Company Background KP Group is a resort company based in Asia, now operating two resorts: Amazing Resort in Singapore and Brilliant Resort in Thailand. A new one in Japan, Cool Resort, is planned to be opened in year 2022. SECTION A You are the Financial Director of Amazing Resort. According to normal practice, you will be awarded a special bonus if the net income growth could be maintained at 10% in each year. In the middle of 2020, a competitor entered and affected the business of Amazing Resort seriously. Based on the following financial statements (actual of 2020 and forecast of 2021), answer questions 1 to 3 in this section. (Show your workings clearly) Amazing Resort Income Statements (in dollars) For the Year Ended 31 Dec Sales Cost of goods sold 2020 actual 2021 proiected 1,200,000 675,000 960,000 564,000 Gross profit 525,000 396,000 Operating Expenses Salaries and Wages 180,000 150,000 Depreciation 5,000 5,000 Rent 93,000 96,000 Insurance 22,000 24,000 Miscellaneous 20,000 14,400 Utilitites 34,000 354,000 36,000 325,400 Operating income 171,000 70,600 Interest expense 13.200 10,800 Income before income taxes 157,800 59,800 Income taxes Net income 55,600 102,200 17,600 42,200 2 Amazing Resort Balance Sheets (in dollars) As at 31 Dec 2020 actual 2021 projected Assets Cash 100,000 60,000 Accounts receivable 240,000 220,000 Inventories 190,000 211,000 Fumiture and equipment 55,000 55,000 Total assets 585.000 546,000 Liabilities Accounts payable 140,000 108,800 Long-term bank ban 110,000 90,000 Total lubilities 250,000 198,800 Shareholders' Equity Common shares (@S0.5 par) 25,000 25,000 Paid-in capital in excess of par 100,000 100,000 Retained earnings 210,000 222,200 Total shareholders' equity 335,000 347,200 Total fabilities and shareholders' equity 585.000 546.000 1. Why is income statement important to shareholders? Do you have any concern about the projected net income in year 2021? (5 marks) 2. Analyze the changes of both the projected sales and net income of 2021 as compared to the actual of 2020. Based on the analysis, are is there any impact(s) on you and the shareholders? (12 marks) 3. Amazing Resort is now required to raise additional capital fund through debt financing. The bank will require its potential clients to meet a series of financial ratios based on their projected financial results of next year in order to determine the eligibility for obtaining the long-term bank loan. With reference to the financial ratios' requirement indicated below by the bank, calculate all the ratios for Amazing Resort. Does Amazing Resort meet the requirement of the bank? Will it be eligible to obtain a long-term bank loan? Financial Ratios (24 marks) Requirement (a) Current ratio 22 (b) Quick ratio 21 (c) Total assets to total liabilities ratio 225 (d) Debt-to-equity ratio 0.75 (e) Net return on assets 29% (f) Net income to revenue 26% (g) Inventory turnover 25 times (h) Cost of goods sold percentage $45% 3 SECTION B Based on the following information, answer questions 4 to 6 in this section. (Show your workings clearly in tabular format, and round the figures to two decimal places, if applicable) Brilliant Resort has forecasted the following budgeted figures for the first-half of 2021. Month Cash Revenue Credit Revenue Total Revenue January $36,200 $55,000 $91,200 February 37,000 58,500 95,500 March 38,000 61,200 99,200 April 39.500 63,000 102,500 May 41,000 64,500 105,500 June 42,500 65,800 108,300 Collections on credit revenue average 70% in a month later and 30% after two months. The cost of sales is 35% of the total sales revenue. 30% of the purchases is on a cash basis, 70% is on credit and will be paid in the month following the purchases. Other budgeted expenses are shown below: Expenses April May Jun Salaries and $25,000 $25,000 $25,000 wages Insurance 1,400 1,400 1,400 Utilities 15,550 15,750 15,600 Miscellaneous 8000 9000 10,000 Depreciation 8,800 8,800 8,800 Interest 1,400 1,400 1,400 Note that the salaries and wages, utilities, miscellaneous and interest expenses are paid in cash each month as they are incurred. The insurance expense of $16,800 is paid in April each year in advance for the whole year. The resort financed its furniture and equipment from bank and makes monthly repayments of $5,080. In June, it will spend $15,000 on new furniture and equipment. 4. What is budgeting? What is the importance of preparing a cash budget? (5 marks) 5. In what financial statement(s) will "depreciation" appear? Will it be appeared in the cash budget? Please explain. (8 marks) 6. Prepare Brilliant Resort's cash budget for the months of April, May and June. The ending cash balance on 31 March 2021 is estimated to be $8,600. (20 marks) SECTION C Based on the following information, answer questions 7 to 9 in this section. (Show your workings clearly, and round the figures to two decimal places, if applicable) The Chief Executive Officer of KP Group appointed you to be the General Manager for the new investment project of Cool Resort. The total investment cost of the project is $8,492,000, in which 40% is financed by shareholders' equity. After your professional analysis, you estimate that it will generate the following amounts of return, i.e. annual cash flows, in the first ten years. The required rate of return is 10%. Year 1 Annual cash flows 2 3 4 5-10 $80,000 210,000 880,000 1,880,000 3,125,000 7. What is/are the need(s) of this project's capital funding? Are there any other capital funding needs for resort business? Justify your suggestions with examples. 8. Calculate the payback period and net present value (NPV) of the project. (10 marks) (10 marks) 9. Do you think "payback period" is a better investment appraisal technique than "net present value (NPV)? Why or why not? (6 marks) -End 5