Module Title: Finance For I.T. Managers 1

Transcription

1 CORK INSTITUTE OF TECHNOLOGY INSTITIÚID TEICNEOLAÍOCHTA CHORCAÍ Semester 1 Examinations: Winter Module Title: Finance For I.T. Managers 1 Module Code: School: FINA8001 Business (Department of Accounting & Information Systems) Programme Title: Bachelor of Business in Information Systems (BIS) Year 4. Programme Code: BBISY_8_Y4 External Examiner(s): Mr Peter Weadack Internal Examiner(s): Mr. Scott McGowan. Instructions: Answer all 3 questions. Question 1 is worth 40 marks, questions 2 and 3 are both worth 30 marks. Duration: 2 hours. Sitting: Winter Requirements for this examination: Calculator and Present Value Tables (attached). Note to Candidates: Please check the Programme Title and the Module Title to ensure that you have received the correct examination paper. If in doubt please contact an Invigilator. Page 1 of 7

2 Question 1 (Total: 40 Marks) Part A) Weighted Average Cost of Capital (30 Marks) O Connell P.L.C. is considering expanding their business operations. This would involve a large capital outlay on a project. In order to determine if this venture is worthwhile or not the company s management have suggested evaluating the project using the Net Present Value rule. O Connell s capital structure has changed recently and management have asked you to calculate their new Weighted Average Cost of Capital (W.A.C.C.) You are provided with the following information: O Connell PLC has issued share capital of 700,000 ordinary shares with a book (nominal) value of The current market value of these shares is 2.20 cum-div (i.e. before dividend). O Connell has 3,000 10% debentures issued each with a book (nominal) value of 100. These debentures are redeemable in 2 years time and have a current market value of before interest payments. Both the ordinary dividend and the interest on debt are due to be paid shortly. The ordinary dividend will be 70,000 this year and the board of directors expect that dividends will increase by 5% per annum for the foreseeable future. The company does not have any Preference Shares you may ignore this portion of the Weighted Average Cost of Capital formula. The tax rate is 30%. 1. Calculate O Connell s Weighted Average Cost of Capital (W.A.C.C.) (30 Marks) Note: Clearly show your workings, attempt marks will be awarded for relevant calculations and formulae. TIP: For your IRR calculation, a discount rate of 10% will give you a small positive result and a discount rate of 9% will give you a small negative result. You may, of course, use any percentages that you wish however. Part B) The invisible cost of debt (10 Marks) Explain the concept of the invisible cost of debt. Why is this this invisible cost of debt so important for firms with a mix of debt and equity financing to consider? (10 Marks) Page 2 of 7

3 Question 2: (Total: 30 Marks) PART A) The Cash Conversion Cycle (20 Marks) Magnetic P.L.C. has provided you with the following excerpts from its published accounts: Statement of Comprehensive Income for year ending 31 st of December for 2015: s Sales (Assume all Sales are on credit) 90,000 Cost of Sales (Take for purchases number) 70,000 Gross Profit 20,000 Net Profit for the year 4,500 Dividends 500 Profits Retained 4,000 Magnetic PLC, Statement of Financial Position as at 31 st of December for 2015: s Non-Current Assets: Plant Property & Equipment 325,000 Current Assets: Inventory (average inventory) 3,000 Trade Receivables 3,200 Cash & Cash Equivalents 60,000 Total Current Assets 66,200 Current Liabilities: Trade Payables 15,000 Taxation Due 5,000 Accrued Expenses 5,000 Total Current Liabilities 25,000 Non-Current Liabilities: Long term loan 70,700 Total Net Assets 322,500 Calculate Magnetic P.L.C s cash conversion cycle for 2015 clearly outlining each of the cash conversion cycles component parts (Accounts Receivable, Accounts Payable and Inventory Days). You may assume the closing inventory is representative of the average number, that all sales are on credit terms and you may take the cost of sales number as the figure for purchases. Comment briefly on your findings (1 or 2 lines per item will suffice) (20 Marks) IMPORTANT: QUESTION 2 Continues on the next page. Page 3 of 7

4 Question 2 Continued PART B) Working Capital Management (10 Marks) Outline some basic best-practice management strategies for the management of the following key components of working capital: 1. Accounts Receivable (A.K.A: Debtors or Trade Receivables) (5 Marks) 2. Accounts Payable (A.K.A: Creditors or Trade Payables) (5 Marks) Note: 2 good methods for each component will suffice, keep your answer concise approximately 8 well-written lines in total will suffice. Page 4 of 7

5 Question 3: (Total 30 marks) PART A) Capital Structure (20 Marks) Explain, using a graph / graphs, the traditional view of Optimal Capital Structure (20 Marks) Note: Keep your answer concise: draw the graph include axis titles and label each line on the graph, explain the graph briefly and offer a conclusion. TIP: You may wish to just show the final graph and explain how it occurs, then give the conclusion. PART B) Economic Order Quantity (10 Marks) A company has estimated its annual demand to be 100,000 units. The order cost is 10 per order and the storage costs are 5.00 per unit. The maximum use is estimated as 400 units per day. The company works 365 days a year. 1. Calculate the company s Economic Order Quantity (E.O.Q.) (4 Marks) 2. Briefly explain what the Economic Order Quantity means (2 Marks) 3. If the company follows the Economic Order Quantity (E.O.Q.) how many times will it need to order stock in a year if the annual demand estimate of 100,000 units is correct? (2 Marks) 4. If the company follows the Economic Order Quantity (E.O.Q.) then what will be the total cost of ordering for the year if the annual demand estimate of 100,000 units is accurate? (2 Marks) Page 5 of 7

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