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)
-
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