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financial management

Questions and Answers of Financial Management

It was mentioned earlier that the EVA® generated during a period is rarely reported to shareholders. Why might this be a drawback for implementing a EVA®-based bonus scheme?
Why is it important to identify when the value was created and how could this be done?
How could the problems of time periods and scale mentioned above be overcome?
What benchmark would be most suitable?
Can you think of any circumstances under which re-issuing share options at a lower price to directors might be justified?
From the business viewpoint, is there a potential disadvantage to this feature of PSPs?
Advocates of the shareholder value approach argue that, by delivering consistent and sustainable improvements in shareholder value, a business will benefit several stakeholder groups. The performance
Which of the three types of mergers discussed above would achieve this objective? What are the potential problems of this kind of merger from the consumer’s point of view?
Why might shares in the bidding business lose value as a result of a takeover of a target business? Try to think of two reasons why this may be so.
What other reason might there be for rejecting a takeover bid?
We came across this tactic when discussing dividends in Chapter 9. Can you recall the reason why it might fail?
Calculate the net assets (book value) of an ordinary share in CDC Ltd.
Calculate the value of an ordinary share in CDC Ltd using the net assets (liquidation)method.
Calculate the value of an ordinary share in CDC Ltd using the net assets (replacement cost) method.
Calculate the value of an ordinary share in CDC Ltd using the P/E ratio method.
Calculate the value of an ordinary share in CDC Ltd using the dividend yield method.
Assume that CDC Ltd has a constant dividend payout and the cost of ordinary share capital is estimated at 12 percent. Calculate the value of an ordinary share in the business using the discounted
Calculate the value of an ordinary share in CDC Ltd using the free cash flow method.
Distinguish between a merger and a takeover.
Identify and discuss four reasons why a business may undertake divestment of part of its operations.
Identify four tactics the directors of a target business might employ to resist an unwelcome bid after the bid has been received.
When a business wishes to acquire another, it may make a bid in the form of cash, a share-for-share exchange, or loan capital-for-share exchange.Required:Discuss the advantages and disadvantages of
Dawn Raider plc has just offered one of its shares for two shares in Sleepy Giant plc, a business in the same industry as itself. Extracts from the financial statements of each business for the year
The directors of Simat plc have adopted a policy of expansion based on the acquisition of other businesses. The special projects division of Simat has been given the task of identifying suitable
Larkin Conglomerates plc owns a subsidiary, Hughes Ltd, which sells office equipment.Recently, Larkin Conglomerates plc has been reconsidering its future strategy and has decided that Hughes Ltd
The senior management of Galbraith Ltd is negotiating a management buyout of the business from the existing shareholders. The most recent financial statements of Galbraith Ltd are as follows:The
Why is wealth maximisation viewed as superior to profit maximisation as a business objective?
Look at Figure 1.3 and state, in broad terms, where an investment in:(a) a government savings account, and(b) a lottery ticket should be placed on the risk–return line. Return Risk Even at zero
Can you think why this may be the case?
What sort of interests might the directors pursue that would benefit themselves, but which may conflict with the interests of shareholders?
Can you think why directors pursuing their own interests, rather than those of shareholders, may be a problem for society as a whole?
Assume that the managers of a business are considering only one option. Could projected financial statements still help them?
Fill in the outline cash flow statement for Designer Dresses Ltd for the six months to 30 June using the information contained in Example 2.1.Example 2.1 Designer Dresses Ltd is a small business to
Fill in the outline projected statement of financial position for Designer Dresses Ltd as at 30 June using the information contained in Example 2.1 and in the answers to Activities 2.3 and
Evaluate the performance and position of Designer Dresses Ltd as set out in the projected financial statements. Pay particular attention to the projected profitability and liquidity of the business.
Prepare a projected statement of financial position for Burrator plc as at the end of Year 9.
The above suggests that the per-cent-of-sales method is best suited to a business with at least one of two possible characteristics. What might these be?
Why do you think managers are normally reluctant to make projected financial statements publicly available? Try to think of at least one reason.
Comment on the earnings per share results, under each of the three financing options, for the different levels of operating profit.
Given the most likely operating profit is £50 million, which financing option in Example 2.5 above would you choose and why?Example 2.5Hidalgo plc has recently been formed to manufacture washing
Calculate the indifference point between the low-geared and the high-geared financing options.
Calculate the degree of financial gearing at the most likely operating profit for Hidalgo plc for both the low-geared option and the all-share option.
What is the degree of financial gearing under the high-geared option when operating profits are:(a) £60m, and(b) £70m?
Can you think of at least three examples of operating costs that are likely to be variable for a manufacturing business?
What types of industries are likely to have high operating gearing?
See if you can calculate the indifference point for sales output between the two strategies set out in Example 2.7.Example 2.7Lethargo plc has recently been formed to produce vacuum cleaners. The
Calculate the degree of operating gearing for Strategy 2 at the different levels of sales output mentioned in Example 2.7.Example 2.7Lethargo plc has recently been formed to produce vacuum cleaners.
What steps might managers of a business take to reduce: (a) the level of financial gearing, and (b) the level of operating gearing where it is considered to be too high?
Semplice Ltd manufactures catering equipment for restaurants and hotels. The statement of financial position of the business as at 31 May Year 4 is as follows:The board of directors of Semplice Ltd
