Accounting Assignment Help UK

Accounting Assignment Help UK

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Accounting Assignment Help UK

SECTION 1: SHORT ANSWER PROBLEMS

1. Vindaloo Corporation reported retained earnings of $400 on its year-end 2002 balance sheet. During 2003, the company reported a loss of $40 in net income, and it paid out a dividend of $60. We will calculate retained earnings for Vindaloo’s 2003 year-end balance sheet.

Retained earnings for Vindaloo’s 2003.

Particulars	Amount
Retained Earning 2002	400
Less : Loss during The year	40
Less : Divided pay out	60
Retained Earning 2003	300

2. A firm has an ROA of 8%, sales of $100, and total assets of $75. Lets calculate its profit margin.

Total Assets	$    75.00
8% ROA	$       6.00
(Total Assets * ROA = 75*(8/100) = 6)
Total Sales	$  100.00
Profit Margin	$       6.00
(Profit / Total Sales = )

3. Given the following information: profit margin = 10%; sales = $100; retention ratio = 40%; assets = $200; equity multiplier = 2.0. If the firm maintains a constant debt-equity ratio and no new equity is used, what is the maximum sustainable growth rate (SGR)?  (Assume a constant profit margin.)

Particulars	Details
profit margin	10%
Sales	100
Total Profit	10
Retention	4
Total Assets	200
Equity Multiplier	2
Total equity	100
(Total Assets/ equity multiplier)
Total debt	100
Debt Equity ration constant
ROE	0.1
Retention Ratio	40%
ROE* Retention Retio	0.04
1-ROE* Retention Retio	0.96
SGR=ROE*R.R/1-ROE*R.R	4.17%

4. Your brother-in-law invests in the stock market and doubles his money in a single year while the market, on average, earned a return of only about 15%, here a discussion is done whether  your brother-in-law’s performance a violation of market efficiency or not.

No, brother in law performance is not violation of market efficiency; this indicates that Brother in law has taken much higher risk than the average market. If it suits him so be it (Preda, 2009).
This could also indicate that the Brother in law had some good market tips and exited at most opportune time without hanging around with the stocks.

5. Iggie’s Used Cars will sell you a 2002 Suzuki Aerio for $3,000 with no money down. You agree to make weekly payments of $40 for two years, beginning one week after you buy the car.  What is the EAR of this loan?

For calculating Ear, formula is

Where EAR=Effective annual rate
K=Nominal interest rate
M=Compounding frequency per year (Randall, 2007)

Lets calculate Nominal rate of interest.

NOMINAL RATE OF INTEREST= (difference in total amount paid per year/total amount paid)/100

[ 4160-3000=1160 For 2 yrs = 580 per yr]

=(580/3000)*100= 19.33%

Putting value in EAR we get

52

EAR = (1+19.33/52) – 1

Solving this we get EAR= 21.2812 %

6. Rebus company is trying to make a decision between two projects. Their calculations are as below.

Year	Project I	Project II
Payback (yrs.)	2.053 Year	1.92 Year
Discounted Payback (yrs.)	2.44 Year	1.25 Year
IRR	15.41%	28.44%
NPV	3907	3843

1. Payback period calculation

PROJECT A		PROJECT B
Cash inflow	cumulative cash inflow	Cash inflow	cumulative cash inflow
8500	8500	6500	6500
9000	17500	6000	12500
9500	27000	7000	19500

Project A

Payback period = 2 yrs + [18000-17500 / (27000-17500)]

= 2.053 years

Project B

Payback period = 1 yrs + [12000-6500/ (12500-6500]

= 1.92 years

1. Discounted Payback period calculation

PROJECT A				PROJECT B
Cash inflow	Discounted fector (11%)	cumulative cash inflow	Cash inflow	Cash inflow	Discounted fector (11%)	cumulative cash inflow	cumulative cash inflow
8500	0.9009	7657.65	7657.65	6500	0.9009	5855.85	5855.85
9000	0.8116	7304.4	14962.05	6000	0.8116	4869.6	10725.45
9500	0.7311	6945.45	21907.5	7000	0.7311	5117.7	15843.15

