Financial Planning and Forecasting

FM – May 2024 – L3 – SB – Q3 – Financial Planning and Forecasting

Evaluate financing options for Tope's Cellular Stores, including impact on profit, EPS, gearing, and shareholder perspective.

Question

Tope operates a chain of cellular telephone stores in the country. An abbreviated profit or loss account and statement of financial position of the business for the year that has just ended is as follows:

Abbreviated Profit or Loss Account for the Year Ended 31 May 2023

Item	Amount (₦’000)
Sales	6,450
Operating profit for the year	800
Interest payable	(160)
Net profit before taxation	640
Tax (20%)	(128)
Net profit after taxation	512
Dividends proposed	(256)
Retained profit for the year	256

Abbreviated Statement of Financial Position as at 31 May 2023

Item	Amount (₦’000)
Non-current assets at written down values	3,500
Current assets	1,800
Less: Current liabilities	(1,100)
Net Current Assets	700
Total Assets	4,200
Less: Long-term liabilities	(2,000)
Net Assets	2,200
Capital and Reserves
₦0.50 ordinary shares	600
Retained profit	1,600
Total Capital and Reserves	2,200

The company is expecting a surge in sales following advances in cellular telephone technology that should translate into additional operating profits of ₦180,000 per year for the foreseeable future. However, the company will need to invest ₦1,200,000 immediately in expanding the asset base of the business if it is to achieve these additional profits.

The business has approached a large supplier that already has an equity investment in the business to see whether it would be prepared to provide further funds for the business. The supplier has indicated it would be willing to provide the necessary funds by either:

(i) An issue of ₦0.50 ordinary shares at a premium of ₦1.50 per share; or
(ii) An issue of ₦1,200,000 10% debt at par.

The Board of Directors of Tope has already announced that it will maintain the same dividend payout ratio in future years as in the past, and that this policy will be unaffected by the form of finance raised.

Required:

a. For each of the financing options: i. Prepare a forecast profit or loss account for the forthcoming year. (5 Marks)
ii. Calculate the forecast earnings per share for the forthcoming year. (2 Marks)
iii. Calculate the projected level of gearing (D/(D+E)) at the end of the forthcoming year. (2 Marks)

b. Calculate the level of operating profit at which the earnings per share will be the same under each financing option. (3 Marks)

c. Evaluate each of the financing options from the viewpoint of an existing shareholder. (2 Marks)

d. Discuss the factors that will influence a company to finance through debt or equity, and whether to opt for long-term or short-term debt. (6 Marks)

(Total: 20 Marks)

Answer

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Tags: Debt Financing, Dividend Policy, Earnings Per Share, Equity Financing, Financing Options, Forecasting, Gearing Ratio, Shareholder Value
Level: Level 3

Topic: Financial Planning and Forecasting
Series: MAY 2024

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

Question

Despite the global recession, demand for the company’s products has recently increased and is expected to grow over the next two years.

As part of a recent strategic review, the directors made the following projections for the years ending March 31, 2018, and March 31, 2019:

An anticipated annual revenue increase of 8% for each year.
Operating costs (excluding depreciation) expected to rise by 4% per year.
Tax rate to remain at 21%, payable in the year liability arises.
The trade receivables/revenue and trade payables/operating costs ratios will stay the same.
Inventory levels to increase by 10% in the year ending March 31, 2018, and then remain stable.
Non-current assets, including Lekki Plc.’s headquarters and factory, are not depreciated, and capital allowances are negligible.
Dividend growth rate to remain at 6% annually, with dividends declared at the year-end and paid the following year.
Purchase of new machinery at N8 million, financed through existing overdraft facilities. Machinery to be depreciated straight-line over 8 years with a N1 million residual value; capital allowances will apply at 18% reducing balance.
Finance costs are projected to increase by 50% in the year ending March 31, 2018, and remain stable thereafter.

Financial Statement Extracts (March 31, 2017):

Income Statement:
- Revenue: N60,240,000
- Operating Costs: N49,500,000
- Operating Profit: N10,740,000
- Finance Costs: N800,000
- Profit before Tax: N9,940,000
- Tax: N2,286,000
- Profit after Tax: N7,654,000
Statement of Financial Position:
- Assets:
  - Non-current Assets: N28,850,000
  - Current Assets:
    - Inventories: N9,020,000
    - Trade Receivables: N9,036,000
    - Cash and Equivalents: N396,000
- Equity and Liabilities:
  - Ordinary Share Capital: N16,700,000
  - Retained Earnings: N12,482,000
  - Non-current Liabilities: N8,000,000 (6% Debentures)
  - Current Liabilities: N10,120,000 (Trade Payables, Dividends)

Assume today is April 1, 2017.

a. Prepare a Forecast Financial Statement (Income Statement, Statement of Financial Position, and Cash Flow Statement) for each of the years ending March 31, 2018, and March 31, 2019.
(24 Marks)

Note: All calculations should be rounded up to the nearest N’000.

b. Beyond March 31, 2019, the directors are considering the disposal of a smaller subsidiary due to poor performance. The Finance Director suggests avoiding liquidation to minimize industrial relations issues.