Newtake Records Ltd owns three shops selling rare jazz and classical recordings to serious collectors. At the beginning of June, the business had an overdraft of £35,000 and the bank has asked for
Eco-Energy Appliances Ltd started operations on 1 January and has produced the following forecasts for annual sales revenue:Required:Prepare projected cash flow statements of the business for each of
Which one of the above categories of ratios is likely to be most useful to short-term lenders?
Can you think of any bases that could be used to compare a ratio you have calculated from the financial statements of a business for a particular period?
Calculate the ROSF for Alexis plc for the year to 31 March 2016.
Calculate the ROCE for Alexis plc for the year to 31 March 2016.
Calculate the operating profit margin for Alexis plc for the year to 31 March 2016.
Calculate the gross profit margin for Alexis plc for the year to 31 March 2016.
Calculate the average inventories turnover period for Alexis plc for the year ended 31 March 2016.
Calculate the average settlement period for Alexis plc’s trade receivables for the year ended 31 March 2016.
Calculate the average settlement period for trade payables for Alexis plc for the year ended 31 March 2016.
Calculate the sales revenue to capital employed ratio for Alexis plc for the year ended 31 March 2016.
Calculate the sales revenue per employee for Alexis plc for the year ended 31 March 2016.
Show how the ROCE ratio for Alexis plc can be analysed into the two elements for each of the years 2015 and 2016. What conclusions can you draw from your figures?
Calculate the current ratio for Alexis plc as at 31 March 2016.
Calculate the acid test ratio for Alexis plc as at 31 March 2016.
What do you deduce from the liquidity ratios set out above?
Calculate the gearing ratio of Alexis plc as at 31 March 2016.
Calculate the interest cover ratio of Alexis plc for the year ended 31 March 2016.
Calculate the dividend payout ratio of Alexis plc for the year ended 31 March 2016.
Calculate the dividend yield for Alexis plc for the year ended 31 March 2016.
Set out below are ratios relating to three different businesses. Each business operates within a different industrial sector. Ratio Operating profit margin Sales to capital employed Average
Conday and Co. Ltd has been in operation for three years and produces antique reproduction furniture for the export market. The most recent set of financial statements for the business is set out as
Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2015 and 2016 are as follows:Required:(a) Calculate the following financial
The financial statements for Clarrods plc are given below for the two years ending 30 June 2015 and 30 June 2016. Clarrods plc operates a large chain of retail stores.Dividends paid on ordinary
Chaotic Industries is considering an investment in a fleet of ten delivery vans to take its products to customers. The vans will cost £15,000 each to buy, payable immediately. The annual running
A business is evaluating three competing projects whose profits are shown below. All three involve investment in a machine that is expected to have no residual value at the end of the five years.
What is the payback period of the Chaotic Industries project from Activity 4.2?
Why is PP not a complete answer to the problem of assessing investment opportunities?Consider the cash flows arising from three competing projects: Time Immediately 1 year's time 2 years' time 3
Why would we see £100 to be received in a year’s time as not equal in value to £100 to be paid immediately? (There are basically three reasons.)
What is the NPV of the Chaotic Industries project from Activity 4.2, assuming a 15 per cent opportunity cost of finance (discount rate)?
When we discounted the cash flows of the Billingsgate Battery Company machine project at 20 per cent, we found that the NPV was a positive figure of £24,190 (see p. 156). What does the NPV of the
What is the internal rate of return of the Chaotic Industries project from Activity 4.2?
Earlier in the chapter, we discussed the limitations of the PP method. Can you explain why it is still a popular method of investment appraisal among managers?
It can be argued that the sequence of these first two stages can be reversed. Can you figure out why?
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects.Both projects are concerned with the purchase of new plant. The following data are available for each
Arkwright Mills plc is considering expanding its production of a new yarn, code name X15.The plant is expected to cost £1 million and have a life of five years and a nil residual value.It will be
Haverhill Engineers Ltd manufactures components for the car industry. It is considering automating its line for producing crankshaft bearings. The automated equipment will cost£700,000. It will
What does the profitability index calculated in Example 5.1 suggest about the relative profitability of the projects? What would be the NPV of the £12 million invested, assuming the profitability
Recommend a solution for Unicorn Engineering Ltd if the investment projects were not divisible(that is, it was not possible to undertake part of a project) and the finance available was:(a) £12
What is the NPV for Machine B over the six-year period? Which machine is the better buy?In the case of Machine B, the NPV over the six-year period will be equal to the NPV above plus the equivalent
Use the table provided in Appendix B to calculate the equivalent annual annuity for each machine referred to in Example 5.2. Which machine is the better buy?Example 5.2 Khan Engineering Ltd has the
Why should this be the case? Try to think of at least one reason.
Leaving aside any technical problems, can you identify a more general problem with producing simulation models?
In which of the above categories do you think most investors will fall?
Can you think what the practical problems with this approach might be?
Can you see a problem with producing an average figure? Look back at Example 5.4. What strikes you about the average figure that has been calculated?Example 5.4Patel Properties Ltd has the
Calculate the standard deviation for the Satellite project. Which project has the higher level of risk?
Refer back to Example 5.6. Which project should be chosen and why? (Assume the possible outcomes are normally distributed.)Example 5.6Zeta Computing Services Ltd has recently produced some software
What is risk and to what extent can it be diversified away when making investment decisions?
D’Arcy (Builders) Ltd is considering three possible investment projects: A, B and C. The expected pattern of cash flows for each project is:The business has a cost of capital of 10 per cent and the

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