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Jun 03, 2023

Question 1

  Required Investment RM ROIC
Project A 40 16%
Project B 40 13.50%
Project C 20 13%
Total Investment 100  

The target capital structure is to use 50% Debt and 50% Equity. Net Income last year was RM40 and the company intends to pay dividends in the amount of RM10. The interest rate that banks will charge for any amount of loan is 8%. The Corporate Tax Rate is 30%. Fixed deposit rates in the market are currently 3%. This rate is considered risk-free (RF). The stock market is forecasted to provide a return of 15% which will be used as the required return from the market. The unleveled beta for the company is 0.8. Any new shares issued will be charged a 3% flotation cost.

Required:

What is the amount of the first stage financing using the intended capital structure and that the company needs to pay the dividends

  1. Calculate the leverage beta at the first stage of financing.
  2. Calculate the cost of equity at the first stage of financing.
  3. Calculate the cost of equity after the first stage of financing.
  4. Calculate the Weighted Average Cost of Capital at the first financing stage and the second financing stage.
  5. Explain whether each of the projects can be Explanation must include the cost of capital of the project.
  6. Based on the answer in part f, what is the total amount of investment

QUESTION 2

The CNC company has access to the following information to prepare for the budget.

Direct Materials: Cost RM1 per kg, and the required amount per unit is 2.5kg. The number of hours workers require to finish a product is 2 hours. The direct labor rate is RM5.00 per hour. The production also requires 2 machine hours per unit.

Manufacturing Overheads Costs are estimated and allocated as follows:

Variable Overheads Total Estimate Cost (RM) Allocation Basis
Cleaning 18,000.00 Direct Labour Hours
Maintenance 12,000.00 Machine Hours
Supervision 24,000.00 Direct Labour Hours

The following fixed overheads were also estimated

Fixed Manufacturing Overheads Total Estimated Cost (RM)
Insurance 36,000.00
Advertising 14,000.00
Depreciation 10,000.00
Administration Cost Total Estimate Cost (RM)
Managers Salary 108,000.00
Utilities in Main Office 12,000.00

Required

  1. Prepare the budget net operating income for the
  2. Calculate the product cost per unit using the absorption costing method.
  3. Calculate the product cost per unit using the variable costing method.
    The actual results of operations are as follows.
Units 100,000      
Price (RM) 12.00      
Sales (RM)       1,200,000.00
Variable Costs Quantity Used Rate (RM)    
Direct Materials 240,000 0.80 192,000.00  
Direct Labour 150,000 4.50 675,000.00  
Variable Overheads Quantity Used Rate (RM)    
Cleaning 150,000.00 0.120 18,000.00  
Maintenance 200,000.00 0.060 12,000.00  
Supervision 150,000.00 0.320 48,000.00  
Total Variable Overhead     78,000.00  
Fixed Overheads        
Insurance     36,000.00  
Advertising     14,000.00  
Depreciation     10,000.00  
Total Fixed Cost     60,000.00  
Total Manufacturing Cost       1,005,000.00
Administration        
Managers Salary     180,000.00  
Utilities     12,000.00  
Total Administration Cost       192,000.00
NET OPERATING INCOME       3,000.00

4. Prepare a usage/efficiency variance analysis and price variance analysis for direct materials, direct labor, cleaning, maintenance and  

5. Prepare a variance analysis on the Unit Sales, Sales Price, Fixed Overhead, and Administration

6. There was a dispute between the workers in production and the management with regard to their Explain the major cause of the low actual net operating income and whether the complaints are justified. Suggest actions that the company can take.

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Total: GBP120

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