D E+D

ASSET BETA

β asset = β equity x E .
E + D (1-T)

EQUITY BETA

β equity = β asset x E + D (1-T)

E

NOMINAL AND REAL RETURNS

(1 + i) = (1 + r) (1 + h)

INTERNAL RATE OF RETURN

IRR = R1 + {(N1/(N1 – N2)) x (R2-R1)}

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Present Value Tables

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Annuity Tables

Periods 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 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145

11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606

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 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192

11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675

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