                PRIFYSGOL CYMRU : UNIVERSITY OF WALES
                             ABERYSTWYTH

EXAMINATIONS 1994

SEMESTER 2

AC10210: INTRODUCTION TO MANAGEMENT ACCOUNTING AND FINANCE


Time:  TWO Hours

This paper consists of   THREE sections

Answer ONE   question from each  section.

ALL questions carry equal marks.

Explain any assumptions you need to make

You will be provided with:

i)  Graph paper

ii) Mathematical,  Statistical  and Financial Tables  for  the  Social 
    Sciences by Kmietowicz and Yannoulis

SECTION A

1.  Frodo  Ltd  which  manufactures curtains  purchases  all  its  raw 
    materials from a  single supplier and uses two metres of the cloth 
    for  each pair of curtains. Variable costs at output  below  5,000 
    pairs  per year are #42 per pair, of which #20 is the cost of  the 
    cloth.  However,  the  supplier offers a discount of  10%  on  all 
    purchases  if  Frodo buys at least 10,000 metres of  cloth  and  a 
    further  discount of #1.00 per metre on any  additional  purchases 
    above  16,000 metres per year.  The selling price of the  curtains 
    is #60 per pair and the fixed costs are #120,000 per annum.



REQUIRED:

(a)  Calculate the contribution per unit at output levels

    (i)      less than 5000 units
    (ii)     5,000 - 8,000 units
    (iii)    more than 8,000 units 
                                                              (6 marks)

(b) Prepare a break even or profit volume chart for Frodo and indicate 
    any	break even points.
                                                              (9 marks)

(c) Using  your chart or otherwise, investigate the effect of  raising 
    the selling price to #65.00.
                                                             (5 marks)


2.  Gandalf  plc  produces one product: the  "balrog".   The  standard 
    costs for the product for a recent period were as follows:

                                                               #
Direct  labour (2.5 hours at #5.00 per hour)                 12.50  per unit
Direct material (5.25kg at #6.50 per kg)                     34.125 per unit
Variable overhead                                             4.00  per unit
Fixed overhead                                               30,000

The standard selling price of a balrog for the period was #80 and  the 
budgeted level of production was 4,000 units.

The  actual results for the period have just become available and  are 
as follows:

                                           #                      #
Sales (4,500 units)                                            337,500
Direct labour (12,500 hours)            65,625
Direct material (22,500kg)             135,000
Variable overhead                       16,550
Fixed overhead32,500                                           249,675
                                                               ------- 
                                                                87,825
                                                               -------
REQUIRED:

(a) Prepare  a  statement  reconciling the budgeted  profit  with  the 
    actual profit, stating the variances in the way you think will  be 
    most helpful to management.                             (12 marks)

(b) Write  a report for the management drawing their attention to  any 	
    important features of the statement and recommending action  where 	
    appropriate.                                             (8 marks)


SECTION B

3.  You  have  recently  been appointed to  the  position  of  finance 
    director of an international company, Williams Chocolate  Biscuits 
    plc.  One  of  your  first  tasks  is  to  advise  your  boardroom 
    colleagues   on  which,  if  any,  of  three  mutually   exclusive 
    investment projects to implement.

    The three projects have the following projected cash flows:

    Project  A: a cash outlay of #10,000 at t0 and net cash inflows of 
                #6,000, #5,000 and #3,000 at t , t  and t 
                                              1   2      3
                respectively.


    Project  B: a  cash  outlay at t0 of #32,000 and annual  net  cash 
                inflows starting at t1 of #5,500 in perpetuity.


    Project  C: a cash outlay of #35,250 at t0 and net cash inflows of 
                #18,000   #15,000  and  #15,000  at  t1,  t2  and   t3 
                respectively.

    The appropriate cost of capital for all three projects is 16%.

REQUIRED:

(a) For each project calculate its net present value and internal rate 
    of return. Which project should the company invest in and why?
                                                            (10 marks)

(b) Using project C's anticipated cash flows, illustrate the  economic 
    interpretation  of  its  net present value and  internal  rate  of 
    return.                                                  (6 marks)

(c) In  addition to your answer to part (a) above, what other  factors 
    should  the company's directors consider before deciding which  of 
    the projects to invest in.                               (4 marks)


4.  Cymysg plc is a quoted company which is attempting to estimate its 
    cost  of capital. The company has supplied you with the  following 
    information:

    The  company  has an issued share capital of 500,000  ordinary  #1 
    (nominal  value) shares, with a current market value, cum div,  of 
    117p  per share. The company also has #200,000 (nominal value)  of 
    10%  debentures which are redeemable at par in two years time  and 
    have  a current market value, ex int, of #95.30 per unit  of  #100 
    and  100,000  #1  (nominal value) 6%  preference  shares,  with  a 
    current market value, ex div, of 40p per share.

    The  total dividend payable to holders of the ordinary share  will 
    be  #60,000 this year, the share price will be quoted ex div  from 
    tomorrow. The directors anticipate that the dividend will increase 
    by  5%  per  annum  for the  foreseeable  future.  The  preference 
    dividend and the debenture interest will be paid shortly

    Assume that the company pays corporation tax at the rate of 35%

Required:

(a) Calculate  the company's cost of equity, preference and  debenture 
    capital.                                                (10 marks)
(b) Calculate the company's weighted average cost of capital.
                                                             (5 marks)

(c) What effect would an increase in the corporation tax rate have  on 
    the company's weighted average cost of capital.          (5 marks)


SECTION C


5.  Explain  carefully, giving examples, how the notion  of  'relevant 
    costs'  assists  decision makers in choosing  between  alternative 
    courses of action.                                      (20 marks)


6.  Answer TWO of the following, each section carries equal marks

(i)   What  advantages  do the discounted cash flow (DCF)  methods  of 
      investment appraisal have over the "traditional" methods? 
                                                            (10 marks)


(ii)  What  conclusions do the "traditional view" and the  "Modigliani 
      and Miller view" (MM) draw with respect to the capital structure 
      debate?                                               (10 marks)

(iii) What  conclusions can be drawn from the "Fisher-Hirshliefer  Two 
      Period  Investment Consumption  Model"?               (10 marks)

