BMAN21040 19-20
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BMAN21040
SECTION A – WITHHELD
Multiple Choice Questions - not included with paper.
SECTION B
Answer two questions from section B (30 marks per question)
QUESTION 6
ChipCo designs architectures and processors, licensing them to device manufacturers including Dell, Apple, HP and LG for use in various devices such as smart phones, tablet devices and personal computers.
Because it is a very large company with a dominant market share (approximately 70%), it expands primarily through seeking ways to increase the total size of the world market for such devices. This involves investing selectively in an “ecosystem” of innovative downstream companies focusing on developing the next generation of mobile infrastructures. It is these kinds of complementary products that may result in an expanding market for ChipCo’s devices.
ChipCo envisages a total cash investment in these downstream software firms of $400 million as of January 1st 2021. This would be in return for minority shareholdings in them. ChipCo’s general policy is to seek to sell the investments to private equity firms or other buyers after a period of 5 years.
From extensive analysis of the prospects of the individual software firms, ChipCo conservatively estimates its investments in the software firms will be valued at about $450 million as of December 31st 2025. In addition, ChipCo expects to receive dividends on its investments totaling $2 million annually, received at the end of each year from 2021 to 2025 inclusive.
If the software firms are successful, then a most-likely estimate is that total sales of devices will increase, yielding the following results for ChipCo and its competitors:
|
Forecast Incremental Volumes & Profitability for all device Sales: |
|||||
|
|
2021 |
2022 |
2023 |
2024 |
2025 |
|
Volume increase (units) |
385,000 |
500,000 |
636,000 |
591,000 |
568,000 |
|
Average selling price/unit |
260 |
240 |
220 |
220 |
220 |
|
Total revenues |
100,100,000 |
120,000,000 |
139,920,000 |
130,020,000 |
124,960,000 |
|
Variable production costs |
40,000,000 |
50,000,000 |
62,000,000 |
57,000,000 |
55,000,000 |
|
Contribution |
60,100,000 |
70,000,000 |
77,920,000 |
73,020,000 |
69,960,000 |
|
As % of total revenues |
60% |
58% |
56% |
56% |
56% |
|
Fixed production + sales costs |
38,000,000 |
46,000,000 |
50,000,000 |
50,000,000 |
48,000,000 |
|
Operating income |
22,100,000 |
24,000,000 |
27,920,000 |
23,020,000 |
21,960,000 |
|
As % of total revenues: |
22% |
20% |
20% |
18% |
18% |
The fixed production and sales costs in the table (above) are allocations based on the costing system of ChipCo. It is not expected that ChipCo will need to increase its production or distribution capacity to meet incremental demand between 2021 and 2025. The data for selling prices and variable production costs are expected averages for ChipCo and its competitors in the region.
Since ChipCo currently holds 70% of the logic device market globally, it is expected that this percentage will decline by roughly one percentage point per year for each year from 2021 to 2025. By investing in software developers, ChipCo unavoidably helps its competitors insofar as they too may gain in sales of logic devices.
The cost of capital rate used by ChipCo is 10% per annum and the relevant discount factors are as follows:
Table: Discount Factor at 10% per annum
|
Years |
|
Start 2021 End 2021 2022 2023 2024 2025 |
|
10% |
|
1 0.9091 0.8264 0.7513 0.6830 0.6209 |
REQUIRED:
a. Compute the Net Present Value of the estimated direct returns from the minority equity investments (10 marks)
And:
b. Compute the Net Present Value of the combined direct returns from the minority equity investments and the indirect returns of making the investments in software firms (5 marks)
And:
c. Where individual firms are highly specialized, a need may arise to coordinate the investment decisions of any one firm with those of others in a network or “ecosystem”. Examine how accounting might facilitate the coordination of such investment decisions at “ecosystem” level. (15 marks)
QUESTION 7
A power operator comprises three divisions. The firm uses economic-value-added (EVA) measures to evaluate performance internally, and return-on-capital (ROC) measures to report divisional performance to the capital markets externally. The following financial statements have been prepared for each of the divisions:
Income Statements & Balance Sheets, Last Financial Year (US$ thousands)
|
Amounts in US$ thousands |
Generation |
Distribution |
‘New’ Energy |
|
Income statements: |
|||
|
Sales: |
76,800 |
63,120 |
57,600 |
|
Operating costs: |
41,804 |
47,104 |
54,234 |
|
Depreciation of fixed assets: |
4,400 |
1,800 |
1,500 |
|
Once-off write-down in value of investments: |
1,500 |
---- |
---- |
|
Exceptional cost of fire in new energy division: |
---- |
---- |
800 |
|
Interest on debt: |
90 |
60 |
40 |
|
Operating income (loss): |
29,006 |
14,156 |
1,026 |
|
Balance sheets at year end: |
|||
|
Current assets: |
10,000 |
8,850 |
3,000 |
|
Investments in partner companies: |
2,500 |
---- |
---- |
|
Fixed assets (net of depreciation): |
72,600 |
15,800 |
11,300 |
|
Total assets: |
85,100 |
24,650 |
14,300 |
|
Trade creditors: Debt capital: Deferred taxation: Pension liabilities: |
3,600 - 125 425 |
3,500 600 - - |
750 420 44 36 |
|
Long-term liabilities: Debt capital: |
1,600 |
400 |
200 |
|
Total liabilities: |
5,750 |
4,500 |
1,450 |
|
Shareholder capital invested: |
79,350 |
20,150 |
12,850 |
The following additional information has been provided concerning the Income Statements of the three divisions:
I. The “Depreciation” numbers refer to periodic reductions in the replacement value of the fixed assets of each of the divisions, and not to out-dated historic costs.
II. The “Once-off Write-down in Value of Investments” relates to unexpected losses in a partner company in which the Generation Division had taken an equity shareholding.
III. The “Exceptional Cost of Fire at the New Energy division” relates to rebuilding and compensation expenses following an accident.
IV. The “Interest on Debt” numbers relate wholly to loans procured to conduct business within the respective Divisions.
The firm’s opportunity cost of capital is 10% per annum.
2022-01-14