Business finance : theory and practice

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Problems 3.4 The following is the balance sheet (in abbreviated form) of Projections Ltd for last year: Balance sheet as at 31 December £000 Non-current assets Cost 290 Accumulated depreciation (110) 180 Current assets Inventories 26 Trade receivables 35 Cash 5 66 Total assets 246 Equity Share capital 150 Retained profit 48 198 Current liabilities Trade payables 21 Taxation 27 48 Total equity and liabilities 246 The following plans have been made for next year: 1 Sales revenue is expected to total £350,000, all on credit. Sales will be made at a steady rate over the year and two months’ credit will be allowed to customers. 2 £200,000 worth of inventories will be bought during the year, all on credit. Purchases will be made at a steady rate over the year and suppliers (trade payables) will allow one month’s credit. 3 New non-current assets will be bought, and paid for, during the year at a cost of £30,000. No disposals of non-current assets are planned. The depreciation expense for the year will be 10 per cent of the cost of the non-current assets owned at the end of the year. 4 The value of inventories at the end of the year is expected to be double what it was at the beginning of the year. 5 Operating expenses, other than depreciation, are expected to total £52,000, of which £5,000 will remain unpaid at the end of the year. 6 During the year, the tax noted in the start-of-the-year balance sheet will be paid. 7 The tax rate can be assumed to be 25 per cent. The tax will not be paid during the year. 8 A dividend of £10,000 will be paid during the year. Prepare a projected income statement for next year and a balance sheet as at the end of next year, to the nearest £1,000. ‘ 71
Chapter 3 • Financial statements and their interpretation 3.5* The following are the financial statements of Prospect plc for last year and this year: Income statement for the year ended 31 December Last year This year £000 £000 Turnover 14,006 22,410 Cost of sales (7,496) (11,618) Gross profit 6,510 10,792 Operating expenses (4,410) (6,174) Operating profit 2,100 4,618 Interest payable (432) (912) Profit before taxation 1,668 3,706 Taxation (420) (780) Profit for the year 1,248 2,926 Balance sheet as at 31 December Last year This year £000 £000 Non-current assets 8,600 16,470 Current assets Inventories 2,418 4,820 Trade receivables 1,614 2,744 Other receivables 268 402 Cash 56 8 4,356 7,974 Total assets 12,956 24,444 Equity Ordinary shares of £0.50 each 3,600 3,600 Capital reserves 1,904 1,904 Retained profit 1,370 3,496 6,874 9,000 Non-current liabilities Loan notes 3,600 7,600 Current liabilities Trade payables 1,214 2,612 Other payables 848 1,202 Taxation 420 780 Bank overdraft – 3,250 2,482 7,844 Total equity and liabilities 12,956 24,444 Note that Prospect plc hopes to retain the bank overdraft on a semi-permanent basis. 72
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Business Finance Theory and Practic
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We work with leading authors to dev
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Pearson Education Limited Edinburgh
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Contents 3 Financial (accounting) s
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Contents 7.12 Arbitrage pricing mod
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Contents 12.6 Dividends: the eviden
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Guided tour of the book Objectives
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Supporting resources Visit www.pear
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Preface updated and expanded. Where
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PART 1 The business finance environ
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Chapter 1 • Introduction 1.1 The
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Chapter 1 • Introduction 1.3 The
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Chapter 1 • Introduction Since it
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Chapter 1 • Introduction Where di
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Chapter 1 • Introduction concerne
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Chapter 1 • Introduction Borrowin
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Chapter 1 • Introduction time is
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Chapter 1 • Introduction Private
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An example of an investment apprais
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Capital rationing Example 5.6 A bus
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Capital rationing There is no mathe
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Replacement decisions Helpful but l
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Routines for use with investment pr
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Investment appraisal and strategic
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Value-based management Select strat
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Value-based management Corporation
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l l Value-based management Use capi
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Real options 5.13 Real options ‘
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Summary Capital rationing l l l l M
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Problems PROBLEMS Sample answers to
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Problems by 31 December 20X7. The c
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Problems Based on an estimated cons
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Chapter 6 Risk in investment apprai
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Sensitivity analysis Example 6.1 Gr
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Sensitivity analysis (6) Cost of ca
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Use of probabilities Clearly, these
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Use of probabilities Solution This
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Expected value Possible outcome NPV
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Systematic and specific risk If, ho
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Utility theory Figure 6.2 Utility o
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Attitudes to risk and expected valu
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Summary Summary Risk l Risk is of v
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Problems REVIEW QUESTIONS Suggested
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Problems Project Initial outlay NPV
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Problems Estimates of the various f
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Problems ‘ There are sets of mult
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The relevance of security prices Th
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Security investment and risk Exampl
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Portfolio theory portfolio. Further
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Portfolio theory Table 7.1 Risk and
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Portfolio theory Figure 7.4 The ris
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Portfolio theory Figure 7.6 The eff
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Portfolio theory tangential to r f
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Capital asset pricing model Beta: a
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CAPM: an example of beta estimation
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CAPM - what went wrong? CAPM has be
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Arbitrage pricing model point is se
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l Portfolio theory - where are we n
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Review questions l l Managers diver
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Appendix: Derivation of CAPM APPEND
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Appendix: Derivation of CAPM or E(r
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Chapter 8 Sources of long-term fina
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Ordinary (equity) capital Figure 8.
