a) Prepare common size comparative profit and loss accounts for the three-year period. (1.5 marks) b) Prepare all relevant financial statement ratios for 2014 and 2015 (Cash Flow ratios are not required). (7 marks) c) Comment on the significant trends and relationships revealed by your analytical computations. (3 marks) d) Would you consider buying this company’s shares if they are now selling for $1.15 per share? Why? (1 mark) PART B: (12.5 marks) Ken Blow is considering going into business by opening a food store. He has found suitable premises. However, before the bank will grant him an overdraft and lending facility, he has been asked to draw up a cash budget for the first three months of trading (February, March and April, 2016). Ken has $100 000 of his own money that he is able to invest into the business. He will need to rent his premises one month before he opens the store, and he will also have to have his stock (inventory) and his staff on hand two weeks before he opens the doors. He also has the following relevant information:
Expected sales for each of the first three months of trading are February - $75 000, March - $90 000 and April - $110 000 respectively. It is assumed that the sales will be even over each four-week period. Staff costs are expected to be $1 500 per week; rent is $2 000 per week, payable one month in advance; electricity and phone are expected to be $500 per week, payable a month in arrears; insurance is $10 000 per annum payable a year in advance; equipment of $45 000 will need to be purchased when the store is first rented and will be depreciated, straight line, over ten (10) years with no residual value. Ken is allowing a 25% mark up on all goods sold. As he is a new customer, all suppliers will require him to pay for goods within seven (7) days. Inventory is ordered three weeks before it is required and there will be a weekly delivery.
The bank is prepared to grant overdraft and lending facilities to the extent of $10 000, if the cash budget indicates that the business should be successful. Interest on the overdraft will be charged at 16% per annum. The bank is also prepared to lend Ken a long-term loan of $50000 with an interest rate of 12% per annum with interest to be paid quarterly. The long-term loan must be taken in full, whether or not Ken requires the whole amount (simple interest calculations only are required). Ken further estimates that his weekly turnover in twelve (12) months’ time will be $175 000 per week. Some assumptions you may consider ï± Assume 4 weeks to a month ï± Assume all sales are cash sales ï± Depreciation will not affect the cash budget Loan Assume $50,000 borrowed in first week of January (interest paid quarterly – 12 weeks later) Wages Paid weekly Rent Assume rent is paid weekly but payable one month in advance Electricity / Phone Assume electricity / phone required when office rented. Assume paid monthly in arrears Electricity / Phone will therefore need to be paid from week 1 in February Stock Needs to have stock on hand two weeks before opening
a) A cash budget covering all the information given until the end of April. (9.5 Marks)
b) Do you think the business will be successful, based on the forecasts? Give reasons for your answer. (1.5 Marks)
c) Given Ken’s estimation that the turnover will increase within twelve months, what other costs would you expect to increase? Why? (1.5 Marks)
PART C: (10 marks)
Required Calculate the Net Present Value and Internal Rate of Return relative to the purchase of a new widget making machine.
• Machine cost $3,400,000 • Useful life: 7 years • For tax purposes a 30 per cent reducing balance depreciation would be used. • Maintenance cost per annum: $75,000. • Maintenance technician salary per annum: $125,000 • Operator’s salary: $90,000, plus 35 per cent on-costs. • Restructuring cost (First year only): $180,000. • Employee training costs are projected as follows: First Year $35,000 Second Year $25,000 Third Year $10,000 • Increase in working capital required: $60,000. • Salvage value: $75,000. • Manufacturing cost savings per annum: $1,200,000. • Sale of now obsolete equipment over the next two years.