Question 4: (20 marks)

1. Lara, an auditor, has just begun an engagement at a University. In her first meeting with the team, the Director commented that "all that mattered in this industry is students. If the number of students is adequate, everything else would take care of itself." Sara noted that while this measure was important, other, broader facets of operation were significant as well. She asked if any of the management team had heard of the Balanced Scorecard; the response was a deadly silence.

Required: Discuss the Management team's current approach to performance measurement and suggest how the use of the Balanced Scorecard might help.

2. Company KPC has an average trade receivables of $7,500,000 and annual sales of $19.5 million. It is considering the use of factoring given that this would result in a reduction in credit control costs of $550,000 per annum. The factoring house charges a fee of 1.1% of sales. It will provide an advance to the company of 70% of its receivables and will charge interest on this advance of 7% per annum.

Required: Assess whether it is financially beneficial for company KPC to enter into this factoring arrangement.

3. A Toys Company has 4.6 million shares in issue. The current market price is $6 per share. The companys debt is publicly traded on the London Stock Exchange and the most recent quote for its price was at 80% of face value. The debt has a total face value of $ 8 million and the companys credit risk premium is currently 2.3%. The risk-free rate is 3.7% and the equity market risk premium is 7.3%. The companys beta is estimated at 0.8 and its corporate tax rate is 25%.

Required: Calculate the companys WACC.