SOLENT UNIVERSITY

BSc (HONS) BUSINESS ADMINISTRATION – LEVEL 6

BUSINESS FINANCE MANAGEMENT

MODULE CODE: BCC620 (ACC314)

Date: Saturday 6th November 2021

INSTRUCTIONS TO CANDIDATES

Please take the time to read ALL the instructions below:

ABOUT THE EXAM:

Your exam is designated to last TWO hours.

This paper contains THREE questions

Candidates are required to answer TWO questions.

Candidates MUST answer QUESTION ONE and EITHER QUESTION TWO or QUESTION
THREE

The allocation of marks is indicated on the paper.

You have a 24-hour period to submit your exam as we recognise students may have
different circumstances.

You are to download the paper and complete it offline so you can pause, continue and
upload your exam paper as needed within the 24 hours.

Please note: You are taking an exam which can be done at any point within the designated
24-hour period. You are not taking a 24-hour exam.

You are not expected to undertake the level of research and referencing in your exam
paper that would be expected for a coursework assessment but should provide effective
answers to the questions set in the same way as you would during a supervised exam
following effective revision.

You are not expected to operate under strict exam conditions but your answers must be
your own work.

You must not share your work

You must not distribute or publish this examination paper

SPECIAL INSTRUCTIONS

Use of calculators is permitted in the examination, providing they are not programmable
and do not have a graphics display facility.

Tables for present values are provided at the back of this examination paper.
Candidates MUST answer this question:

QUESTION ONE

Studland Ltd is considering the launch of a new product range, which it expects to achieve
sales of 350 thousand units in each of the next five years, at a selling price of £28.00 per
unit.

In order to manufacture the product, Studland will need to purchase new equipment at a
cost of £8 million. The disposal value of this equipment after five years is estimated at
£1.2 million.

The new product range will require an investment of £0.6 million in working capital at the
start of the first year. No further investment in working capital is required, and this sum
will be recovered in full at the end of the project.

The additional operating costs arising from the new range are estimated to be: £0.5
million per annum of fixed overheads; and £20.00 per unit of variable manufacturing and
distribution costs.

The company uses a hurdle rate (discount rate) of 14% when evaluating capital
expenditure proposals.

Apart from the initial investment, all cash-flows can be assumed to occur at the end of the
relevant year. Ignore taxation.

Required:

a) Calculate the Net Present Value (NPV) and cash-flow payback of the project.

(20 Marks)

b) Recommend what action should be taken. Include in your answer an evaluation of

the basis of your recommendation, and identification of any additional analysis you
would wish to perform.
(10 Marks)

c) Compare and contrast the advantages and limitations of the NPV approach against
that of other Capital Investment Appraisal techniques.
(20 Marks)

(Total 50 Marks)
Candidates MUST answer EITHER QUESTION TWO OR QUESTION THREE but not both:

QUESTION TWO

Bill and Ben formed a business having identified an opportunity to source products from
Asia, and distribute them to a number of retailers and market traders. The summary
financial statements below relate to the new company’s first two years of trading.

Balance Sheet as at financial year ending 31st 2018 2017

December:
£000 £000 £000 £000

Non-current assets
Tangible – at cost 367 172
Less accumulated depreciation (127) (46)
240 126

Current assets:
Inventory 1,868 562
Trade receivables 1,642 535
Other receivables 7 28
Bank and cash 16 8
3,533 1,133

Current liabilities:
Trade payables (1,950) (642)
Other current liabilities (39) (100)
Taxation (158) (29)
Bank overdraft (150) (34)
(2,297) (805)

Non-current liabilities
Bank loan (900) (300)

Net assets 576 154

Ordinary shares 200 1,00

Retained earnings 376 54
Shareholders’ funds (Equity) 576 154

QUESTION TWO continued on the next page

QUSTION TWO continued from previous page

Income Statement for the year ended 31st 2018 2017

December:
£000 £000

Sales revenue 9,174 3,745

Cost of sales (4,128) (2,133)
Gross profit 5,046 1,612

Operating expenses
Administration (1,214) (314)
Selling (986) (398)
Warehouse and distribution (2,055) (741)
Depreciation (81) (46)
(4,337) (1,499)

Operating Profit 710 113

Finance charges (230) (30)
Profit before tax 480 83
Taxation (158) (29)
Net Profit for the period 322 54

Bill and Ben believe that they have identified a new product line, which according to the
fashion news will be a definite big seller for the summer season of 2019. They recognise
that the company will have to carry an increased level of inventory from September to
March to meet the anticipated demand. The directors have asked you to review the
accounts for the first two years and advise them as to if they are in a position to increase
inventory in order to support the anticipated demand.

Required:

a) Using the information given above, apply relevant ratio analysis to assess the
financial performance of the company over the first two years of trading.

i. Ratio selection and calculations

(10 Marks)

ii. Interpretation of the performance, using the ratios.

(20 Marks)

b) Using the ratios calculated in a) above, discuss whether the company is in a position
to increase the level of inventory to support the anticipated demand for this
proposed new product.
(20 Marks)

(Total 50 Marks)
QUESTION THREE

Chalfield plc is a regional restaurant operator. The company’s latest strategic plan sets
the objective of creating a national chain which generates operating profits of £10 million
per annum. Chalfield will need to raise additional capital to fund its planned expansion,
and expects to have an enterprise value (market values of debt plus equity) of £90 million.

Following discussions with investors, the company has established that in order to fund the
expansion, equity holders and debt providers will require the following rates of return on
their investments, at the specified levels of gearing.

