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FIN309 Finance Assignment 2 - Individual Assignment/TMA02 January 2016 Presentation FIN309 Assignment 2 Individual Assignment This assignment is worth 25% of the final mark for FIN309 Finance. The cut-off date for this assignment is 27 April 2016, 2359hrs. ___________________________________________________________________________ Question 1 The board of directors of Tong & Fong Limited (\"T&F\"), a major motor distribution and transportation company, are considering bidding to be the exclusive authorised distributor of \"Bruser\" brand of automobile. This distributorship will be for a term of 5 years and will cost T&F $3 million. Management believes that the automobile industry, in particular the sale of automobiles, is an attractive industry that will remain robust in the long term. They expect to sell 100 Bruser cars in the first year of operations. This is expected to grow by 20 cars each year for the next two years. After which, volume is expected to grow by 10 cars each year. Selling price per car is $140,000 and this is unlikely to change over the next several years. Cost of sales, which includes primarily cost of the cars, freight charges, COE, ARF and sales commission is estimated to be 75% of sales. Fixed overheads comprising rent for show room, utilities and staff salaries is about $1.5 million in the first year. This is anticipated to increase by the general inflation rate of 2% per year. Distributorship cost is amortised on a straight line basis and it qualifies for tax deduction. Corporate tax rate is 17% and the appropriate discount rate for this prospective business opportunity is 20%. You have been assigned by your boss to carry out a sensitivity analysis. Specifically, you are required to: (a) Calculate the net present value (NPV) on a base case. (12 marks) (b) Calculate the net present value (NPV) if sales volume were 10% more. (6 marks) (c) Calculate the net present value (NPV) if cost of sales were 10% less. (6 marks) (d) Calculate the net present value (NPV) if fixed overheads were 10% less. (6 marks) (e) Analyse the results obtained and identify which variable is the most sensitive. (5 marks) SIM UNIVERSITY Assignment 2 - Page 2 of 4 FIN309 Assignment 2 Question 2 T&F's latest income statement and statement of financial position is set out below: Income Statement For the financial year ended 30 June 2016 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Other operating expenses Profit from operations Financing costs Profit before tax Income tax expense Profit for the year 106,480,000 (85,130,000) 21,350,000 (8,090,000) (8,580,000) (290,000) 4,390,000 (1,176,500) 3,213,500 (546,295) 2,667,205 Statement of Financial Position As at 30 June 2016 Non-current assets Current assets 81,130,000 107,250,000 188,380,000 Current liabilities Borrowings Equity 42,220,000 23,530,000 122,630,000 188,380,000 Inventories for the financial year ended 30 June 2015 was $19,592,000. Assume 365 days a year. Inventories as of 30 June 2016 is the same as last year. Also, assume current assets include only trade receivables and inventory and current liabilities comprise trade payables only. (a) Calculate the cash conversion cycle for FY 2016. (12 marks) (b) Explain the term cash conversion cycle and discuss how T&F can go about improving it. (8 marks) SIM UNIVERSITY Assignment 2 - Page 3 of 4 FIN309 Assignment 2 Question 3 The management of T&F is evaluating the financing requirements for the coming year. Accordingly, FY 2017 revenue is forecasted to increase by 5% and gross profit margin will remain the same. Distribution costs will increase in tandem with sales. All other expenses are expected to remain the same. Income tax rate will remain at 17% and the company has a dividend payout ratio of 75%. Non-current assets will increase by $3 million. Both current assets and current liabilities will increase by 3%. In order to estimate the financing needs for FY 2017, management has requested your help on the following: (a) Calculate the increased in retained earnings for FY 2017. (12 marks) (b) Assess the discretionary financing needs for FY 2017. (8 marks) Question 4 Currently, T&F's stock is trading at $0.65 per share and the number of outstanding ordinary shares is 200 million. Given that borrowing are on floating-rate, the carrying amounts approximates market value. You may assume the company is operating at its optimal capital structure and that the discretionary financing needs for FY 2017 is about $4 million. Management is contemplating reducing dividends so that the profit can be used to meet the firm's financing needs. (a) Calculate the amount of equity and debt to be raised for FY 2017. (10 marks) (b) Analyse in a balanced manner whether the management of T&F should reduce its dividends. (15 marks) ---- END OF ASSIGNMENT ---- SIM UNIVERSITY Assignment 2 - Page 4 of 4