Reference no: EM132572585
Question 1
a) Define agency problem in the context of company owners employing professional managers to run the company. Identify and explain TWO (2) financial plans that may be implemented within the company to minimise such agency problems.
b) New Norm Co. is considering an investment. The project is expected to be financed by $1,000,000 of bank loans, $2,000,000 of common equity and $1,500,000 of preferred equity. It is known that the firm's weighted average cost of capital (WACC) is 12% and the investment is expected to generate a net operating profit after tax (NOPAT) of $420,000. The company's tax rate is 20%.
(i) What is the project's Economic Value Added (EVA)?
(ii) Should the firm accept or reject the investment? Explain your reason(s).
Question 2
a) ABC Corporation and XYZ Corporation are companies in the electronic industry. You are provided with the financial statements for both companies for 2019 in the table below:
|
BALANCE SHEET
|
ABC
Corporation S$
|
|
XYZ
Corporation S$
|
|
Cash
|
1,000,000
|
|
200,000
|
|
Accounts Receivable
|
500,000
|
|
500,000
|
|
Inventory
|
500,000
|
|
500,000
|
|
Total Current Assets
|
2,000,000
|
|
1,200,000
|
|
Net Fixed Assets
|
3,000,000
|
|
3,800,000
|
|
Total Assets
|
5,000,000
|
|
5,000,000
|
|
Total Current Liabilities
|
1,000,000
|
|
1,000,000
|
|
Long Term Liabilities
|
500,000
|
|
2,500,000
|
|
Total Liabilities
|
1,500,000
|
|
3,500,000
|
|
Common Stockholders' Equity
|
3,500,000
|
|
1,500,000
|
|
Total Liabilities & Stockholders' Equity
|
5,000,000
|
|
5,000,000
|
|
INCOME STATEMENT
|
|
|
|
|
Total Sales Revenue
|
5,000,000
|
|
4,000,000
|
|
Less : Cost of Goods Sold
|
1,200,000
|
|
1,400,000
|
|
Gross Profit
|
3,800,000
|
|
2,600,000
|
|
Less : Operating Expenses
|
700,000
|
|
600,000
|
|
Operating Profit
|
3,100,000
|
|
2,000,000
|
|
Less : Interest Expense
|
100,000
|
|
500,000
|
|
Profit before Tax
|
3,000,000
|
|
1,500,000
|
|
Less : Tax (20%)
|
600,000
|
|
300,000
|
|
Profit After Tax
|
2,400,000
|
|
1,200,000
|
(i) Copy the following table and calculate the ratios (to 2 decimal places) for the two companies:
|
Ratios
|
ABC Corporation
|
XYZ Corporation
|
|
Current Ratio
|
|
|
|
Quick Ratio
|
|
|
|
Debt Ratio
|
|
|
|
Times Interest Earned
|
|
|
(ii) Evaluate and compare the liquidity and financial leverage risks taken by the two companies.
b) For each of the following ratio, would the financial manager prefer a higher or lower ratio? Why?
(i) Average Age of Inventory
(ii) Average Collection Period
(iii) Average Payment Period
Question 3
WFH Corporation forecasted its total funding requirements for the coming year as shown in the table below :
|
Month
|
Total funding requirements
(S$)
|
|
January
|
20,000
|
|
February
|
30,000
|
|
March
|
55,000
|
|
April
|
20,000
|
|
May
|
40,000
|
|
June
|
35,000
|
|
July
|
70,000
|
|
August
|
20,000
|
|
September
|
30,000
|
|
October
|
35,000
|
|
November
|
25,000
|
|
December
|
30,000
|
WFH Corporation was informed by its bank that short-term loans cost 5.2%p.a. and long-term loans cost 7.6%p.a.. Calculate the total cost (to 2 decimal places) of each of the following strategy:
a) An aggressive funding strategy.
b) A conservative funding strategy.
Question 4
As a new finance manager of HBL Pte Ltd, you are responsible in managing the firm's financial affairs. Your review of the business cycle reveals that HBL Pte Ltd manufactures a product which typically remains with the firm for 15 days before it is sold and requires 25 days for the monies to be collected from the customers. On average, the firm takes 40 days to pay its suppliers.
a) Compute the cash conversion cycle (CCC) of HBL Pte Ltd. Comment on your answer.
b) Should HBL Pte Ltd lengthen or shorten its CCC? Why?
c) If HBL Pte Ltd has always been given a 30-day credit payment period by its suppliers whenever it purchases goods from them, discuss whether the firm has been managing its accounts payable optimally. What should HBL do?
Question 5
a) An aging schedule helps a company to check on those customers who are overdue in their payments. The table below shows the aging schedule of CB Pte Ltd's accounts receivable. Calculate the percentage of balance outstanding (to 2 decimal places) for each age group.
|
Age Group
|
Accounts Receivable Balance Outstanding
|
Percentage
|
|
Less than 30 days
|
$200,000
|
|
|
31 days to 60 days
|
$26,000
|
|
|
61 days to 90 days
|
$10,000
|
|
|
Over 90 days
|
$4,000
|
|
|
TOTAL
|
S$240,000
|
100.00%
|
b) If the credit period given to these customers is 30 days, comment on the company's performance in managing its accounts receivable.
c) Besides the aging schedule, discuss another method which the company may use to monitor its accounts receivable.