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DPBS1180 Value Creation

Practice Final Examination

Practical Questions

Question 1 - Value from Pricing – Single Product.

Angus Johns Pty Ltd produces and sells concentrated protein shakes. Price and cost data are in the following table. Taxation rates are set at 30%

Selling price per bottle	$40.00
Variable Costs per bottle:
Direct Material	$14.50
Direct Labour	$9.00
Manufacturing Overhead	$6.00
Selling Costs	$3.50
Annual Fixed Costs:
Manufacturing overhead	$410 000
Selling and Administrative	$630 000

Forecast Annual Sales	150000 units

Required:

Please enter numbers into the table in whole numbers. i.e no decimal points $ or % signs, ensure you round correctly. Include your workings in the working column

Question

a) What is Angus’s break-even point in units
b) What is Angus’s break- even point in sales dollars?
c) How many units would Angus have to sell in order to earn an after-tax profit of $350 000?
d) What is the firm’s margin of safety?
e) What is the firm’s current forecast profit?
f) Management estimates that direct labour costs will increase by 10% next year. How many units will Angus need to sell next year to reach its after-tax profit target of $350 000?

Question 2 - Value from Pricing - Multiple Products

Racing Wheels Bicycle Shop sells racing bicycles. For the purposes of a CVP analysis, the

shop owner has divided sales into two categories, as follows:

Product Type	Sales Price	Cost	Sales Commission
Off Road Bikes	$3000	$1050	$75
Road Bikes	$2000	$750	$50
Mountain Bikes	$1500	$575	$25

Total sales consist of Off Road bikes account at 15% Road Bikes at 65% with Mountain Bikes the remainder. The shops annual fixed costs are $451500. (for the following questions assume a 30% income tax rate.)

Required:

Please enter numbers into the table in whole numbers. i.e no decimal points $ or % signs, ensure you round correctly

Question	Solution
a) Calculate the unit contribution margin for each product type	Off Road
	Road
	Mountain
b) What is the shops sales mix?	Off Road
	Road
	Mountain
c) Calculate the weighted average unit contribution margin, assuming a constant sales mix.
d) What is the shops total break even units? Assume a constant sales mix
e) How many bicycles of each type must be sold to earn a target after tax net profit of $409500. Assume a constant sales mix	Off Road
	Road
	Mountain

Question 3 - Investment Decisions

ABC Ltd is considering a new machine which will reduce net cash flow by $40000 in the

current year, but increase net cash inflow by $8000, $12000, $16000, $20000, $24000 and $28000 in the following six years.

Required:

Please enter numbers into the table to 2 decimal places. Show workings where possible in the workings column. Do Not enter $,% or any other symbol.

Question	Workings	Solution
a) If funds earn 11%, what is the machines NPV?
b) If funds earn 15%, what is the machines NPV?
c) What is the payback period of the machine?
d) What is the IRR of the machine?
e) Advise management on the purchase of the machine.

Question 4 - Risk, Return and Cost of Capital - CAPM

Suppose News Corporation shares have a beta of 1.7, whereas CBA shares have a beta of 1. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM:

Required:

Please enter numbers into the table to 2 decimal places. Do Not enter $, % or any other symbol. Show all workings in the Working Column.

Question	Workings	Solution
a) What is the expected return of News Corp shares?
b) What is the expected return of CBA shares?
c) What is the beta of a portfolio that consists of 60% News Corp shares and 40% CBA shares?
d) What is the expected return of a portfolio that consists of 60% News Corp shares and 40% CBA shares? (Show both ways) to solve this.)

Question 5 – Risk, Return and Cost of Capital - WACC

Growth Company’s current share price is $20 and it is expected to pay a $1 dividend per share next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year.

Required:

Please enter numbers into the table to 2 decimal places. Do Not enter $,% or any other symbol. Show all workings in the Working Column.

Question	Workings	Solution
a) What is an estimate of Growth Company’s cost of equity?
b) Growth Company also has preference shares outstanding that pay a $2 fixed dividend. If this share is currently priced at $28, what is Growth Company’s cost of preference shares?