Weighted Average Cost of Capital and Financial Management

Question 1: Calculate the Weighted Average Cost of Capital for ABC Limited

Dzscount tables and a Formula Sheet are attached to the back of this question paper
QUESTION 1

ABC Limited is a medium size shipping company. It is planning a project which would require the acquisition of a new equipment in order to improve its co-ordination activities. The initial investment is £60,000 with a scrap value of £6000 at end of six years. It will generate cash inflows of £21,000 per annum for the first 3 years, £18,000 per annum for the next two years and £12000 in the last year.  

During the fifth year, repairs of £10,000 are expected to be carried out on the equipment. All cash flows are assumed to arise at the end of the year to which they relate other than the initial costs.  

ABC Limited also has:

50 million Ordinary shares (of £1 each) in issue with a current market value of £1.80 per share. Dividend for the next year is expected to be £0.15 per share and this is expected to grow each year at a constant growth rate of 7.5%.  

£6million 7% £1.00 irredeemable Preference shares in issue with a market price of £1.30 per share.

£12million 10% £1.00 irredeemable Loan notes in issue with a market price of £1.50 per £1 of nominal value.

Tax rate is assumed to be 25%. The market value of capital is to be used in all calculations.

Required:

a) Calculate the Weighted Average Cost of Capital for ABC Limited  (8marks)                           

b) Using the Weighted Average Cost as the investment hurdle rate, calculate the net present value for the proposed project.

c)     Prepare a brief memo advising the directors of ABC Ltd on whether to               implement the project while highlighting any assumptions that you have made.  
QUESTION 2   

(a) Explain the key features of activity-based costing (ABC) system relative to traditional costing systems. Critically discuss the principal reasons for, and developments in, the ABC system as an alternative to traditional costing systems.

(b) As a tool for decision making, outline the key decisions break-even/cost-profit volume analysis can be used to make. Given its assumptions, critically evaluate its limitations as a decision-making tool.                                                                       
QUESTION 3  

a) Critical discuss how budgeting may be used as a tool to aid control and performance management

b) Traditional budgeting techniques are often criticised as an inappropriate system of planning and control in the current global environment which is characterised frequent changes.

Critically discuss the limitations of traditional budgeting including some features of ‘Beyond Budgeting ‘which could contribute to an improved system of planning and control.    
QUESTION  4  

United Ltd (a small private company) and Prudence Ltd (a medium sized company) both   trade in general merchandise. The Boards of the two companies are facing a multitude of options in their bid to decide on how small and medium (SME) sized companies without stock market listing might be financed.

Required:

Categorise and critically discuss the principal means that SME’s without stock market listing might be financed.
QUESTION 5  

"Corporate social responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it... but because it is good for our business" - Niall FitzGerald, Former CEO, Unilever  

Required:

Critically discuss the need for the stakeholder-approach and the related factors which companies should take into account when appraising their corporate strategies; including the benefit of such factors to stakeholders, who are not shareholders