Semester One, 2011
Unit Code and Title
ECF5220 Principles of Finance
Reading time Working time Total time
5 minutes 3 hours 3 hours 5 minutes
Any four (4) out of five (5) questions All questions carry equal marks. This will total to 100 marks and will be scaled to produce a mark consistent with 60% weighting in the unit assessment. Closed Book exam – textbook, reference books, notes, and tutorial solutions are not permitted. Text programmable calculators may be used in the exam but must have their memory cleared before entering the exam room. Failure to do so and/or the use of any programmed information during the exam will be regarded as cheating and will be dealt with according to the University rules governing academic misconduct
Type of Exam
• • • • •
Do not use red ink or pencil in your answers. Set your calculator to 4 decimal places or more for all calculations. Show the workings in your calculations. No marks will be given if no workings are provided. Take time to write clearly. No credit will be given for illegible answers. Use diagram(s) where relevant to help illustrate your answers.
Students are not permitted to write on the examination or any other paper during reading time. Do not commence the examination until you are told to do so.
ECF5220 FE 111
Page 1 of 7
Answer any FOUR questions. Each question carries 25 marks.
QUESTION 1 A manufacturer has a small factory which generates revenue of $800,000 per year. The factory and office cash costs (being rent, rates and office staff) amount to $160,000 per annum. Factory labour costs for each of the ten employees are $30,000 per person per annum. The additional associated labour costs, like superannuation and annual leave, are 20% of labour costs. The current machinery cost $1,500,000 two years ago and is being depreciated over its estimated life of five years. If the machinery were scrapped today, its salvage value would be $850,000 and in three years it would be nothing. The owner is considering the purchase of new machinery for $1,200,000 with a threeyear life. The advantages will be the saving of four employees and a 25% investment allowance for the new machinery. However, the company will have to pay a redundancy payment amount to $10,000 per employee. Depreciation for the new machinery is based on the 3-year MARCS rates as shown in Table 1. The new machinery will be worthless in three years. Table 1: Depreciation Schedule Modified Accelerated Cost Recovery System (MACRS) Year 1 2 3 4 3-year 33% 45% 15% 7%
The company income tax rate is 30 cents in the dollar, and the after-tax required rate of return is 15% per annum. Should the manager purchase the new machinery based on the information given? State clearly any assumptions you make. [25 marks]
ECF5220 FE 111
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QUESTION 2 (A) The following financial information relates to the operation of Glasswork Ltd: Glasswork Ltd: Selected Balance Sheet data $ Liabilities Accounts payable 12% Debentures, $100 par value Mortgage loan Shareholders’ funds 6% Preference shares, $50 par value Ordinary shares, issued and paid up at $10 Retained earnings 250,000 800,000 1,000,000
500,000 3,000,000 350,000
Additional information: 1. Debentures which pay quarterly coupon of 12% per annum will mature in 6 years’ time. A new issue on similar terms will require a quarterly coupon payment of $2.50 each to be fully subscribed at $100 par value. Current mortgage loan has fifteen years remaining until maturity and the interest is charged annually at a rate of 9%. A new loan is estimated to cost 8% per annum on similar terms. The current market price of each preference and ordinary shares are $52.00 and $15.00, respectively. Glasswork has just paid an annual dividend of $1.40 per share, and it is expected to grow at an annual rate of 4% for the foreseeable future. The company income...