ACC5502 Accounting and Financial Management by uc86


									                   ACC5502 Accounting and Financial Management
Choice One – Financial Accounting                                               55 marks
Shown below are extracts from the financial statements of Pressurised Ltd for the three years
ended 30 June 2008, 2009 and 2010 and for the year ended 30 June 2011, which are about to
be issued. It can be noted that no dividend was paid by the company in 2010. In his
statement accompanying the 2010 financial statements the chairman forecasts the
‘resumption of normal dividends’ in the following year. The interim financial statements
for the six months to December 2010 confirmed this expectation, although no interim
dividend was declared.

Within the last month there has been an unusually high level of trading in the company’s
shares and the share price has moved to a recent high of $0.70. The board of directors has
recently received credible information that the main buyer of Pressurised shares is the Oz
Conglomerate Group (OCG), and that an offer may shortly be made by that group to take
over Pressurised. It is thought that the offer price will be about $1.08 per Pressurised share.
This news is most unwelcome to the board of Pressurised, partly because it doubts the ability
or willingness of OCG to carry through the development of the company which has been
quietly planned over the past few years, and partly because the directors suspect their own
prospects would be uncertain.

Extracts from the financial statements of Pressurised Ltd for the years ended 30 June

                                                2008       2009      2010      2011
                                                $000       $000      $000      $000
           Extracts from profit and loss
           Sales                              10 000     12 000    14 000 15 000
           Profit before taxation1             2 000      1 400       100    840
           Dividends                             325        325         0    100
           Extracts from balance sheets
           Ordinary share capital2             4 500      6 000     6 000      6 000
           Other reserves                        860      1 060     1 110      1 380
           10% debentures 2011                 2 000      2 000     2 000      2 000
           15% debentures 2019                     0          0     2 000      2 000
           Trade creditors                     1 140      1 360     1 610      3 500
           Bank overdraft                          0          0       450        970
           Land and buildings3                 1 500      2 000     3 000      3 750
           Other fixed assets4                 3 900      4 000     3 900      4 030
           Inventory                           2 000      3 500     4 500      5 750
           Debtors                             1 400      2 250     3 000      3 250

1.     The rate of corporate taxation over the relevant period has been 30%.
2.     The ordinary shares have a nominal value of $1 each.
3.     Land and buildings are stated at cost, originating back to 1994.
4.     Other fixed assets are stated at cost less accumulated depreciation.
The following summarises the movements in the share price of Pressurised for the period
under review:

                                                  2008 2009 2010 2011
                 Share price ($) during
                 Mean                              3.50   1.80     .60     .63
                 High                              3.70   2.44    1.40     .70
                 Low                               2.00   1.54       .4    .47

The following data relates to companies typical of high and low P/E ratio groups in the same
industry as Pressurised:

                                               Company A       Company B
                   EPS                              $0.80          $0.15
                   Dividend                         $0.03          $0.08
                   Most recent share price          $0.80          $2.25
                   P/E ratio                        10.00             15
                   Dividend yield                     4%             3%


The board of Pressurised has asked you to supply the following:

   a. Give your analysis of the recent performance including any problem areas and
      possible future prospects of the company based on the above information. (29

   b. Advise the chairman:

            i. As to the grounds, if any, on which to recommend that shareholders reject the
               expected bid, having regard to the figures in the accounts and to the results of
               comparable businesses.                       (12 marks)

            ii. What defensive measures the board might take to avoid this particular bid, or
                at least to obtain a higher offer.        (14 marks)
Choice Two – Management Accounting                                           55 Marks

Part A
Music Maker Ltd has just finished production of Idle Talent, the latest music album directed
by Kyle Urban and starring Delta Seal and Keith Josh. The total production cost to Music
Maker was $5 million. All the production personnel and musicians for Idle Talent received a
fixed salary (included in the $5 million) and will have no “residual” (equity interest) in the
revenues or operating income from the album. Media Productions will handle the marketing
of Idle Talent. Media agrees to invest a minimum $3 million to market the album and will
be paid 20% of the revenues Music Maker itself receives from the receipts. Music Maker
receives 62.5% of the total in-store/on-line receipts (out of which comes the 20% payment
to Media Productions).

