FIN2101 Full-Time Diploma

Full-Time Diploma
BUSINESS FINANCE (FIN2101)
CONTINUOUS ASSESSMENT 1
TERM OF JANUARY 2021 – MARCH 2021
Individual Assignment (30%)
Total marks: 50 marks
Instructions:

1. Type out your assignment in Word document and submit it through the D2L by the
   deadline.
2. In your cover page, include your full name and ID number.
3. Answer ALL questions.
4. Show ALL workings.
5. Please be reminded that plagiarism and collusion are serious offences, and all cases will
   be referred to the administration. Grades will be withheld until investigations are
   completed if the submission is suspected of plagiarism or collusion.
   Question 1
   Explain what business ethics is. Discuss whether having an ethics programme in the firm may
   benefit the organisation and its shareholders.
   (6 marks)
   Question 2
   a) K&M Co. is considering an investment. The project is expected to be financed by
   $2,000,000 of bank loans and $3,000,000 of common equity. It is known that the firm’s
   weighted average cost of capital (WACC) is 9.8% and the investment is expected to
   generate a net operating profit after tax (NOPAT) of $480,000. The company’s tax rate
   is 30%.
   (i) What is the project’s Economic Value Added (EVA)?
   (2 marks)
   (ii) Should the firm accept or reject the investment? Explain your reason(s).
   (2 marks)
   2
   Question 3
   The balance sheet and income statement for DRM Pte Ltd are shown below:

a) You are given selected financial ratios of DRM Pte Ltd for 2018 and 2019 in the table
below. Compute the corresponding ratios for 2020. Round your answers to two decimal
places.
(5 marks)
b) Using the information provided in the table and your answers in part (a), perform a timeseries
analysis for DRM Pte Ltd in the following areas:
i) Liquidity.
ii) Profitability.
(6 marks)
DRM Pte Ltd
Balance Sheet
As at 31 Dec 2020
$(‘000)
Cash 50
Accounts Receivable 300
Inventories 300
Total Current Assets 650
Net Fixed Assets 750
Total Assets 1,400
Accounts Payable 300
Long-Term Debt 1,000
Total Liabilities 1,300
Common Stockholders’ Equity 100
Total Liabilities & Stockholders’
Equity 1,400
DRM Pte Ltd
Income Statement
For the Year Ended 31 Dec 2020
$(‘000)
Sales 1,000
Less : Cost of Goods Sold 300
Gross Profit 700
Less : Operating Expenses 400
Operating Profits 300
Less : Interest Expenses 180
Profit before Taxes 120
Less : Taxes (20%) 24
Profit After Taxes 96
Ratios DRM Pte Ltd
2018
DRM Pte Ltd
2019
DRM Pte Ltd
2020
Current Ratio 1.42 1.62
Quick Ratio 0.52 0.64
Gross Profit Margin 0.70 0.70
Operating Profit Margin 0.19 0.24
Net Profit Margin 0.13 0.12
3
c) Discuss how Debt Ratio and Times Interest Earned ratio may be used by the management
to better manage the firm.
(4 marks)
Question 4
QRS Corporation forecasted its total funding requirements for the coming year as shown in
the table below :
Month Total funding requirements
(S$)
January 40,000
February 60,000
March 110,000
April 40,000
May 80,000
June 70,000
July 140,000
August 40,000
September 60,000
October 70,000
November 50,000
December 60,000
QRS Corporation was informed by its bank that short-term loans cost 6.8%p.a. and long-term
loans cost 8.2%p.a.. Calculate the total cost (to 2 decimal places) of each of the following
strategy:
a) An aggressive funding strategy.
(3 marks)
b) A conservative funding strategy.
(3 marks)
4
Question 5
As a new finance manager of S&T Pte Ltd, you are responsible in managing the firm’s
financial affairs. Your review of the business cycle reveals that S&T Pte Ltd’s inventory
typically remains with the firm for 20 days before it is sold and requires 30 days for the monies
to be collected from the customers. On average, the firm takes 40 days to pay its suppliers.
a) Compute the cash conversion cycle (CCC) of S&T Pte Ltd. Comment on your answer.
(3 marks)
b) Should S&T Pte Ltd lengthen or shorten its CCC? Why?
(3 marks)
c) Suggest TWO ways in which S&T Pte Ltd can improve its CCC.
(3 marks)
Question 6
Company ABC manufactures stoneware. Supplier LMN provides raw materials to Company
ABC under the credit terms of 3/15 net 60.
a) Determine the cost of giving up the cash discount from Supplier LMN. Your answer
should be in percentage and rounded to two 2 decimal places.
(3 marks)
b) Bank XYZ offers short-term financing to Company ABC at a premium of 4% above
PRIME. If the current PRIME rate is 8%p.a., what is the cost of bank borrowing for
Company ABC? Your answer should be in percentage and rounded to two 2 decimal
places.
(3 marks)
c) Given your answers in (a) and (b), should Company ABC take up the cash discount from
Supplier LMN? If the invoice amount is $120,000, determine when and how much should
Company ABC pay.
(4 marks)
-- END OF ASSIGNMENT --