UNIVERSITY OF GLOUCESTERSHIRE

BUSINESS SCHOOL

MB466: Managing Finance and Accounting

Time allowed: 3 hours
______________________________________________________________

INSTRUCTIONS TO CANDIDATES

Answer ANY 3 questions from the 6 presented.

Please start each question in a new answer book, and indicate clearly on
each book which question you are answering.

You are reminded to enter your student number on the examination paper
cover sheet.

THIS IS A CLOSED BOOK EXAMINATION

All questions carry equal marks.

The examination accounts for 100% of the module assessment.

You may use a calculator (not programmable)

Question 1

Below is Baynhall Ltd.’s income statement and balance sheet for the current year, and a
projection for next year.

Balance Sheet year+1 Profit and Loss year+1

Fixed assets 2500 2944 Revenue 2500 2750
Accum Depreciation 1000 1294 cost of good sold 1250 1375
1500 1650 Gross profit 1250 1375
Stocks 104 115
Debtors 208 301 Administrative expenses 400 440
Cash 0 -32 Depreciation 250 294
313 384 650 734
Creditors 52 57 Earnings before interest and tax 600 641
260 327 interest paid 88 99
1760 1977 512 542
Long term borrowing 880 988 Tax at 50% 256 271
880 988 Net profit for distribution 256 271

Owners capital 100 100 Dividends 154 163

Profit reserves 780 888 Profit retained 102 108
880 988 256 271

You are required to:-

(i) Using no more than 10 ratios, assess the potential performance,
efficiency, risk, and liquidity of this business over the next twelve
months, noting the basis on which you have made your judgement in
each case
(20 marks)
(ii) what further information you would require in order to give a more
complete analysis?
(7 marks)
(iii) discuss the extent to which financial reports can provide relevant
information to decision-makers both within and outside the firm.
(7 marks)

2
Question 2

Jonas Ltd, a small company in the light engineering business, is reviewing the rate of return
that it should use in the appraisal of a new capital investment project. Its industry is highly
competitive and it has one major competitor in its dominant line of business from which it
derives two-thirds of its revenue. Its competitor’s beta is 1.9. The other third of its activity is
in a new area of machine tool development. The beta for that sector is quoted by the London
Business School Risk Management Service as 1.4. The return on a 90-day Treasury Bill is
4.6 % per annum and the current Equity Risk Premium is 3.5 % for the UK.

Jonas’ market gearing is in line with the industry norms at 20 % (debt to debt plus equity).
The company pays the bank base plus 2 % p.a. on its borrowing. Current base rate is 4.5 %
p.a. Debt interest is tax-deductible and the current rate of corporation tax is 30 %. As part of
its capital expansion programme Jonas is contemplating taking on a further £5 million of
borrowing which will lift its gearing ratio to 45 %. This additional gearing is likely to raise
its cost of debt capital to base plus 2.5 % p.a. and raise its beta to 1.85.

You are required:

(i) To estimate the company’s cost of equity capital using the capital asset pricing model
(10 marks)
(ii) To calculate its current cost of capital both before and after taking out the additional
borrowing
(10 marks)
(iii) To note any assumptions you have made in your analysis
(5 marks)
(iv) To discuss how you might refine your cost of capital calculation if you had more
information at your disposal
(9 marks)

3
Question 3
Apple Press Ltd., a new business which cold-presses apple juice, has completed its first six
months trading from January 1st to 30th June. The summarised monthly cash account is as
follows:-
Dec. Jan Feb March April May June
Cash received from
customers 12100 26950 29645 33600 46500 52300
Cost of sales 7260 16170 17800 21200 27900 33100
Gross Surplus 4840 10780 11845 12400 18600 19200
Marketing and
distribution -4700 -2900 -3250 -3640 -4070 -4500
General administration -2200 -2250 -2700 -3890 -6500 -7600
Operating surplus -2060 5630 5895 4870 8030 7100

Purchase of opening
inventory -8675
Equipment and fit out -18600
Capital introduced 12000
Bank loan 12000
Local start up grant 5000
Cash flow -3275 -2060 5630 10895 4870 8030 7100

The following information is also relevant:

1. Its sales in June were £62,400, of which 10 days sales were still unpaid for at the
month-end.
2. Its cost of sales was 62 % of turnover over the first six months.
3. There were no outstanding marketing and distribution costs at the end of June.
However the general administration costs need to be adjusted for the following items
that are not shown above:-
a. £1,200 was unpaid at the end of the month
b. The equipment and fit-out costs are to be depreciated over a 6-year life
(straight line)
4. Interest on the bank loan accrues on a monthly basis at 8 % per annum
5. Interest on any overdraft accrues at 1.5 % of the outstanding balance at each month-
end.
6. Tax accrues at the small business rate of 10 % per annum [NB: capital allowances
may be ignored].
7. The firm has been granted a three-month rent holiday on its business premises. It paid
its first rent in April. There was no rent outstanding at the end of June.
8. Inventory at the end of June was counted at £10,500.
9. The start-up grant is not repayable.

You are required to:

(i) Prepare a budgeted income statement and balance sheet for the period January 1st to June
30th
(16 marks)
(ii) Calculate and explain six ratios which best demonstrate the performance, risk and
liquidity of this business.
(9 marks)
(iii) Provide a short written summary of the key issues that the owner of this business should
bear in mind when running the business.
(9 marks)

4
Question 4

Bernardo Ltd, a construction company, is considering a short-term contract which would

require just 3 months to complete. It currently has a very full order book and there is a
shortage of skilled labour in the construction industry. Taking the new work would entail the
redeployment of part of the company’s regular workforce and the use of overtime working to
complete the job. Bernardo’s current average labour cost per person is £15,000 per year
(basic) plus £4,000 of on-costs (social security plus a contribution to personal pensions). The
company costs each day at double-time (basic plus on-costs) when setting its minimum price
for negotiation purposes.

This job would entail the redeployment of eight men for 100 days, of which 20 days would
be on overtime rates of time-and-a-quarter. The basic working year is 240 days. The
redeployment of the men to this job will mean that other work will be foregone which would
have earned a contribution of £150,000 (after charging the direct cost of labour).

You are required:

(i) To estimate the opportunity cost of labour as an average day rate and in total for this
project noting any assumptions that you have made
(15 marks)
(ii) Given that materials and other direct costs are 10 % of total labour cost, calculate the
minimum price that should be quoted for this contract
(9 marks)
(iii) Discuss the alternative approaches to labour costing that a company could employ in this
situation and the relative advantages and disadvantages of the alternatives compared with the
method described under (i) above
(10 marks)

5
Question 5

Assuming that a company has identified its cost of capital, the net present value of a project
provides us with an estimate of the value added to the firm by its decision to undertake a
given capital investment. However, a number of other capital investment appraisal techniques
are available which, whilst being theoretically inferior to the net present value model, can
provide useful additional information for management in situations where the assumptions of
the model are not perfectly realised.

Describe the usefulness of these various techniques, and the extent to which they contradict
the proposition that it is the role of management to maximise shareholder value.
(34 marks)

6
Question 6

Activity-based costing is a system of costing which has grown in popularity over recent years.
Advocates of the method argue that it delivers superior product costs that more accurately
reflect the underlying opportunity costs of production. Furthermore, they argue that it also
helps a firm to control complexity in its operations. To what extent do you agree with this,
and what are the likely benefits and costs of implementing such a system in a small business
of less than £20 million turnover per annum?
(34 marks)