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Ordinary (equity) capital Young and
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Methods of raising additional equit
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Preference shares perspective, than
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Loan notes and debentures are issue
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Loan notes and debentures Methods o
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Loan notes and debentures The relat
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Asset-backed finance (securitisatio
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Leasing from the large first-year a
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Conclusions on long-term finance Br
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Summary l l Rights issue = issue to
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Review questions l This too is quit
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The London Stock Exchange The exist
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The London Stock Exchange When memb
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Capital market efficiency current s
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Tests of capital market efficiency
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Conclusions and implications would
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Conclusions and implications winner
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Further reading l The current price
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Cost of individual capital elements
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Weighted average cost of capital ta
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Weighted average cost of capital Th
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Practicality of using WACC as the d
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Openmirrors.com Summary figure is s
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Problems 10.6 Vocalise plc has rece
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Is debt finance as cheap as it seem
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Business risk and financial risk Ta
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The traditional view 11.4 The tradi
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The Modigliani and Miller view of g
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Other practical issues relating to
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l Evidence on gearing a shareholder
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Gearing and the cost of capital - c
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Pecking order theory Figure 11.5 Th
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Weighted average cost of capital re
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Summary Summary Capital (financial)
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Problems A board meeting has been s
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Appendix I: Proof of the MM cost of
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Appendix II: Proof of the MM cost o
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Modigliani and Miller on dividends
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The traditional view on dividends W
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l l l l Other factors raising an eq
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Other factors is interpreted advers
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l l l Dividends: the evidence a ten
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Dividends: the evidence attract ins
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Conclusions on dividends Agency Age
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Problems l l l l Debt finance - rel
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Problems It has been estimated that
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Appendix: Proof of the MM dividend
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PART 4 Integrated decisions There a
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Chapter 13 • Management of workin
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Chapter 14 • Corporate restructur
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Chapter 15 International aspects of
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Chapter 15 • International aspect
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Chapter 16 Small businesses Objecti
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Chapter 16 • Small businesses The
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Chapter 16 • Small businesses 16.
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Chapter 16 • Small businesses sma
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Chapter 16 • Small businesses l l
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Chapter 16 • Small businesses Fig
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Chapter 16 • Small businesses Sol
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Chapter 16 • Small businesses 16.
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Chapter 16 • Small businesses l l
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Chapter 16 • Small businesses REV
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Chapter 16 • Small businesses Bal
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Chapter 16 • Small businesses (b)
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Chapter 16 • Small businesses ‘
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Appendix 2 Annuity table Present va
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Appendix 3 • Suggested answers to
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Appendix 4 Suggested answers to sel
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Glossary Accounting rate of return
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Glossary Forward (foreign exchange)
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Glossary of its effective life. It
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References Aharony, J. and Swary, I
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References Dimson, E., Marsh, P. an
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References markets. Journal of Busi
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Index Note: Page references in bold
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Index Draper, P. 399 Drury, C. 121,
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Index Mehrotra, V. 314 Memoranda of
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Index Stock Exchange Automated Quot
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Business finance : theory and practice

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