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FIN2101 BUSINESS FINANCE
CONTINUOUS ASSESSMENT 1
INDIVIDUAL ASSIGNMENT: 30 marks
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Deadline: Date specified on Canvas Learning Management Systems.
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Within 24 hours: 20% to be deducted from total marks
More than 24 hours: submission will be graded zero
CA Submission
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Question 1
AI Corporation and EP Corporation are companies in the manufacturing industry. Assume that the companies do not need to pay taxes.
We are provided with the relevant information of the two corporations in the table below.
Item
|
AI Corporation
|
EP Corporation
|
Sales
|
$1000000
|
$500000
|
Earnings before interest and tax
|
$500000
|
$200000
|
Total equity
|
$1000000
|
$1000000
|
Total liabilities
|
$2000000
|
$500000
|
Interest expense
|
$250000
|
$40000
|
Based on the information in the table, calculate and explain the following ratios. Show all necessary workings.
(i) Net profit margin (2 marks)
(ii) Time interest earned (2 marks)
(iii) Based on the information provided and your answers in part (i) and part (ii), explain which firm has better ability to meet its debt obligation? Justify your answer. (4 marks)
Question 2
Your firm is considering an investment, raising $250,000 equity and with a $150,000 bank loan. Given your firm’s cost of equity is 5% and before-tax cost of debt is 8%. The investment is expected to generate a net operating profit after tax of $80,000. Your firm has a tax rate of 20%.
(a) Calculate the Economic value added (EVA) for the investment? (4 marks)
(b) Should the firm acceptor reject the investment? Explain your reason(s). (1 mark)
Question 3
You are told that “it is better for a firm to have negative networking capital” . Do you agree with the statement? Justify your answer.
Note: Use your own words; do not copy directly from any sources. [Word limit: 200] (5 marks)
Question 4
Your firm has a supplier offering the credit terms of 3/5 net 60 for a current invoice of $10,000.
(i) Calculate the cost of discount in percentage (round your answer to 2 decimal places). (2 marks)
(ii) Given the bank’s lending rate is 15% per annum, should your company take up the cash discount? Explain your reason(s). (2 marks)
Question 5
Your firm has forecasted its total funds requirements for the coming year as shown in the table below:
Month
|
Total funds requirements
|
Jan
|
$4,000,000
|
Feb
|
$3,000,000
|
Mar
|
$3,500,000
|
Apr
|
$3,500,000
|
May
|
$3,500,000
|
Jun
|
$6,000,000
|
Jul
|
$3,500,000
|
Aug
|
$3,500,000
|
Sep
|
$3,500,000
|
Oct
|
$4,000,000
|
Nov
|
$5,000,000
|
Dec
|
$5,000,000
|
Given that short-term funds cost 6% annually and that long-term funds cost 8% annually, calculate the total cost of each of the following strategies:
Note: Copy the above table and show all necessary workings. Zero marks will be awarded if there are no workings.
(a) An aggressive funding strategy. (3 marks)
(b) A conservative funding strategy. (2 marks)
(c) Given the firm’s management is currently focusing on increasing returns, should the firm adopt the Aggressive financing strategy or Conservative financing strategy? Discuss the risk(s) related with Aggressive strategy. Provide justification for your answer. (3 marks)