Question 1
Dragons' Den is a series of reality television programmes featuring entrepreneurs pitching their business ideas in order to secure investment finance from a panel of venture capitalists. An investor has become the 'Dragons' Den' most successful project - after selling two million sit-on suitcases. Entrepreneur Rob Law came up with his idea for the Trunki in 1997 but was turned down when he appeared on the show in 2006. During his first appearance on the programme, he asked for £100,000 in exchange for a 10 per cent share of his company. He received the negative verdict of 'I'm out' from all of the judges and left the Den without his desired investment.
Despite the rejection, he invested thousands of Pounds into developing the product and it is now very popular baggage item among families. Mr Law of Bristol enjoys a turnover of over £7 million a year and his company employs 30 people. In 2013 the firm moved into a new phase when it bought its own factory in Devon and moved production of its suitcases to the UK. Mr Law's business has turned into a success story.
Required:
a) What are the merits and disadvantages of funding using Private equity/Venture Capital?
b) After being denied funding by the Dragon's Den venture capitalists, which other sources of funding can entrepreneurs like Mr Law use to fund their business operations? Discuss the advantages and disadvantages of such sources of funding.
c) If Mr Law's company experiences much success in 5 years' time and it decides to expand into other European countries as well as USA, recommend with reasons, the sources of funding that can be used to finance such expansions.
Question 2
The extracts of the Income Statement and the Statement of Financial Position of a company are as follows:
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£'m
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50p ordinary shares
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80
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Reserves
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30
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Long term Liabilities
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20
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130
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Fixed Assets
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90
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Current Assets
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50
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Current Liabilities
Net Current Assets
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(10)
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40
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Total Assets
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130
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Earnings before Interest & Tax
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50
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Interest
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(7)
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Tax
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(15)
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Earnings after tax
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28
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Total dividends for year
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(16)
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Retained profit
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12
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Required:
(a) From the extract above, calculate and interpret:
i. Gearing ratio
ii. Current ratio
iii. Return on Capital Employed (ROCE)
iv Earnings Per Share (EPS)
v Dividend Per Share (DPS)
(b) Alpha company has 80,000 issued shares of 25p per share which are currently trading at a market price of 275p. The company paid £6,000 in dividends to ordinary shareholders. Net Profit after taxation was £35,000.
i. Calculate the dividend yield, the Price Earnings ratio and dividend cover.
ii. Bravo Company is in the same industry sector with Alpha Company. The EPS and PE ratios for Bravo Company are 30p and 15p respectively. Compare the two figures with the results from (a) and discuss which company you want to invest and why?
Question 3
(a) Assume that Citadel plc, a UK multinational firm sold some goods in Japan that are denominated in Japanese Yen of Y1,000,000 in 2011. In 2012, the company established its subsidiary in Japan to overcome the trade barrier it faces in the exportation of its goods to Japan. Due to the double taxation treaty existing between the two countries, the new subsidiary in Japan was directed by James Danny, the Finance Director of the parent company in the UK to transfer £500,000 for the payment of the company's tax difference to the UK's tax authority. In 2014, the subsidiary in Japan faced a liquidity problem and James Danny decided to transfer £1,000,000 to the subsidiary immediately in order to avoid the risk of litigation by Japanese creditors.
Required:
i. If the rate of exchange between the Japanese yen and sterling is quoted at ¥/£188.869 -189.131: How much pounds will Citadel plc generate from its sales in Japan and how much Japanese Yen the subsidiary of the company needs to convert to transfer £500,000 to the head office in London. Using the same exchange rate above, how much Japanese Yen is the subsidiary receiving from the transferred £1,000,000 by James Danny.
ii. The Board of Directors of Citadel plc directed James Danny to travel to Japan on an inspection visit to assess the performance of the company's subsidiary. It was estimated that James needs ¥100,000 for the visit. What is the cost of buying ¥100,000 using the same exchange rate given above?
iii. Explain the differences between spot exchange rate, forward exchange rate and cross exchange rate?
iv. The difference between ‘bid rate' and ‘offer rate' is called ‘the spread'. Explain the meaning of ‘bid rate' and ‘offer rate' from the point view of a bank or broker.
v. Explain the terms ‘Arbitrage' and ‘Speculation' in foreign exchange markets.
(b) Source the Interbank exchange rate for sterling against another currency. Compare this with the tourist exchange rate. Explain the difference between the two rates.
Question 4
In 2013, the UK's banking regulator, the Financial Services Authority (FSA), has been abolished and replaced with two successor organisations. The changes mark the end of the system set up by the previous Labour government. From 1st April of that year, the Prudential Regulation Authority (PRA) ensures the stability of financial services firms and became part of the Bank of England. The Financial Conduct Authority (FCA) is now the City's behavioural watchdog. The Bank of England has also gained direct supervision for the whole of the banking system through its powerful Financial Policy Committee (FPC), which can instruct the two new regulators. Chancellor George Osborne announced the changes back in 2010, aiming to make it clear who is in charge over supervising the financial services sector and avoid a recurrence of failing banks and enormous state-backed bailouts.
Required:
(a) Describe the functions of new financial services regulatory regime: Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and Financial Policy Committee (FPC).
(b) Under what circumstances might regulation of financial services industry decrease rather than increase the stability of financial industry? Your answer should particularly include moral hazard on part of customers (depositors etc.) and financial services provides (banks etc.)