1. What is the breakeven point to Music Maker for Idle Talent expressed in terms of (a)
   revenues received by Music Maker, and (b) total in-store/on-line receipts? (15 marks)
2. Assume in its first year of release, the total in-store/on-line receipts for Idle Talent total
   $300 million. What is the operating profit to Music Maker from the album in its first
   year? (5 marks)

Part B
Music Maker Ltd is negotiating for Idle Talent 2, a sequel to its mega-block-buster success
Idle Talent. This negotiation is proving more difficult than for the original album. The
budgeted production cost (excluding payments to the director Urban and the stars Seal and
Josh) for Idle Talent 2 is $21 million. The agent negotiating for Urban, Seal and Josh,
proposes either of two contracts:
 Contract A: Fixed-salary component of $15 million for Urban, Seal and Josh (combined)
with no residual interest in the revenues from Idle Talent 2.
 Contract B: Fixed-salary component of $3 million for Urban, Seal and Josh (combined)
plus a residual of 15% of the revenues Music Maker receives from Idle Talent 2.

Media Productions will market Idle Talent 2. It agrees to invest a minimum of $10 million.
Because of its major role in the success of Idle Talent, Media Productions will now be paid
25% of the revenues Music Maker receives from the total in-store/on-line receipts from Idle
Talent 2. Music Maker receives 62.5% of these total in-store/on-line receipts (out of which
comes the 25% payment to Media Productions).

1. For contracts A and B, what is the breakeven point for Music Maker expressed in terms
   a. revenues received by that company (10 marks)
   b. total in-store/on-line receipts for Idle Talent 2? (10 marks)

   Explain the difference between the breakeven points for contracts A and B. (5 marks)

2. Assume in its first year of release Idle Talent 2 achieves the same $300 million in box-
   office receipts as was the case for Idle Talent. What is the operating income to Music
   Maker from Idle Talent 2 if it accepts contract B? Comment on the difference in
   operating income between the two albums. (10 marks)
Choice Three – Finance                                                     55 Marks
Electronic Pro manufactures and delivers prototype chips to customers within 24 hours. The
current production facility was set up when the company began operations in Sydney,
Australia in 1994. It is outdated and constrains future growth. In 2012, Electronic Pro
expects to deliver 460 prototype chips at an average price of $80,000 per prototype.
Electronic Pro’s marketing vice president forecasts growth of 50 prototype chips per year
through 2021. That is, demand is 460 in 2012, 510 in 2013, 560 in 2014, and so on.
The current facility cannot produce more than 500 prototypes annually. To meet future
demand, Electronic Pro must either modernize the current facility or replace it. The old
equipment is fully depreciated and can be sold for $3,000,000. If the current facilities are
modernised, such costs are to be capitalised and depreciated over the useful life of the
updated facility. The old equipment is retained as part of the modernised alternative.
Following is some data on the two options available to Electronic Pro:

                                                            Modernise              Replace
     Initial investment in 2012                            $28,000,000            $49,000,000
     Terminal disposal price in 2018                        $5,000,000            $12,000,000
     Useful life                                              7 years               7 years
     Total annual cash operating cost per prototype          $62,000               $56,000
 Electronic pro uses straight-line depreciation for income reporting, assuming zero terminal
disposal price. For simplicity, we assume no change in prices or costs in future years. The
investment will be made at the beginning of 2012, and all transactions thereafter occur on the
last day of the year. Electronic Pro’s required rate of return is 12 percent.
There is no difference between the modernise and replace alternatives in terms of required
working capital. Electronic Pro has a special waiver on income taxes until the year 2021.
1.        Sketch the cash inflows and cash outflows of the modernise and replace alternatives
          over the 2012 to 2018 period. (10 Marks)
2.        Compute the payback period for the modernise and replace alternatives. (10 Marks)
3.        Compute the NPV of the modernise and replace alternatives. (15 Marks)
4.        Compute the IRR of the modernise and replace alternatives. (10 Marks)
5.        What factors should Electronic Pro consider in choosing between the modernise and
          replace alternatives. (10 Marks)

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