Learning outcomes:
L1: Understand the role of financial management in the performance of organisations and critically appraise alternative sources of finance for business firms.
L2: Critically analyse the financial position and performance of an organisation using key ratios.
L3: Apply advanced decision making techniques in a range of short-term and long- term situations. This assignment is worth 50% of this 30 credit module. The written part of this assignment must not exceed the maximum of 2500 words. Figures; tables and numerical analysis are not included in the word count.
You are required to answer ALL questions
Question 1
Shah Trading Ltd. is an established private company located in Muscat engaged in the manufacture and distribution of drilling equipment. The owners of the company, who are also the directors, are considering selling their business in order to pursue other interests. They have now begun a search for organisations interested in buying the company.
Summary of Profit & Loss Accounts and Balance Sheets for Shah Trading Ltd. are shown below:
Shah Trading Ltd
Statement of Comprehensive Income for the year ended on 31st December
|
|
2015
OMR 000's
|
2016 OMR 000's
|
|
Turnover (Sales)
|
1,855
|
1,830
|
|
Cost of goods sold
|
(1,330)
|
(1,370)
|
|
Gross Profit
|
525
|
460
|
|
Other expenses
|
(347)
|
(294)
|
|
Profit before interest &tax
|
178
|
166
|
|
Interest payable
|
(35)
|
(38)
|
|
Corporation tax
|
(43)
|
(38)
|
|
Profit after tax
|
100
|
90
|
|
Dividends paid
|
(45)
|
(45)
|
|
Retain Profit
|
55
|
45
|
Shah Trading Ltd
Statement of Financial Position as on 31st December
|
NON CURRENT ASSETS
|
2015
OMR 000's
|
2016
OMR 000's
|
|
Land & buildings
|
590
|
|
568
|
|
|
Plant& equipment
|
257
|
|
280
|
|
|
Motor vehicles
|
55
|
|
50
|
|
|
|
902
|
|
898
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
Inventories
|
|
260
|
|
210
|
|
Accounts Receivable
|
|
150
|
|
172
|
|
Cash
|
8
|
|
3
|
|
|
|
418
|
|
385
|
|
|
CURRENT LIABILITIES
|
(227)
(38)
|
(224)
(34)
|
|
|
Accounts Payable Provision for Taxation
|
|
|
Net Current Assets
|
153
|
127
|
|
|
Total Assets less Current Liabilities
|
1,055
|
1,025
|
|
|
Long term loan (secured on property)
|
400
|
425
|
|
|
655
|
600
|
|
|
Net Assets
|
|
|
CAPITAL & RESERVES:
|
|
|
|
|
Share Capital
|
|
|
|
|
(100,000 Ordinary shares of OMR 1)
|
100
|
100
|
|
|
Retain Earning
|
125
|
170
|
|
|
Reserves
|
430
|
330
|
|
|
Shareholders' Funds
|
655
|
600
|
|
Required:
a) Compute accounting ratios for the year ended on 31st December 2015 & 2016 which provide insights into Shah Trading Ltd's financial statements as follows:
i. Profitability
ii. Working capital control (activity and liquidity ratios) and
iii. Financial risks
iv. Earnings per share & dividend per share, dividend pay-out ratio
Note: Answers should be expressed to one place of decimals with complete working
b) Critically analyse the answers of Part A.
c) The face value of the Equity shares of Shah Trading Ltd. is OMR 1.000 and the current market price OMR 2.500. The company issues right shares at the rate of 3 equity shares for every 5 existing equity shares held, the right shares being priced at OMR 1.800. Calculate the value of 'Right'.
Question 2
"Sultanate of Oman is in a developing stage and currently, its government is focusing on the growth of Small and Medium Enterprises (SMEs) to strengthen the overall economic system of a country. SMEs have a great impact on the economic condition of any country because almost 95% of the economy depends on these businesses. To promote SMEs, the government of Oman has provided a lot of training and guidance to its management so that these businesses will grow and strengthen the economy in a desired manner. For the development and sustainability of SMEs, it is important to study the issues and challenges which they are facing in the growth stage of their business"
Critically evaluate the measures that could overcome the different issues and challenges in order to facilitate the development and the sustainability of SMEs.
Question 3
Jadeeda LLC wishes to raise additional finance of OMR 1,000,000 for meeting its investment plans. It has OMR 210,000 in the form of retained earnings available for investment purposes. The following are the further details.
Debt / Equity mix: 30% / 70%
Cost of debt:
Up to OMR 180,000 10% (before tax)
Beyond OMR 180,000 16% (before tax)
Earnings per share OMR 4
Dividend payout 50% of earnings
Expected growth rate in dividend 10%
Current market price per share OMR 44
Tax rate 50%
Required:
A) Determine the pattern for raising the additional finance.
B) Determine the post - tax average cost of additional debt.
C) Determine the cost of retained earnings and cost of equity.
D) Estimate the overall weighted average after tax cost of additional finance.