Certificate in Advanced Business Calculations

ASE3003

Level 3

Thursday 8 November 2012

Time allowed: 3 hours

Information

There are 8 questions in this examination.

Total marks available: 100

Instructions

Do not open this paper until you are told to do so by the supervisor.

Answer all questions.

Write your answers in blue or black ink/ballpoint. You can only use a pencil for graphs, charts,
diagrams, etc.

Please ensure your answers are written clearly.

Begin your answer to each question on a new page.

All answers must be correctly numbered but need not be in numerical order.

Workings must be shown.

You can use mathematical and statistical tables.

You may use a calculator provided the calculator gives no printout, has no word display facilities,
is silent and cordless. The provision of batteries and their condition is your responsibility.

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QUESTION 1

A bank successfully tenders £147,600 for a £150,000 Treasury bill that runs for 3 months and is to be
redeemed at par.

(a) Calculate the rate of simple interest per annum earned on the investment in the Treasury bill.
(4 marks)

Eleri suggests that the interest is equal to a rate of compound interest per annum of 7%.

(b) Use the compound interest formula to calculate the interest for three months on £147,600 at 7%
per annum.
(3 marks)

(c) Calculate the rate of compound interest per annum for an investment of £147,600 to produce an
amount of £150,000 in 3 months. Give your answer to 3 significant figures.
(4 marks)

(Total 11 marks)

QUESTION 2

£100 of 3½% debenture stock can be bought for £91. Interest is paid half yearly. A bank invested
£455,000 in the stock.

(a) Calculate the nominal value of the stock bought by the bank.
(2 marks)

The bank held the stock for 2½ years.

(b) Calculate the total interest received on the stock over this period.
(2 marks)

The bank purchased 31,000 5½% Preference Shares (nominal value £5) at £1.88 per share.

(c) Calculate the cost of the shares.

(2 marks)

(d) Calculate the dividend received each year.

(2 marks)

The bank also purchased units in a unit trust with an offer price of £56 per unit, and sold the units after
3½ years at £63 per unit.

(e) Calculate:

(i) the increase in price per unit

(1 marks)
(ii) the increase as a percentage increase per annum.
(3 marks)

(Total 12 marks)

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QUESTION 3

A manufacturer’s product is sold to customers at £60 each. Manufacturing costs are as follows:

Fixed costs per period £1,625,000

Variable costs per unit £47

Calculate:

(a) the profit or loss at a level of production and sales of 110,000 units per period
(4 marks)

(b) the level of production and sales to produce a profit of £325,000 per period
(3 marks)

(c) the fixed costs per unit at a level of production of 130,000 units per period
(2 marks)

(d) the break-even point in units per period

(3 marks)

(e) the total cost of production at break-even.

(2 marks)

(Total 14 marks)

QUESTION 4

(a) At the end of the year 2011 the following information applied to Company A:

Current liabilities £4,800,000

Current ratio 2.25 : 1
Acid test ratio 1.4 : 1

(i) Calculate the stock held by Company A at that time.

(3 marks)

(ii) Explain why it is important to have an acid test ratio of 1 : 1 or greater.

(1 mark)

(iii) Explain the significance of having an acid test ratio that is too large.
(1 mark)

(b) During a trading period, the average credit given by Barry to his debtors was 25 days, and the
average money owed to Barry by his debtors was £48,000. His sales, before deducting sales
returns, were £713,100, and his overhead expenses were £105,120.

Calculate, for this period, the:

(i) net sales

(2 marks)

(ii) sales returns

(2 marks)

(iii) ratio of overhead expenses to net sales, expressed as a percentage.

(2 marks)

(Total 11 marks)

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QUESTION 5

Kai is considering whether to invest in an investment project with an initial cost of £975,000 and an
estimated cash inflow of £250,000 per annum for 5 years.

He uses the following table of discounting factors:

Discounting factor

Year 1 0.917
Year 2 0.841
Year 3 0.772
Year 4 0.708
Year 5 0.650

(a) Calculate the net present value of the project.

(4 marks)

(b) Advise Kai whether the project is a worthwhile investment at the discount rate used.
(1 mark)

(c) Calculate the percentage discount rate used.

(2 marks)

(d) Explain what the net present value calculated in (a) represents.
(1 mark)

(e) Calculate the discount factor for year 6.

(2 marks)

At a discount rate of 11% the project has a negative net present value of (£51,000).

(f) Calculate the internal rate of return of the project.

(3 marks)

(Total 13 marks)

QUESTION 6

(a) In each of the following two bankruptcies calculate the rate in the pound paid to unsecured
creditors, and the amount received by an unsecured creditor who is owed £15,000.

(i) bankruptcy X: An unsecured creditor who is owed £34,500 is paid £14,145

(4 marks)

(ii) bankruptcy Y: The total liabilities are £141,800, of which £95,300 is owed to secured
creditors. The total assets available for creditors are £110,180.
(6 marks)

(b) In another bankruptcy, Bankruptcy Z, an unsecured creditor who was owed £39,000 received
£2,535. The company owed a total of £257,000 to unsecured creditors and £145,000 to secured
creditors. The expenses of winding up the business were £9,395.

Calculate the value realised for the assets of the business.

(4 marks)

(Total 14 marks)

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QUESTION 7

Factory F buys two machines. Machine A costs £95,500 and is estimated to have a life of 4 years and a
scrap value of £7,500. It is depreciated by the equal instalment method.

(a) Using the equal instalment method, calculate:

(i) the percentage of the cost to be written off during the first year
(2 marks)
(ii) the book value after one year
(2 marks)
(iii) the accumulated depreciation after three years.
(2 marks)

Machine B is depreciated by the equal instalment method over five years. It has the same scrap value
as machine A. It also has the same book value at the end of one year as machine A.

(b) Calculate the original cost of machine B.

(4 marks)

Factory G buys Machine C for £120,000, and depreciates it by the reducing balance (diminishing
balance) method with an annual rate of depreciation of 44%.

(c) Calculate the book value of Machine C after 2 years.

(2 marks)

(Total 12 marks)

QUESTION 8

(a) Part of an index of industrial production at January 2012 is shown below:

Industry Weight Index (Jan 2000 = 100)

Mining and quarrying 203 112

Construction 117 149
Gas, electricity, water 184 93
Manufacturing 221 126
Transport 175 100

(i) Calculate the weighted index of industrial production for January 2012, with January
2000 = 100, for the industries shown.
(6 marks)
(ii) State the percentage increase in industrial production from 2000 to 2012.
(1 mark)

(b) An index of retail prices is 140 in 2005 (2000=100), and 120 in 2010 (2005=100).

(i) Calculate the index of retail prices for 2010 with 2000 as the base year.
(2 marks)
(ii) Give a full interpretation of your answer.
(4 marks)

(Total 13 marks)

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