Project A

Discounted Payback period = 2 yrs + [18000-14962 / (21907-14962)]

= 2.44 years

Project B

Payback period = 1 yrs + [12000-10725/ (15843-10725]

= 1.25

1. Net present value (11%IRR)

Project A

21907-18000=3907

Project 2

15843-12000= 3843

1. Calculation of internal rate of return (IRR)

PROJECT A
year	cash inflow	discounted factor@15%	discounted cash inflow	discounted factor@16%	discounted cash inflow	discounted factor@14%	discounted cash inflow
1	8000	0.869	6952	0.862	5992.624	0.877	5255.5
2	9500	0.756	7182	0.743	5336.226	0.769	4103.5
3	9000	0.657	5913	0.64	3784.32	0.674	2550.6
		3.351	20047	3.273	15113.17	3.273	11909.7
IRR using interpretation formula Project A = 15% – (18000-15113.17/ 20047-15113) = 15% – 0.5851 = 15.415%
PROJECT B
year	cash inflow	discounted factor@28%	discounted cash inflow	discounted factor@29%	discounted cash inflow	discounted factor@30%		discounted cash inflow
1	6500	0.7813	5078.45	0.7752	5038.8	0.7692		4999.8
2	6000	0.6104	3662.4	0.6001	3600.6	0.5917		3550.2
3	7000	0.477	3339	0.4658	3260.6	0.4551		3185.7
		3.351	12079.85	3.273	11900			11735.7
IRR using interpretation formula Project A = 29% – (12000-11900/ 12080-11900) = 29% – 0.556 = 28.44%

 SECTION 2

Problem 1

Assets	Amount	25%	90% capacity of acutal
Cash	50	62.5	45
Inventory	150	187.5	135
FA	600	750	540
Total	800	1000	720
Liability	Amount	25%
Accounts payble	100	125	90
Notes payble	100	125	90
long term Debt	350	434	477
Equity	250	250	250
	800	1000
Reserves and Surplus	0	66	47
Particulars	Amount	25%	90% of actual
Sales	800	1000	720
Cost	600	750	540
Profit	200	250	180
Taxes	68	85	61
	132	165	119

a) External finance if sales increased by 25% :

Effect of increase in 25% sasles is already given in the table above.

As menationed in question, 40% is retained.

So retained profit=165*40/100=66 (add as reserves and surplus to liability)

Now if we balance both sides we get Long Term debt = $ 434

So total external financing need is $434.

1. Firm is producing at only 90% capacity

In this case, looking at figures in above calculation, external financing will increase from $434 to $477 due to decrease in working capacity. Since amount of profit retained is less, the firm has to maintain more external financing to meet its requirement.

1. B) Suppose the firm wishes to maintain a constant debt-equity ratio, retains 60% of net income, and raises no new equity. Assets and costs maintain a constant ratio to sales.   What is the maximum increase in sales the firm can achieve.

Lets find debt equity ratio.

Debt-to-Equity Ratio =	Total Liabilities
	Shareholders’ Equity

= 800/250 = 3.2

Looking at the calculation above, there can be no change in total liability or equity amount as debt equity ratio is to be maintained. So any change to be made in liability side can be only done through change on long term debt. As plant is already operating on 100% capacity, the maximum possible sale is $800

Problem 2

The managers of Magma International, Inc.  plan to manufacture engine blocks for classic cars from the 1960s era.  Cetain values are given. We will calculate following things

1) Depreciation tax shield in the third year for this project (Nissim, 2002).

