BST189 ENTREPRENEURIAL FINANCE SPRING MAIN 2022/23
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Academic year: 2022/23
Examination period: SPRING MAIN
Examination paper number: BST189
Examination Paper Title: ENTREPRENEURIAL FINANCE
Duration: 2 HOURS
1. Fountain ltd has set up in business manufacturing water pumps. A summary of the transactions for the year ended 31 December 2022, the first year of trading, are as follows:
i. Shareholders invested £50,000 into the business.
ii. On 1 January 2022 Fountain ltd borrowed £30,000 from the bank and the first loan repayment of £3,000 was paid on 31 December 2022. Annual interest payments on the loan are £2,100, payable half yearly in arrears, the first interest payment of £1,050 was paid on 1 July 2022 and the second interest payment of £1,050 was paid on 1 January 2023.
iii. In January 2022 the business purchased and paid for equipment costing £50,000. The equipment is expected to last for five years and have a scrap value of £10,000 at the end of five years.
iv. In January 2022 the business purchased and paid for a fork lift truck at a cost of £20,000, to be depreciated at 15% per annum reducing balance.
v. Total sales for the year were £500,000 of which £45,000 was still owed from customers at the year end. It is considered prudent to provide a bad debt provision of 2% of annual sales.
vi. Total purchases during the year for direct costs of manufacturing the fountains were £185,000 of which £20,000 was still owing to suppliers at the year end.
vii. At 31 December 2022 there was closing inventory costing £15,000.
viii. During the year wages and salaries of £110,000 were paid.
ix. During the year marketing, energy and administration costs of £60,000 were paid and energy costs of £10,000 were estimated to be outstanding at 31 December 2022.
x. Insurance costing £20,000 covering the year to 31 March 2023 was paid during the year.
i. Corporation tax is estimated at 20% of the net profit for the year and is payable on 30 September 2023.
REQUIRED:
(a) Prepare an Income Statement (Profit and Loss Account) and Cashflow
Statement for the first year of trading. (34 marks)
(b) Explain the purpose of the Statement of Financial Position (Balance Sheet) and discuss three limitations of the Statement of Financial Position. (16 marks) (Total: 50 marks)
2. Kayak ltd is a canoe manufacturer and is considering introducing a new canoe, the XL100. The following information regarding the XL100 has been provided:
i. New equipment costing £260,000 will have to be purchased and paid for immediately. At the end of the three years the equipment will have a scrap value of £50,000.
ii. Sales have been forecast at £325,000, £375,000 and £175,000 in years 1, 2 and 3 respectively. Operating costs are estimated to be £100,000, £140,000 and £60,000 in years 1, 2 and 3 respectively. Annual fixed costs are estimated to be £120,000, this cost of £120,000 includes straight line depreciation on the new equipment.
iii. Working capital requirements are expected to amount to 10% of the expected annual sales value of which 95% will be recovered as the sales decrease. Working capital cash outflows are payable at the start of each relevant year and cash inflows at the end of each relevant year.
iv. Corporation taxation is payable annually at a rate of 20% on operating cashflow, where operating cashflow includes relevant sales, operating and fixed cost cashflows.
v. Kayak ltd’s required return is 25%.
vi. Assume all cash flows, including corporation tax, are payable at the end of the year in which the relevant cashflows arise, unless otherwise indicated.
