Cfm 201: Financial Planning And Control Question Paper

Cfm 201: Financial Planning And Control

Institution: Kca University question papers

Exam Year:2009

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UNIVERSITY EXAMINATIONS: 2008/2009
SECOND YEAR STAGE III EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 201: FINANCIAL PLANNING AND CONTROL
DATE: AUGUST 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
(a) Distinguish between independent projects and mutually exclusive projects as used in capital
budgeting. (3 Marks)
(b) Mapema Ltd is evaluating a project with the following characteristics.
i) Fixed capital investment is sh 2000000 at the beginning
ii) The project has an estimated life of 6 years
iii) The initial investment in net working capital is sh 200000. At the end
of each year, networking capital must be increased so that the cumulative
investment in the networking capital is approximately equal to 1/6 of the next
year’s projected sales.
iv) Sales are Sh 1,200,000 in year 1. They grow at 25% annual rate for the
next two years, and then grow at 10% annual rate for the last three years.
v) Fixed cash operating expenses are 150,000 for years 1-3 and 130,000 for
years 4-6
vi) Variable cash operating expenses are 40% of sales in year 1, 39% of
sales in year 2, and 38 in years 3-6
vii) Marginal tax rate is 30% and the project is depreciated straight line
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viii Mapema Ltd will sell the fixed capital investment at Sh 200,000 when
the project terminates
ix) The required rate of return is 12%
Required
Advise management whether to invest or not using NPV.
QUESTION TWO
Atlantico, Inc: Prepare a Comprehensive Master Budget
Atlantico, Inc., is a small, rapidly growing wholesaler of consumer electronic products. The firm's
main product lines are small kitchen appliances and power tools. Malinda Alexander, Atlantico's
general manager of marketing, recently completed a sales forecast.
She believes the company's sales during the first quarter of 20x1 will increase by 10 percent each
month over the previous month's sales. Then Alexander expects sales to remain constant for several
months. Atlantico's projected balance sheet as of December 31, 20x0, is as follows:
Cash ...................................................................................................

$29,000 Accounts receivable ............................................................................... 276,000 Marketable securities................................................................................ 15,000 Inventory ............................................................................................. 154,000 Buildings and equipment (net of accumulated depreciation) ....................... 626,000 Total assets.......................................................................................$ 1,100,000
Accounts payable................................................................................

$176,400 Bond interest payable............................................................................... 12,500 Property taxes payable.............................................................................. 3,600 Bonds payable (10%; due in 20x6) ......................................................... 300,000 Common stock ...................................................................................... 500,000 Retained earnings ................................................................................. 107,500 Total liabilities and stockholders' equity ...............................................$ 1,100,000
Shawn Garrity, the assistant controller, is now preparing a monthly budget for the first quarter of
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20x1. In the process, the following information has been accumulated:
1. Projected sales for December 20x0 are

$400,000. Credit sales typically are 75 percent of total sales. Atlantico's credit experience indicates that 10 percent of the credit sales is collected during the month of sale, and the remainder is collected during the following month. 2. Atlantico's cost of goods sold generally is 70 percent of sales. Inventory is purchased on account, and 40 percent of each month's purchases are paid during the month of purchase. The remainder is paid during the following month. To have adequate stocks of inventory on hand, the firm attempts to have inventory at the end of each month equal to half of the next month's projected cost of goods sold. 3. Garrity has estimated that Atlantico's other monthly expenses will be as follows: Sales salaries..............................................................................$ 21,000
Advertising and promotion............................................................. 16,000
Administrative salaries .................................................................. 21,000
Depreciation ................................................................................ 25,000
Interest on bonds .......................................................................... 2,500
Property taxes ................................................................................ 900
In addition, sales commissions run at the rate of 1 percent of sales.
4. Atlantico's president, Carrie Howland, has indicated that the firm should invest

$125,000 in an automated inventory-handling system to control the movement of inventory in the firm's warehouse just after the new year begins. This equipment purchase will be financed primarily from the firm's cash and marketable securities. However, Howland believes that Atlantico needs to keep a minimum cash balance of$ 19,000. If necessary, the remainder of the equipment purchases will be financed
using short-term credit from a local bank. The minimum period for such a loan is three months.
Garrity believes that short-term interest rates will be 10 percent per year at the time of the equipment
purchases. If a loan is necessary, Howland has decided it should be paid off by the end of the first
quarter if possible.
5. Atlantico's board of directors has indicated its intention to declare and pay dividends of

$50,000 on 4 the last day of each quarter. 6. The interest on any short-term borrowing will be paid when the loan is repaid. Interest on Atlantico's bonds is paid semiannually on January 31 and July 31 for the preceding six-month period. 7. Property taxes are paid semiannually on February 28 and August 31 for the preceding six-month period. Prepare Atlantico's master budget for the first quarter of 20x1 QUESTION THREE ABC Company Common Size Balance Sheet For the year ending December 31, 200x Assets$

$Current Assets Cash 12,000 Marketable Securities 10,000 Accounts Receivable (net of uncollectible accounts) 17,000 Inventory 22,000 Prepaid Expense 4,000 Total Current Assets 5 65,000 Fixed Assets Building and Equipment 105,000 Less Depreciation 30,000 Net Buildings and Equipment 75,000 Land 40,000 Total Fixed Assets 115,000 Total Assets 180,000 Liabilities Current Liabilities Wages Payable 3,000 Accounts Payable 25,000 Taxes Payable 12,000 Total Current Liabilities 40,000 Long-Term Liabilities Mortgage Payable 70,000 Note Payable 6 15,000 Deferred Taxes 15,000 Total Long-Term Liabilities 100,000 Total Liabilities 140,000 Owner's Equity 40,000 Total Liabilities and Owner's Equity 180,000$ %
Sales

$200,000 Cost of goods sold 130,000 Gross Profit 70,000 Operating expenses Selling expenses 22,000 General expenses 10,000 Administrative expenses 4,000 Total operating expenses 36,000 Operating income 34,000 Other income 2,500 Interest expense 500 Income before taxes 36,000 Income taxes 1,800 Net profit 34,200 Required: Calculate the following: 7 i) Common size ratios ii) Liquidity ratios iii) Efficiency ratios iv) Solvency ratios QUESTION FOUR Moon Investments Balance Sheet shows: Bonds$ 200,000
Common shares

$200,000 Retained Earnings$ 100,000
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$500,000 ========= Bonds: • Annual interest rate 6% • Years to maturity is 9 years Common shares: • Shares held 100,000 • Current share price$ 5
• Market return over next year 12%
• Beta (somewhat risky) 1.15
• Treasury bills currently yield 4%
• Tax rate 25%
i) Calculation of Cost of Capital (10 Marks)
ii) Discuss the importance of the cost of capital (5 Marks)
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iii) Discuss the factors that affect the cost of capital (5 Marks)
QUESTION FIVE
The basic ideas justifying the use of Activity Based Costing (ABC) and Activity Based Budgeting
(ABB) are well publicized and the number of applications has increased. However, there are
apparently still significant problems in changing from existing systems.
Required;
a) Explain which characteristics of an organisation may make the use of ABC useful and the
problems that may cause the organisation not to use or abandon ABC
b) Categorization of cost drivers provides both hierarchical models while others focus on value
adding and non value adding activities. Discuss these categories showing the usefulness of this
form of analysis

Cfm 201: Financial Planning And Control Question Paper

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