CCA at 30% = Machinery Cost*30%

Depreciation tax shield = Machinery cost- CCA

Machinery cost	CCA @30%	Depreciated Tax shield
800000	240000	560000
560000	168000	392000
392000	117600	274400

2) Present value of CCA tax shield

Machinery cost	CCA @30%	Depreciated Tax shield	Discounting Factor	Present value of Cca tax shield
800000	240000	560000	0.892857143	500000
560000	168000	392000	0.797193878	312500
392000	117600	274400	0.711780248	195312.5
274400	82320	192080	0.635518078	122070.3125
192080	57624	134456	0.567426856	76293.94531

Discounted Value @ 12% = 1st year = 1/1.12

= 2nd yr = 1st year discounted rate/ 1.12

3)  the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation

price of machine	800000
cost for block	125000
fixed cost	125000
total cost	1050000
less salvage value	150000
total cost	900000
less depreciation @30%	630000
add: Tax@35%	850500

From above table, the firm has to bid a minimum amount of $850500. It can add industry profit to it and bid accordingly.

4) NPV of this project

Inflow
Year	Profit	Depreciation	PBT	PAT	Disc Factor @ 8%	PV of Cash Profit
2	150000	45000	105000	36750	0.892857143	32812.50001
3	150000	45000	105000	36750	0.797193878	29296.87502
4	150000	45000	105000	36750	0.711780248	26157.92411
5	150000	45000	105000	36750	0.635518078	23355.28937
6	150000	45000	105000	36750	0.567426856	20852.93696
						0
				Total PV cash profit		132475.5255
Salvage of plant & machinery				150000
TOTAL INFLOW
Net cash Inflow				-17524.47454

PROBLEM 3

• cost of equity based on the dividend growth model

Cost of Equity = (Next Year’s dividends per share / Current market value of stock) + Growth rate of dividends

= (1.8/8)+4% = 6.17%

Cost of equity = 6.17 %

• cost of equity based on the security market line

Cost of equity = rf + Bs(Emkt – rf)

Where: rf = the risk-free rate
Bs = the beta of the investment
Emkg = the expected return of the market

Here cost of equity = 4+ 1.2 (12-4) = 13.6 %

• the cost of financing using preferred stock

The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.

SO here in this case, Cost of Preferred stock = (1.8/83)+12 = 12.01

• pre-tax cost of debt financing

lets calculate

1- (Company tax rate/100) = 0.66

Pre tax costing = (400000*83)/.66 = $50303030

• weight to be given to equity in the weighted average cost of capital computation

In financial decision making, financing of firm’s assets is done by either debt or equity. The weighted average cost of capital (WACC) measures the average riskiness of a firm’s assets by calculating the weight of debt and equity to any given situation. In effect, by calculating a weighted average, a firm can estimate the capital discount of debt and equity in dollar terms.

Formula for this is

WACC = Wd x Rd(1-T) + Ws x Rs + Wp x Rp

where:

• Wd: the weight of debt (percentage of debt allocated to finance the project)
  • Ws: the weight of equity (percentage of equity allocated to finance the project)
  • Wp: the weight of preferred stocks (percentage of preferred stocks allocated to finance the project)

So for this case, percentage of equity allocated to finance the project = (total equity allocated/ total amount of financing)*100

• the cost of new financing (including the impact of each of 28-year bonds, preferred shares and common shares), assuming that flotation costs would be 5% of the proceeds of the issue

the cost of financing will have effect of floatation cost at 5% will will affect equity.

• If net income in the next year is expected to be $8,000,000, what would be the common equity breakpoint for new financing, assuming the current capital structure is considered optimal

Current capital structure is optimal

Breakeven ppoint = Available Retained Earnings = 800000/10 = 80000

Equity Percentage of Total

REFERENCES:

• Randall, S. (2007). “FRB Speech: Creating More Effective Consumer Disclosures”.
• Preda, A. (2009). “Framing Finance: The Boundaries of Markets and Modern Capitalism.” University of Chicago Press.
• Nissim, D. (2002). “Valuation of the Debt Tax Shield”. The Journal of Finance 57 (5): 2045–2073.

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