DEADLINE 29 /03/18

UNIT CODE: MAF5102 UNIT TITLE: FINANCIAL MANAGEMENT

CAT II 20 MARKS

INSTRUCTIONS
1. Attempt All Questions
2. Use New Time Roman Font 12
3. Adhere To The Deadline

Question one

The following financial statements relate to the Ibacho company:

Ibacho company balance sheet as at 31st December 2017.

Assets Shs Liabilites & Net Worth Shs.

Cash 28,500 trade creditors 116,250
Debtors 270,000 Notes payable (9%) 54,000
Stock 649,500 Other Current Liabilities 100,500
Total Current ast. 948,800 Long term debt (10 %) 300,000
Net fixed assets 285,750 Net worth 663,000

1,233,750 1,233,750
Income statement for the year ended 31st December, 2017.
Shs.
Sales 1,972,500
 Less cost of sales 1,368,000
Gross profit 604,500
Selling and administration Expenses 498,750
Earnings before interest & tax 105,750
Interest expense 34,500
Earnings before tax 71,250
Estimated taxation (40%) 28,500
Earnings after interest and tax 42,750

Calculate:

(i) Inventory turnover ratio; (2.5 Marks)

Inventory turnover = Cost of Sales / Closing Inventory
= 1,368,000÷649,500 = 2.1 times
(ii) Times interest earned ratio; (2.5 Marks)
= Operating profit (earnings before interest and tax) ÷Interest Charges
= 105,750 ÷34,500 = 3.1

(iii) Total assets turnover; (2.5 Marks)

Total asset turnover = Annual sales÷ Total asset
= 1,972,500÷1,233,750 = 1.6
(iv) Net profit margin; (2.5 Marks)

(Note: Round your ratios to one decimal place)

Question two

Nyakwerigeria company is considering two mutually exclusive projects requiring an initial cash outlay of Ksh. 10,000 each and with a
useful life of 5 years. The company required rate of return is 10% and the appropriate corporate tax rate is 50%. The projects will be
depreciated on a straight line basis. The before depreciation and taxes cash flows expected to be generated by the projects are as
follows:

YEAR 1 2 3 4 5
Project A Ksh. 4,000 4,000 4,000 4,000 4,000
Project B Ksh. 6,000 3,000 2,000 5,000 5,000

Required;
Calculate for each project:
(i) The net present value.
(ii) The internal rate of return.

Which project should be accepted? Why? (10 Marks)

PROJECT A

IRR = a + (NPVa ÷ (NPVa – NPVb)) (b-a) = 0.1 + (1372.1÷ (1372.1 – 56.60)) (0.15-0.1) = 15.22%
Project B
IRR = a + (NPVa ÷ (NPVa – NPVb)) (b-a) = 0.1 + (1768.65÷ (1768.65 – 425.15)) (0.15-0.1) = 16.58%

Project B should be accepted as it has the Highest NPV and IRR