Required: Discuss three non-liquidation methods to divest the subsidiary.
(6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flow Statement, Divestment Options, Finance Strategy, Forecast Financial Statements, Income Statement, Statement of Financial Position, Subsidiary
Level: Level 3

Topic: Financial Planning and Forecasting
Series: NOV 2017

FM – May 2024 – L3 – SB – Q3 – Financial Planning and Forecasting

Evaluate financing options for Tope's Cellular Stores, including impact on profit, EPS, gearing, and shareholder perspective.

Question

Abbreviated Profit or Loss Account for the Year Ended 31 May 2023

Item	Amount (₦’000)
Sales	6,450
Operating profit for the year	800
Interest payable	(160)
Net profit before taxation	640
Tax (20%)	(128)
Net profit after taxation	512
Dividends proposed	(256)
Retained profit for the year	256

Abbreviated Statement of Financial Position as at 31 May 2023

Item	Amount (₦’000)
Non-current assets at written down values	3,500
Current assets	1,800
Less: Current liabilities	(1,100)
Net Current Assets	700
Total Assets	4,200
Less: Long-term liabilities	(2,000)
Net Assets	2,200
Capital and Reserves
₦0.50 ordinary shares	600
Retained profit	1,600
Total Capital and Reserves	2,200

(i) An issue of ₦0.50 ordinary shares at a premium of ₦1.50 per share; or
(ii) An issue of ₦1,200,000 10% debt at par.

Required:

b. Calculate the level of operating profit at which the earnings per share will be the same under each financing option. (3 Marks)

c. Evaluate each of the financing options from the viewpoint of an existing shareholder. (2 Marks)

d. Discuss the factors that will influence a company to finance through debt or equity, and whether to opt for long-term or short-term debt. (6 Marks)

(Total: 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Debt Financing, Dividend Policy, Earnings Per Share, Equity Financing, Financing Options, Forecasting, Gearing Ratio, Shareholder Value
Level: Level 3

Topic: Financial Planning and Forecasting
Series: MAY 2024

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

Question

Despite the global recession, demand for the company’s products has recently increased and is expected to grow over the next two years.

As part of a recent strategic review, the directors made the following projections for the years ending March 31, 2018, and March 31, 2019:

An anticipated annual revenue increase of 8% for each year.
Operating costs (excluding depreciation) expected to rise by 4% per year.
Tax rate to remain at 21%, payable in the year liability arises.
The trade receivables/revenue and trade payables/operating costs ratios will stay the same.
Inventory levels to increase by 10% in the year ending March 31, 2018, and then remain stable.
Non-current assets, including Lekki Plc.’s headquarters and factory, are not depreciated, and capital allowances are negligible.
Dividend growth rate to remain at 6% annually, with dividends declared at the year-end and paid the following year.
Purchase of new machinery at N8 million, financed through existing overdraft facilities. Machinery to be depreciated straight-line over 8 years with a N1 million residual value; capital allowances will apply at 18% reducing balance.
Finance costs are projected to increase by 50% in the year ending March 31, 2018, and remain stable thereafter.

Financial Statement Extracts (March 31, 2017):

Income Statement:
- Revenue: N60,240,000
- Operating Costs: N49,500,000
- Operating Profit: N10,740,000
- Finance Costs: N800,000
- Profit before Tax: N9,940,000
- Tax: N2,286,000
- Profit after Tax: N7,654,000
Statement of Financial Position:
- Assets:
  - Non-current Assets: N28,850,000
  - Current Assets:
    - Inventories: N9,020,000
    - Trade Receivables: N9,036,000
    - Cash and Equivalents: N396,000
- Equity and Liabilities:
  - Ordinary Share Capital: N16,700,000
  - Retained Earnings: N12,482,000
  - Non-current Liabilities: N8,000,000 (6% Debentures)
  - Current Liabilities: N10,120,000 (Trade Payables, Dividends)

Assume today is April 1, 2017.

a. Prepare a Forecast Financial Statement (Income Statement, Statement of Financial Position, and Cash Flow Statement) for each of the years ending March 31, 2018, and March 31, 2019.
(24 Marks)

Note: All calculations should be rounded up to the nearest N’000.

Required: Discuss three non-liquidation methods to divest the subsidiary.
(6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flow Statement, Divestment Options, Finance Strategy, Forecast Financial Statements, Income Statement, Statement of Financial Position, Subsidiary
Level: Level 3

Topic: Financial Planning and Forecasting
Series: NOV 2017

Topic: Financial Planning and Forecasting

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FM – May 2024 – L3 – SB – Q3 – Financial Planning and Forecasting

Evaluate financing options for Tope's Cellular Stores, including impact on profit, EPS, gearing, and shareholder perspective.

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

FM – May 2024 – L3 – SB – Q3 – Financial Planning and Forecasting

Evaluate financing options for Tope's Cellular Stores, including impact on profit, EPS, gearing, and shareholder perspective.

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

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Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

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Evaluate financing options for Tope's Cellular Stores, including impact on profit, EPS, gearing, and shareholder perspective.

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Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

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