(a) Calculate the Net Present Value and Accounting Rate of Return for the XL100. (32 marks)
(b) Compare the Net Present Value and Accounting Rate of Return for the XL100 calculated in part “a” above and advise Kayak ltd, with explanations and reasons, whether or not to launch the XL100. (6 marks)
(c) When comparing different projects, explain one advantage the Net Present Value appraisal technique has over the Internal Rate of Return appraisal technique. (4 marks)
(d) Explain one advantage and one disadvantage of the Payback Period appraisal technique. (8 marks)
(Total: 50 marks)
3. Track ltd and Field ltd are two companies, operating in the same industry, that have recently setup in business. The annual results for their first year of trading to 31 March 2023 are set out below:
Profit and Loss Accounts |
Track ltd |
Field ltd |
£ |
£ |
|
Sales turnover |
650,000 |
975,000 |
Less: Cost of sales |
195,000 |
302,250 |
Gross profit |
455,000 |
672,750 |
Less: Operating expenses: |
|
|
Wages |
227,500 |
351,000 |
Depreciation |
10,000 |
10,000 |
Marketing |
130,000 |
180,375 |
Other operating costs |
65,000 |
107,250 |
Total operating expenses |
432,500 |
648,625 |
Operating profit |
22,500 |
24,125 |
Less: Interest payable |
12,000 |
12,000 |
Profit before Tax |
10,500 |
12,125 |
|
|
|
Balance Sheets |
|
|
Fixed assets at Cost |
250,000 |
250,000 |
Less: Accumulated depreciation |
10,000 |
10,000 |
Net book value |
240,000 |
240,000 |
Current assets: |
|
|
Stock |
18,000 |
80,000 |
Trade debtors |
50,000 |
130,000 |
Cash |
50,000 |
- |
|
118,000 |
210,000 |
Less: Current liabilities: Bank overdraft |
- |
70,000 |
Trade creditors |
20,000 |
60,000 |
|
20,000 |
130,000 |
Less: Long term loans |
150,000 |
150,000 |
|
|
|
Net assets |
188,000 |
170,000 |
Financed by: |
|
|
Share capital (£1 Ordinary Shares) |
177,500 |
157,875 |
Accumulated profit less losses |
10,500 |
12,125 |
Shareholders’ equity |
188,000 |
170,000 |
|
|
|
REQUIRED:
(a) For each of the companies calculate the following ratios;
Profitability Ratios:
Return on Capital Employed, Gross Profit Margin and Operating Profit.
Working Capital Ratios:
Stock Turnover Days, Trade Receivable Days and Trade Creditor Days.
Liquidity Ratios:
Current Ratio and Quick Ratio. (24 marks)
(b) Use the annual results and ratios calculated in part “a” above to
evaluate the profitability, working capital and liquidity of Track ltd and
Field ltd and advise, with reasons, which company has performed best
in their first year of trading. (20 marks)
(c) Briefly explain two limitations of ratio analysis. (6 marks)
(Total: 50 marks)
4. Camping ltd manufactures and sells tents and is considering offering for sale four new tents for the coming season; the D2, D4, D6 and D8. The following information has been provided regarding the tents, (on a per unit basis):
D8 D6 D4 D2
£ £ £ £
Selling Price 420 400 300 250
Variable Costs:
Labour costs 25 35 25 20
Material costs 150 160 230 215
Direct Production costs 10 170 35 20
Separable Fixed Costs:
Overhead cost allocation 205 5 20 20
Expected
Monthly Demand 300 units 300 units 300 units 350 units
REQUIRED:
(a) Based on financial factors, advise Camping ltd on which tents to launch and calculate the expected total monthly profit. Had the fixed production costs been shared fixed costs would this change your advice, and if so, calculate the revised total monthly profit. (10 marks)
(b) Assuming fixed production costs are separable:
i. For each tent introduced, calculate the expected breakeven volume, margin of safety, gearing sensitivity and operational gearing. (16 marks)
ii. You have been advised that Camping ltd has taken a prudent approach to the sales forecasts and as such there is a high degree of certainty that the monthly sales forecasts will be achieved. Advise with reasons which tent, if any, Camping ltd should introduce. Use your calculations from part “a” and ‘i’ above to explain your advice. (10 marks)
(c) Use your answers in part ‘b’ above to explain how and why operational gearing impacts profit sensitivity. (6 marks)
(d) Critical discuss two assumptions of Cost Volume Profit Analysis. (8 marks)
(Total: 50 marks)
5. EITHER
Evaluate sources of long-term finance available to businesses at the expansion stage of finance. (Total: 50 marks)
OR
In the context of over-trading, explain the term working capital requirement and discuss measures managers can take to address over-trading. (Total: 50 marks)
OR
Critically evaluate how traditional budgeting addresses the aims of budgeting. (Total: 50 marks)
2023-07-24