1 The financial management function

The examiner's style is to test this area of the syllabus as partof a much larger question. Usually, a part (c), or part (d), you willhave to discuss or explain some of the key aspects and theirimplications.

The questions given here replicate that style.

1. Stakeholder groups and corporate governance

Private sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

(a)Identify five stakeholder groups and briefly discuss their financial and other objectives.

(b)Examine the extent to which goodcorporate governance procedures can help manage the problems arising from the divergent interests of multiple stakeholder groups in privatesector companies.

2. Minicorp

Minicorp is a mining company. Its mission is to 'maximise profitsfor shareholders whilst recognising its responsibilities to society'. Itis considering a mining opportunity abroad in a remote country areawhere there is widespread poverty. The mining work will destroy localvegetation and may pollute the immediate water supply for some years tocome. The company directors believe that permission for the mining workis likely to be granted by the government as there are few people oranimals living in the area and the company will be providing much-neededjobs.

Identify the likely stakeholders in the company's decision.Consider their possible objectives and describe three likely conflictsin those objectives.

3. Not for profit and objectives

(a)Explain and comment on the problems of measuring performance in a not-for-profit organisation.

(b)Discuss the objectives of a public sector organisation and how performance is measured and controlled.

(c)Briefly explain the relevance of three measures which may be used to assess performance in public sectorservices that provide education.

4. Made to order product

A company has produced a made-to-order product for a customer at acost of $50,000, which was to have been sold to the customer for$120,000.

The customer has now gone bankrupt.

The company has the option of converting the product into a different version which it estimates could be sold for $85,000.

The conversion would require the following:

(1)1,000kgs of material A. Thecompany currently has 2,500kgs in stock which was bought last month for$2.00 per kg, although the current purchase price has now increased to$2.15. Material A is regularly used in the company's other products.

(2)2,000kgs of Material B. Thecompany currently has 600kgs in stock which was bought last month for$3.00 per kg although the current purchase price is now $3.50. There isno other use for the material and it has a scrap value of $1.00 per kg.

(3)4,000 hours of skilled labour.Skilled labour is paid a fixed weekly wage and there is currently sparecapacity sufficient to provide half the required hours. The remaininghours would be made up through overtime which would be paid at $12 perhour.

(4)3,000 hours of semi skilledlabour. Semi skilled labour is paid at $6 per hour but is currentlyfully occupied on other projects. Due to union restrictions, staff willnot work overtime and there is no other labour available at such shortnotice. Therefore the only way to get the required hours is to movestaff from other production. Each hour used on this other productioncurrently generates contribution of $4 per hour (being revenue of $25,material cost of $15 and labour of $6).

(5)A machine bought for $30,000four years ago. The machine is currently being used elsewhere in thebusiness where it generates a present value of $20,000; it has a scrapvalue of $12,000. A similar replacement machine could be purchased for$15,000 and would have a zero residual value after the conversionproject.

(6)The project will take place in afactory which is currently empty. The factory is being depreciated anddepreciation for the duration of the project will be $10,000.

(7)The conversion project will be allocated a share of central overheads calculated at a rate of $4 per skilled labour hour worked.

Requirement

Perform calculations to show whether the company should convert the product.

5. Breccon Co

Breccon Co introduced a new product, DV, to its range last year.The machine used to mould each item is a bottleneck in the productionprocess meaning that a maximum of 5,000 units per annum can bemanufactured.

The DV product has been a huge success in the marketplace and as aresult, all items manufactured are sold. The marketing department hasprepared the following demand forecast for future years as a result offeedback from customers.

The directors are now considering investing in a second machinethat will allow the company to satisfy the excess demand. The followinginformation relating to this investment proposal has now been prepared:

If production remained at 5,000 units, the current selling pricewould be expected to continue throughout the remainder of the life ofthe product. However, if production is increased, it is expected thatthe selling price will fall to $45 per unit for all units sold. Again,this will last for the remainder of the life of the product.

No terminal value or machinery scrap value is expected at the endof four years, when production of DV is planned to end. For investmentappraisal purposes, Breccon uses a nominal (money) discount rate of 10%per year and a target return on capital employed of 20% per year. Ignoretaxation.

Required:

(a)Calculate the following values for the investment proposal:

(i)net present value;

(ii)internal rate of return;

(iii)return on capital employed (accounting rate of return) based on initial investment; and.

(iv)discounted payback period

(b)Discuss your findings in each section of (b) above and advise whether the investment proposal is financially acceptable.

(c)Explain briefly the key steps that should be included in a company's capital budgeting process.