DBAS Financial Management
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DBAS Financial Management QP E0618
ANSWER ALL QUESTIONS (25 MARKS EACH)
Write your answers in the answer booklet provided, starting your answer to each question on a new page. Number your answers according to the question number, and also enter these numbers on the frontpage of the answer booklet.
1. Happy-Muff is a confectionary supplying fresh muffins daily to supermarkets and convenience stores. It is considering expanding its current range of muffin flavors. To do so, Happy-Muff would need to purchase a new machine for its production line to replace an existing one. Happy-Muff had paid $10 000 to conduct a feasibility study on the popularity of these new range of flavors.
The new machine is expected to cost $250 000, with an additional $14 000 for installation expense. The after-tax proceeds from disposing off the existing machine is expected to amount to $30 000. As a result of this transaction, current assets will increase by $12 000, and current liabilities will increase by $5000.
The revenues and expenses (excluding depreciation and interest) associated with the existing machine for the next four years are given in the table below.
|
Year |
1 |
2 |
3 |
4 |
|
Revenue ($) |
400 000 |
420 000 |
410 000 |
400 000 |
|
Expenses ($) |
290 000 |
300 000 |
315 000 |
325 000 |
The company has a cost of capital of 10% per annum.
a) Determine the initial investment associated with the purchase of the new machines. (4 marks)
b) It is projected that the new machine will increase revenue by 15%, and increases expenses by 10% respectively. Calculate the following:
i. Operating cash inflows for the existing machine. (4 marks)
ii. Operating cash inflows for the new machine. (4 marks)
iii. Incremental cash flows for this project. (4 marks)
c) Calculate the Net Present Value (NPV) for this project. (7 marks)
d) Should Happy-Muff purchase the new machine, or continue with the existing machine? Explain. (2 marks)
2. a) AeroProp Corp has a $5000 face value bond with a 6% coupon rate.
The bond matures in 15 years, and coupons are paid annually. The required rate of return is 5%.
(i) Calculate the value of the bond. (6 marks)
(ii) Is the bond priced at a discount, par or premium? Explain. (2 marks)
(iii) List three features that AeroProp Corp could attach to this bond issue. (3 marks)
b) Ultima Networks has been paying a $3 annual dividend per share (D0) for the past 3 years. The management has just announced that they expect the dividend to grow at a rate of 1.5% per annum for the foreseeable future. Assume investors require a rate of return of 8%.
(i) Calculate the current price of the stock. (3 marks)
(ii) If the stock currently trades at $45, would you buy it? (1 mark)
c) HAAT Holding is a health care facilities provider. It has the following sources of long-term capital:
Long-term debt: Bonds can be issued at a yield to maturity of 4.8%. Corporate tax rate is 35%.
Preferred Stock: The company can sell 5% preferred stock at its $100 par value. Floatation cost is 2% of selling price.
Common Stock: Current price per share is $80. Dividend is projected to be $3.50 next year. There is no projection to dividend growth rate.
Giving your answers in percentages to 2 decimal places, calculate the
(i) Cost of debt. (2 marks)
(ii) Cost of preferred stock. (2 marks)
(iii) Cost of common stock. (2 marks)
(iv) Weighted average cost of capital, using the following capital structure.
|
Source of Capital |
Long-term Debt |
Preferred Stock |
Common Stock |
|
Weights |
15% |
20% |
65% |
(4 marks)
3. Iron-Bit is a manufacturer of industrial drill bits. The management is concerned about the adequacy of the firm’s working capital in funding daily operations.
a) The average collection period and average payment period are 35 days and 30 days respectively. The firm turns over its inventory 20 times each year (assume 365 days year), and currently has annual sales of $185 million.
(i) Calculate the firm’s operating cycle (OC) and cash conversion cycle (CCC), correct to 1 decimal place. (5 marks)
(ii) Determine the amount of resources needed to support the firm’s cash conversion cycle. (4 marks)
b) Iron-Bit purchases 2 million units per year of a component used in drill bits production. The cost per order is $55, while the carry cost is $6 per unit per year.
(i) Calculate the economic order quantity. (4 marks)
(ii) Using your answer in (i), calculate the ordering cost, carrying cost and total inventory cost. (8 marks)
c) Suppose Iron-Bit operates a 250 days per year, and maintains a minimum inventory level of 1500 units of safety stock. If the lead time to receive orders of the component is 3 days, calculate the reorder point. (4 marks)
4. a) State, in order, the FIVE steps in planning personal financial affairs. (10 marks)
b) “Apart from your own actions, the outcome of your financial plans also depended on external factors” . List THREE of such external factors. (6 marks)
c) The following is an extract of Vivian Lee’s personal balance sheet.
|
Assets |
|
|
Liquid Assets |
$ |
|
Cash |
2 500 |
|
Checking Account |
20 000 |
|
|
|
|
Investments |
$ |
|
Timed Deposit |
40 000 |
|
Bonds |
60 000 |
|
CPF Savings |
180 000 |
|
|
|
|
Real Properties |
$ |
|
HDB apartment |
340 000 |
|
|
|
|
Personal Properties |
$ |
|
Jewellery |
5 000 |
|
Car |
75 000 |
|
|
|
|
Liabilities |
|
|
Current Liabilities |
$ |
|
Credit Cards |
4 500 |
|
Tax Payable |
3 200 |
|
|
|
|
Long Term Liabilities |
$ |
|
Personal Loan |
10 000 |
|
Mortgage Loans |
250 000 |
|
Vehicle Hire Purchase |
60 000 |
(i) Calculate Vivian’s net worth. (3 marks)
(ii) Determine Vivian’s Solvency, Liquidity and Gearing ratios (6 marks)
2025-07-12