Finance Assignment In Tutorial Library

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TITLE: Finance Assignment

CLASS / COURSE: Finance and Accounting

QUESTION DESCRIPTION:

 

Question 1

(25 marks)

The following is the balance sheet of Cambridge Valley Ltd. at the end of its first year of trading.

 

Cambridge Valley Ltd.

Balance sheet as at 31 December 2009

 

Current assets

Current liabilities

Receivables

82,000

Bank overdraft

12,500

Stocks of raw materials

16,000

Payables

51,000

Stocks of finished goods  34,000

 

Non-current assets

Equity

Machinery

100,000

Opening balance

120,000

                                

Profit and loss               48,500

Assets

232,000

Liabilities and equity

232,000

 

During 2010, the following transactions took place (all transactions conducted by means of a bank current account):

                    1. Settled receivables of £72,000 with debtors and payables of £21,000 with      creditors.

                    2. Bought office premises for £80,000 by means of a long-term mortgage loan, at 5% p.a. interest.

                    3. Paid rent of £5,000 for factory premises.

                    4. Spent £33,000 on raw materials. £8,000 was paid for by cheque and the remainder was bought on credit.

                    5. Produced finished goods costing £80,000. Raw materials costing £35,000 were used in production, and cash of £45,000 was paid in wages for factory labour.

                    6. Finished goods costing £90,000 were sold on credit for £170,000. £80,000 was received from debtors during the year.

                    7. Paid wages of £15,000 for office staff.

                    8. Paid £8,000 for electricity, and a further £2,000 was outstanding at the end of the year.

                    9. Paid interest for the year on the mortgage loan.

 

Required

a) Record in journal form how you deal with each transaction.

b) Write up Cambridge Valley’s ledger for the year, opening separate accounts for the various expenses.

c) Prove your work by drawing up a trial balance at the end of the year.

d) Produce an income statement for the year and a closing balance sheet.

e) What concern might you express as an auditor if you were shown these draft accounts (maximum 100 words)?

 

Question 2

(25 marks)

(maximum length: 600 words)

Consult the annual report of Bristol-Myers Squibb Co. for the year ended 31 December 2009 (available at www.bms.com). Choose one other major pharmaceutical company, and obtain its annual report for the period closest to Bristol Myers Squibb’s.  (I suggest Merck & Co., but you can choose another company if you feel it’s more appropriate).  Using the two companies’ reports and accounts – focusing on the income statement and the balance sheet, and computing appropriate ratios – discuss and compare the two companies’ financial performance for the respective accounting year, and the state of their finances at the end of the year. Explain briefly what other information would have been valuable to you in improving your analysis.

 

Question 3

(50 marks)

The Welsh Whisky Company is the only distiller of whiskies in Wales, and the producer of Penderyn, the best-selling single malt at Welsh branches of Tesco.

Welsh Whisky has just been offered a 10-year UK-wide distribution deal for Penderyn by Tesco, but it is struggling with capacity problems. The company currently produces 12,000 bottles of Penderyn per year, 5,000 of which are sold at £18 per bottle through Welsh Tesco stores, 4,000 are sold at £20 per bottle through the Thresher chain of off-licences, and 3,000 are sold at £22 per bottle through the duty free shops of BAA airports. If the company agreed to the distribution deal, it would have to supply Tesco with 10,000 bottles per year with immediate effect, reducing its higher-margin sales elsewhere. Producing a bottle of Penderyn costs the company £10.

Welsh Whisky realizes that the Tesco deal could be instrumental in establishing the Penderyn brand, and has commissioned AMTEC Consulting for £10,000 to work out a strategy for capacity expansion. Given the labour shortage in the tiny village of Penderyn, AMTEC has proposed that the company build a new distillery in nearby Hirwaun.

The new distillery would cost £1,080,000 immediately, take one year to build, and produce 25,000 bottles of Penderyn per year. Once the company moved into the new distillery, its per-bottle production cost would be reduced to £7 per bottle. AMTEC is also confident that the distribution deal would lead to an immediate boost in demand for Penderyn: in addition to supplying 10,000 bottles to Tesco at £18 per bottle, the company could now sell 8,000 bottles at £21 per bottle through Thresher, and 7,000 bottles at £23 per bottle through BAA.

Mr Rhys Jones currently manages the old distillery for a salary of £50,000 per year, and has expressed willingness to manage the new distillery for a salary of £70,000 per year. Once the company moved into the new distillery, it could rent the old distillery to a local producer of generic vodka for £60,000 per year. Alternatively, the company could sell the distillery, which has been fully depreciated on its books, to a property developer for £350,000.

Welsh Whisky is unwilling to plan beyond the proposed distribution deal with Tesco, and would depreciate the new distillery over the life of the deal using the straight-line method. The corporation tax rate is expected to remain 28% over the next ten years. Any capital gains realized by the company would be added to its taxable income rather than taxed separately. It is estimated that the company’s working capital requirement is 10% of revenues.

AMTEC has proposed that the company use its weighted average cost of capital to calculate the net present value of the distribution deal. The company recently repurchased part of its equity with a new bank loan, which raised its debt-to-assets ratio from 20% to 25%. Before the repurchase, Welsh Whisky’s cost of equity was 10.9527%. The company’s pre-tax cost of debt is 10%.

Required

 

                    a) What is Welsh Whisky’s weighted average cost of capital?

                    b) If the company agreed to sign the distribution deal with Tesco, should it rent out or sell the old distillery?

                    c) Advise the company if the distribution deal is worthwhile.

Note: Ignore inflation.

Assume capital allowance is the same as depreciation.

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SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Accounting
4. Corporate Finance

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