Essay/Numerical Questions

1) Klingon Widgets plc purchased new machinery three years ago. The machinery can be sold to the Romulans today for £4.9 million. Klingon’s current statement of financial position shows non- current  assets  of  £3.7  million,  current  liabilities  of  £1.1  million,  and  net  working  capital  of £380,000. If all the current assets were liquidated today, the company would receive £1.6 million cash.

(a) What is the book value of Klingon’s assets today if the historical cost method of accounting is used and what is the value of its assets if the revaluation method is used?

(b) Discuss the difference between book values and market values and explain which one is more important to the financial manager and why.

2) The 2008 financial statements for WPP plc are shown here:

Assets, costs, and current liabilities are proportional to sales. Non-current liabilities and equity are not. The company maintains a constant 40 per cent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase exactly 15 per cent.

(a) What is the external financing needed?

(b) What are the firm's options in this case?

3) Coheed plc had equity of £135,000 at the beginning of the year. At the end of the year the company had total  assets  of £250,000.  During the year the  company  sold  no  new  equity.  Net income for the year was £19,000, and dividends were £3,500.

(a) What is the sustainable growth rate for the company?

(b) What is the internal growth rate for the company?

(c) Coheed plc has a fixed financial policy and is unlikely to be willing to raise external equity capital,  in  part  because  the  owners  don’t  want  to  dilute  their  existing  ownership  and control positions. However, Coheed plc is planning for a growth rate of 15 per cent next year. What are your conclusions and recommendations about the feasibility of Coheed plc’s expansion plans?