Madeira Plc
All values in AED Millions
Income statement for the year ended 31^{st} Aug 2021
2019 
2020 
2021 

Turnover 
786 
841 
900 

Cost of Sales 
503 
563 
630 

Gross Profit 
283 
278 
270 

Admin Costs 
109 
122 
137 

Net Profit 
174 
156 
133 

Dividends 
50 
80 
80 

Retained Earnings 
124 
76 
53 

Statement of Financial Position as at 31^{st} Aug 2021 

2019 
2020 
2021 

NonCurrent Assets 
477 
832 
890 

Current Assets 
262 
281 
300 

Total Assets 
739 
1,113 
1,190 

Current Liabilities 
154 
192 
93 

NonCurrent Liabilities 
100 
412 
412 

Ordinary Shares 
350 
350 
350 

Retained Profits 
135 
259 
335 

739 
1,113 
1,190 

Sector average ratios: 

Return on capital employed 
20% 
Net profit margin 
23% 
Current ratio 
1.5 Times 
Debt/equity ratio (book value basis) 
45% 
Return on equity 
17% 
Question 1
Required:
1.1 Calculate the following ratios for Madeira Plc:
Gross Profit Margin
Net Profit Margin
Net Asset Turnover
Receivable Days
Payable Days
Return on Capital Employed
Debt / Equity Ratio
Return on Equity (12 marks)
1.2 Comment on the financial performance of Madeira Plc between the years 2019 and 2021 using the ratios above and any other financial measure you feel appropriate.
(10 marks)
1.3 In 2019 the share price of Madeira was 2 AED per share. Today the share price is 5 AED per share. Critically evaluate if you believe the directors of Madeira Plc are maximising the wealth of shareholders. What other goals might the company consider.
(8 marks)
Question 1 Total 30 marks
Question 2
2.1 Madeira has an ambitious plan to invest 1 billion AED in the next 5 years. Explain how the company might fund such an ambitious investment plan. You are required to evaluate the benefits and drawbacks of equity finance and debt finance from the company’s perspective.
(10 marks)
2.2 Summarise the (theoretical) costs of each type of finance available to the company when funding its investment appraisal in the future. What are the relative costs of retained earnings compared with raising new finance via the financial markets.
(10 marks)
Question 2 Total 20 marks
Question 3
BlueMoon plc is looking to take on a new investment. The company will evaluate two mutually exclusive projects, whose details are given below. The company’s cost of capital is 12%.
AED Millions 
Project A 
Project B 
Initial Investment 
(150) 
(152) 
Year 1 
40 
80 
Year 2 
50 
60 
Year 3 
60 
50 
Year 4 
60 
40 
Year 5 
85 
30 
5

1.
Calculate the Payback period
(4 marks)
2.
Calculate the Net Present Value (NPV) of both projects
(6 marks)
3.
Calculate the Internal Rate of Return (IRR) of both projects
(6 marks)

Critically discuss the merits of each investment appraisal method, then discuss the result of the evaluations you have made of the two projects and advise the company
which project should be undertaken (9 marks)
Question 3 Total 25 marks
Question 4
4.1 The fundamentals of finance are said to be the concept of ‘Risk and Return’ and secondly the ‘Time Value of Money’. Critically evaluate how investment appraisal techniques can take account of both fundamental theories to aid decision making
(10 marks)
4.2 Summarise the benefits of Leasing to the company when obtaining new fixed assets
(5 marks)
Question 4 Total 15 marks