辅导 BUSNESS 114 – Accounting for Decision Making Mid-term Test SECOND SEMESTER, 2021讲解 Python编程

SECOND SEMESTER, 2021

BUSNESS 114 – Accounting for Decision Making

Mid-term Test

24 August 2021

NOTE:

1.   The Test is marked out of 30 marks, with a general guide of the topics covered, how much time you should spend approximately on the questions, and the allocation of marks as follows:

2.   Please enter your name and ID number in the ANSWER BOOKLET.

3.   This test accounts for 20% of the final grade.

4.   Attempt ALL questions (three questions in total).

5.   This is a RESTRICTED BOOK test and CALCULATORS are permitted.

6.   By RESTRICTED BOOK, we allow one A4 sheet of paper with notes on both sides to be taken into the test room.

7.   Written answers should be presented space provided in a clear and concise manner demonstrating a high standard of communication skills.

8.   Present numerical work clearly and concisely. Show your workings, as they will be graded. Full marks will be given only where a solution is supported by clearly labelled workings.

Question 1 – Budgeting

Milano Interior Ltd is a small business that sell designer homewares. It has two stores in Auckland. The owner, Estella, has partially completed the cash budget for the fourth quarter of 2021.

Required:

a)   Complete the incomplete budget above by working out the following amounts:

.    Beginning cash balance for October;

.    Cash pay for inventory purchase for November;

.    Total payments and Net cash from operations in November;

.    Total cash receipts from sales, Total payments and Beginning cash balance for the Quarter.

(6 marks)

b)  Estella foresees a cash flow problem in the fourth quarter. Explain two ways the business can address the problem.

1.   Estella can consider the possibility of paying for the store refurbishment by instalments, or delay the expenditure.

2.   The business can investigate the availability of overdraft facilities and bank loans.

Other valid reason with proper explanation is also accepted.

(2 marks)

Total for this question: 8 marks

Question 2 – Time Value of Money                                                    8 pts

You have seen an Aporo Macpukapuka laptop, costing $3,254, which has all the features you desire. The store is offering a deal, which expires on 1 September 2021, whereby you would pay nothing until 1 February 2022. On 1 February 2022, you can choose to either pay the purchase price in full or use the store’s easy finance plan.

If you chose the finance plan, you would make 12 monthly payments of $300. The first monthly payment would be due on 1 February 2022 (finance payments are made monthly in advance).

Use the rate of 1% per month as your discount rate. Tables are attached at the back.

Required

a)   Calculate the present value of the purchase payment options on 1 February 2022:

(i) pay for the purchase price in full on 1 February 2022,

The present value of paying the purchase price in full on 1 February 2022 is $3,254

(ii) use the easy finance plan,

The present value of the payments required for the finance plan is

PV= $300 + [$300 * PVIFA (1% per month for 11 months)]

= $300 + [$300 * 10.368] Table 4      = $3,410.40

Or use annuity due,

PV= [$300 * PVIFA (1% per month for 12 months)] x (1 + 1%)

= [$300 * 11.255] Table 4 x 1.01 = $3,410.40

and determine which payment option would be financially better.

The present value of paying in full on 1 Feb 2022 is lower. Thus paying for the

purchase price in full on 1 Feb 2022 is financially better than using the finance plan.

(6 marks)

b)  Explain why it is preferable, when comparing payment options, to sum the discounted cash flows instead of simply adding the cash payments.

Simply adding the cash payments does not consider the time value of money and opportunity cost. Under the pay now option you would lose the opportunity to earn interest on your money. While the easy finance plan option allows you to keep the  money it also incurs interest charges.

The present value method consider the opportunity cost and time value of money through the discounting process. From a lender’s perspective, a lender would prefer to receive payments earlier rather than later. Thus, earlier cash payments do not include   the interest charges associated with later cash payments.

Later cash payments will include charges for the following likely factors not present  in earlier payments: the borrower’s use of the principal; the risk of non-payment; and the risk of inflation.

(2 marks)

Total for this question: 8 marks

Question 3 – Source of Finance

Starscream issued seven thousand $1,000 bonds with a coupon rate of 8%p.a. and a yield to maturity (market return) of 6%p.a. the bonds have a market price of $1,300 each.

Starscream issued 3 million shares on the local stock market in its 2019 IPO, priced at $1.00 per share. The company raised another $2.5 million in 2020 by issuing 1 million new shares at  a price of $2.5 each share. Starscream’s shares currently trade at $3.00 per share. Starscreams’ shareholders expect a return of 14%p.a.

Starscream pays company tax at a rate of 30%.

Required

a)   Calculate Starscream’s Weighted Average Cost of Capital (WACC) and explain what it means in your own words (Round your answer to two decimal places).

MVD = 7,000 x $1,300 = $9,100,000

MVE = (3,000,000 + 1,000,000) x $3.00 = $12,000,000

MVD +  MVE = $9,100,000 + $12,000,000 = $21,100,000

WD = $9,100,000 / $21,100,000 = 43.13%

RD = 6%

WE = $12,000,000 / $21,100,000 = 56.87%

RE = 14%

WACC = WD x RD x (1-t) + WE x RE = 43.13% x 6% x (1-30%) + 56.87% x 14% = 9.77%

The Weighted Average Cost of Capital (WACC) is the minimum rate of return required from the assets that the company owns, to satisfy the return requirements of the capital   providers (both debt and equity providers) of the firm.

The Company should invest in those opportunities that can generate a rate of return higher than or at least equal to the WACC.

(8 marks)

b)  Explain why the cost of equity (shareholders’ expect return) is higher than the costs of debt with two reasons.

Reason- 1: Cost of debt (e.g., interest) is an expense so it is tax deductible, it shows in   calculating WACC and effective interest rate, both cost of bonds and bank loan are tax deductible.

Reason-2: Debt holders have lower risk than shareholders because interests will be paid before dividends, and interest payments are compulsory, not dividends. Moreover, debt  holders will be paid before shareholders once the company goes bankrupt.

(2 marks)

c)  Do you think having too much debt is a good thing? Explain the risk of having too much debt in the total capital.

No.

The risks of have a high level of debt to equity:

.    Higher levels of debt increase the probability of financial distress. The payments of  debts (bank loans or bonds) and interests are compulsory, so the company may have limited residual free cash flows to use after pay back the interests and debts, which   may cause a cash flow problem for the company.

.    Higher levels of debt reduce financial slack of the firm. Managers want the flexibility to invest in new opportunities. They also want to maintain adequate unused debt

capacity that will cover the firm’s potential future borrowing needs. Having too many debts in the total capital reduce the company’s financial slack as well as the potential  for future borrowing.

(4 marks)

Total for this question: 14 marks