Financial Management Exam Questions and Answers

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Question 1

Question 1: (40 marks)

a. Assume that all the division managers do overstate cash flow projections in their proposals. What would you do if you were recently promoted to division manager and had to compete for funding under these circumstances. What controls might be implemented to discourage the overstatement of capital budgeting estimates by division manager.

b. Calculus Company makes professional calculators. The profit plan and actual results for the previous year, 2020, are as follows:

The plant manager, Salem, has instructed the plant management accountant to prepare a detailed report to be sent to corporate headquarters comparing each component’s actual result with the amounts set forth above in the annual budget. Required: Explain the difference between the expected and actual profit. Show your workings. [Marks: (12+28) = 40]

	Profit Plan		Actual Results
	Volume	Pounds	Volume	Pounds
Sales	3,000	42,000	6,000	60,000
Cost of Goods Sold
Raw material (KG)	5,000	8,000	8,000	12,000
Raw material (L)	10,000	7,500	12,000	6,000
Labor (Hours)	900	4,500	1,600	12,000
Contribution Margin		22,000		30,000
Other costs
Energy		3,000		5,000
Maintenance		2,000		3,000
Depreciation		4,000		5,000
Selling expenses		6,000		6,000
Advertising		6,000		7,000
Profit before interest and tax		1,000		4,000

Question 2: (20 marks)

a Critically discuss the benefits and limitations of using budgets for strategic management purposes, with exploring some potentially adverse consequences of the budget process (Hint: some research is required here).

b. The following summary information is available regarding CPL Plc.

Required: Compute and analyze the

Return on Investment (ROI) for project A

Return on Equity (ROE) and its components for the company.

Residual income (RI) [Marks: (8+12) = 20]

Question 3: (20 marks)

Rana Company has $300,000 to invest and wishes to evaluate the following three projects.

Required:

Which project(s) would you recommend using:

a. Payback Period (PP) in nominal and discounted values.

b. Net Present Value (NPV)

c. Profitability Index (PI)

d. The internal rate of return (IRR) (hint: use 30% for X and Y, and 5% for Z) [Marks: (4+6+3+7) = 20

Question 4: (20 marks)

a. Respond to the following statement, the director says: “Because of its inclusion of a financial perspective, a balanced scorecard can only be used for profit-oriented companies.” Is this statement true or false? Explain.

b. Company KPC has an average trade receivables of $750,000 and annual sales of $1.45 million. It is considering the use of factoring given that this would result in a reduction in credit control costs of $70,000 per annum. The factoring house charges a fee of 1.3% of sales. It will provide an advance to the company of 85% of its receivables and will charge interest on this advance of 7 % per annum. Required: Assess whether it is financially beneficial for company KPC to enter into this factoring arrangement.

c. A Toys Company has 1.4 million shares in issue. The current market price is $22 per share. The company’s debt is publicly traded on the London Stock Exchange and the most recent quote for its price was at 90% of face value. The debt has a total face value of $6 million and the company’s credit risk premium is currently 2.4%. The risk-free rate is 3.4% and the equity market risk premium is 7.3%. The company’s beta is estimated at 1.1 and its corporate tax rate is 32%.

Required: Calculate the company’s WACC. [Marks: (6+7+7) = 20

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