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%.

Madeira Plc

All values in AED Millions

Income statement for the year ended 31st 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 31st Aug 2021

2019

2020

2021

Non-Current Assets

477

832

890

Current Assets

262

281

300

Total Assets

739

1,113

1,190

Current Liabilities

154

192

93

Non-Current 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)

  1. 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