Part A
The Franco brothers opened a Mobile Phone pop up kiosk in a regional shopping centre on 1 May 2019. The business trades under the name of ‘Franco Pty Ltd’ and sells one type of phone; the Apple iPhone XR 64GB (white). All credit sales are made on the following terms: payable in 30 days.
The following selected information is available for the business for the month ended 31 May 2019:
1. Invested $60,000 cash to commence business as Francis Pty Ltd. 2. Borrowed $10,000 cash from Grandma at zero% interest. 3. Paid one month rent $500. 4. Purchased one Microsoft Surface Book 2 – 15” Display/256 GB / Intel Core i7 to use in business, $3,699 cash. 5. Purchased one Apple iPhone XS Max 256GB (gold) to use in business, $2,100 cash. 6. Purchased 80 Microsoft Surface Pro 256 GB Tablets for $640 each, paying cash. 7. Sold 50 Microsoft Surface Pro 256 GB Tablets for $1,599 each, on credit. 8. Purchased 40 Microsoft Surface Pro 256 GB Tablets for $640 each, on credit. 9. Sold 30 Microsoft Surface Pro 256 GB Tablets for $1,599 each, for cash. 10. Paid wages $3,200, cash. 11. The estimated useful life of the Microsoft Surface Book 2 – 15” Display/256 GB / Intel Core i7 is three years, and two years is the estimated useful life of the Apple iPhone XS Max 256GB (gold). Both have an estimated scrap value of zero at their end of life.
REQUIRED:
a. Prepare a worksheet using the format presented below to record each transaction for the month ended 31 May 2019 b. Total the column amounts c. Prove the accounting equation is in balance.
Assets Liabilities Owners’ Equity
Transaction Bank Receivables Inventory Equipment Payables Loan Capital Retained Earnings
(16 + 2 + 2 = 20 marks)
(20 marks)
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QUESTION TWO
Pasta Ltd and Omelette Ltd are listed on the Kilda Securities Exchange. The 31 August 2019 closing price of Pasta Ltd shares was $7.93, whereas the closing price of Omelette Ltd shares was $16.26.
Other available information.
Holiday Ltd Cruise Ltd
Shares outstanding 324,500,000 118,500,000
Earnings Per Share $0.45 $0.76
Book value per share $6.00 $20.00
REQUIRED:
A. Calculate the market cap, current P/E, and price to book ratio for Pasta Ltd and Omelette Ltd based on the above information (show all workings). B. Based on information above which firms are bigger? Which indicator(s) need(s) to be considered in this case?
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QUESTION THREE
Part A
Denny Maguire has just been offered a contract by Melbourne FC as the most expensive player in Australia. As part of his compensation he has the option to either receive payment as a lump-sum (with bonus) or annual salary (without bonus) with a given discount rate of 5%. The details are below:
a. One off lump-sum payment received today worth $5,000,000. Further, Melbourne FC will also provide him with an annual stipend as royalty bonus worth $100,000 for the next 5 years (paid at the end of the year). b. Annual payment of $1,200,000 for the next 5 years (paid at the beginning of the year) and without any royalty bonus.
REQUIRED: Advise Denny on which compensation package is the best for him (show all workings).
(6 marks)
Part B
Robert is thinking to deposit his heritage of $5,000,000 in the Commonwealth bank for 5 years; a bank teller offers him an interest rate of 3% per year and asks him whether he wants his interest rate to be compounded.
A. Annually B. Monthly C. Daily
REQUIRED: Which compounding interest rate should Robert choose, given he is interested to maximise his Future value of the heritage? What is difference in FV value between the highest and the lowest compounding? (show all workings).
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QUESTION FOUR
Based on recent published accounting and finance studies below:
a. Hopkins et al. (2014) find that the ascension of lawyers to top management is associated with higher earning management, which ultimately reduces the shareholders’ belief in the company. b. Dole et al. (2019) argue that the economic uncertainty condition aggravates the ability of analysts to accurately predict the company’s future earnings. c. Fiordelisi and Ricci (2014) state that firms with aggressive corporate culture are associated with higher CEO turnover due to high expectation from the Board of Directors and majority shareholders.
Explain whether the studies above indicate a systematic or unsystematic risk of investing?
Can those situations above be diversified and/or managed? Explain.
(6 + 2 = 8 marks)
QUESTION FIVE
Part A
“Based on one of profitability ratio (ROA), it is clear that my company is quite profitable, and yet somehow, I still don’t have cash to pay my employees’ salary and even utilities bills”.
REQUIRED: Explain the financial ratios that can clear up the confusion of the business owner. Refer to two ratios to support your explanation.
(6 marks)
Part B
I. What insights can the solvency ratio provide to the owners of a business? II. Is a higher value of solvency ratio necessarily good for a business? Explain.
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QUESTION SIX
Part A
If the Apiando’s share price at 6 August 2019 is $32.98 whereas beta is 1.6. US government bond at the same period is 3%, and the average return of NASDAQ at 6 August 2019 is 13%. REQUIRED: Estimate the cost of equity using the Capital Asset Pricing Model (show all workings). If Appiando’s beta is reduced to 0.98, what does that mean for the investors?
Part B
On 15 November 2018, Resources Ltd issued $500,000,000 aggregate principal amount of $1,000 per value fixed interest bonds payable carrying quarterly coupon rate of 4.75%. They are maturing on 15 November 2025. The bonds have a market value per bond of 112.5 as at 15 November 2018.
REQUIRED: If the tax rate is 30%, find the before tax and after-tax cost of debt using the yield to maturity approach (show all workings). What does the yield to maturity approach tell you and how is it used?
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QUESTION SEVEN
You recently attended a business seminar where one of the clients approached you to give advice about the projects below:
Year
Cash Flow Project A
Cash Flow Project B
Cash Flow Project C 0 -$100,000 -$100,000 -$1,000,000 1 $10,000 $5,000 $50,000 2 $12,000 $5,000 $50,000 3 $12,000 $5,000 $50,000 4 $30,500 $5,000 $50,000 5 $12,500 $5,000 $50,000 6 $35,000 $5,000 $50,000 7 $20,000 $5,000 $50,000 8 $20,000 $5,000 $50,000 9 $35,000 $5,000 $50,000 10 $25,000 $1,000 $2,100,000
REQUIRED:
A. Given the interest rate is 5%, calculate NPV and IRR of projects above. B. Based on NPV and IRR, which project(s)
QUESTION EIGHT
Mark is thinking to invest for his son’s future education. After speaking with a financial adviser, Mark learns that he has two different options: A. Treasury Bonds of US government with expected rate of return 5% per year B. Common stocks of newly founded Australian company with expected rate of return 13% per year Having seen the return of two different instruments, it seems like an easy decision for Mark to opt for Common Stock as it has a higher return than Treasury Bonds. What do you think will be the potential problem(s) with Mark’s decision? What information could help Mark to make a better decision?
