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.

Answer all the Questions. (Word Limit-2000-2500 words)

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

Statement of Financial Position as at 31st Aug 2021

53
  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
Sector average ratios:

Return on capital employed

Net profit margin

739 23% 1 113 1 190
Current ratio   1.5 Times  
Debt/equity ratio (book value basis)
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)

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

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%.

  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)
  4. 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

  • 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)

  • Summarise the benefits of Leasing to the company when obtaining new fixed assets

(5 marks)

Question 4 Total 15 marks

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