Debt: Equity ratio. 30% : 70% 40% : 60% 50% : 50%

Expected return for:
Equity (Shareholders) 12.0% 13.0% 14.0%
Debt providers (Term loan) 4.5% 4.75% 6.25%

Corporate income tax (Corporation tax) is payable at a rate of 20%, on all profits after
deduction of interest costs.

Required:

a) Calculate the Weighted Average Cost of Capital for each of the potential capital
structures identified above.
(12 Marks)

b) Discuss your results and recommend which level of financial gearing should be
adopted as the company’s target capital structure.
(6 Marks)

c) Based on your preferred Debt to Equity Ratio, and assuming that the company pays
an annual dividend of £2 million, calculate:

i. Dividend yield (ignore taxation)

ii. Interest cover

iii. Price Earnings ratio

(12 Marks)

d) The directors of Chalfield plc have arranged to see their bankers to discuss a new
bank loan. What aspects will the bank wish to consider before agreeing a new loan
facility?
(20 Marks)

(Total 50 Marks)
 Discount factor table (Single period)

Discount factors for a range of discount rates

 Present value of £1 after n years at discount rate r%
 Discount factor = 1/(1+r)n where r = discount rate and n = number of years

Yea
r 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
0.990 0.980 0.970 0.961 0.952 0.943 0.934 0.925 0.917 0.909
1 1 4 9 5 4 4 6 9 4 1
0.980 0.961 0.942 0.924 0.907 0.890 0.873 0.857 0.841 0.826
2 3 2 6 6 0 0 4 3 7 4
0.970 0.942 0.915 0.889 0.863 0.839 0.816 0.793 0.772 0.751
3 6 3 1 0 8 6 3 8 2 3
0.961 0.923 0.888 0.854 0.822 0.792 0.762 0.735 0.708 0.683
4 0 8 5 8 7 1 9 0 4 0
0.951 0.905 0.862 0.821 0.783 0.747 0.713 0.680 0.649 0.620
5 5 7 6 9 5 3 0 6 9 9
0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
6 0 0 5 3 2 0 3 2 3 5
0.932 0.870 0.813 0.759 0.710 0.665 0.622 0.583 0.547 0.513
7 7 6 1 9 7 1 7 5 0 2
0.923 0.853 0.789 0.730 0.676 0.627 0.582 0.540 0.501 0.466
8 5 5 4 7 8 4 0 3 9 5
0.914 0.836 0.766 0.702 0.644 0.591 0.543 0.500 0.460 0.424
9 3 8 4 6 6 9 9 2 4 1
0.905 0.820 0.744 0.675 0.613 0.558 0.508 0.463 0.422 0.385
10 3 3 1 6 9 4 3 2 4 5

Yea
r 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
0.900 0.892 0.885 0.877 0.869 0.862 0.854 0.847 0.840 0.833
1 9 9 0 2 6 1 7 5 3 3
0.811 0.797 0.783 0.769 0.756 0.743 0.730 0.718 0.706 0.694
2 6 2 1 5 1 2 5 2 2 4
0.731 0.711 0.693 0.675 0.657 0.640 0.624 0.608 0.593 0.578
3 2 8 1 0 5 7 4 6 4 7
0.658 0.635 0.613 0.592 0.571 0.552 0.533 0.515 0.498 0.482
4 7 5 3 1 8 3 7 8 7 3
0.593 0.567 0.542 0.519 0.497 0.476 0.456 0.437 0.419 0.401
5 5 4 8 4 2 1 1 1 0 9
0.534 0.506 0.480 0.455 0.432 0.410 0.389 0.370 0.352 0.334
6 6 6 3 6 3 4 8 4 1 9
0.481 0.452 0.425 0.399 0.375 0.353 0.333 0.313 0.295 0.279
7 7 3 1 6 9 8 2 9 9 1
0.433 0.403 0.376 0.350 0.326 0.305 0.284 0.266 0.248 0.232
8 9 9 2 6 9 0 8 0 7 6
0.390 0.360 0.332 0.307 0.284 0.263 0.243 0.225 0.209 0.193
9 9 6 9 5 3 0 4 5 0 8
0.352 0.322 0.294 0.269 0.247 0.226 0.208 0.191 0.175 0.161
10 2 0 6 7 2 7 0 1 6 5
Yea
r 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
0.826 0.819 0.813 0.806 0.800 0.793 0.787 0.781 0.775 0.769
1 4 7 0 5 0 7 4 3 2 2
0.683 0.671 0.661 0.650 0.640 0.629 0.620 0.610 0.600 0.591
2 0 9 0 4 0 9 0 4 9 7
0.564 0.550 0.537 0.524 0.512 0.499 0.488 0.476 0.465 0.455
3 5 7 4 5 0 9 2 8 8 2
0.466 0.451 0.436 0.423 0.409 0.396 0.384 0.372 0.361 0.350
4 5 4 9 0 6 8 4 5 1 1
0.385 0.370 0.355 0.341 0.327 0.314 0.302 0.291 0.279 0.269
5 5 0 2 1 7 9 7 0 9 3
0.318 0.303 0.288 0.275 0.262 0.249 0.238 0.227 0.217 0.207
6 6 3 8 1 1 9 3 4 0 2
0.263 0.248 0.234 0.221 0.209 0.198 0.187 0.177 0.168 0.159
7 3 6 8 8 7 3 7 6 2 4
0.217 0.203 0.190 0.178 0.167 0.157 0.147 0.138 0.130 0.122
8 6 8 9 9 8 4 8 8 4 6
0.179 0.167 0.155 0.144 0.134 0.124 0.116 0.108 0.101 0.094
9 9 0 2 3 2 9 4 4 1 3
0.148 0.136 0.126 0.116 0.107 0.099 0.091 0.084 0.078 0.072
10 6 9 2 4 4 2 6 7 4 5