QUESTION 1: FINANCIAL STATEMENT ANALAYSIS (35 MARKS)
Using the annual report of Meridian Energy Limited (MEL) for 2017 & 2016, answer the following questions.
1. Discuss THREE significant matters that have impacted the financial performance of MEL, in the last financial year. (6 marks)
2. Evaluate MELâ€™s sales, gross margin, operating profit, net profit margin, asset, debt, equity structure and explain trends and changes over the years 2016 and 2017.
(6 marks)
3. Discuss the role of MELâ€™s governance in creating value for Meridian. (5 marks)
4. Using the following financial ratios for 2016 and 2017 periods, and other associated information available in the public domain, assess the financial health of MEL from the view of an investor.
a) Liquidity ratios
) Asset management efficiency ratios
c) Profitability ratios
d) Market ratios (10 marks)
5. Assume you are a banker evaluating a loan request from Meridian Energy Limited (MEL) for $220 million. Considering MELâ€™s recent earnings announcements and earnings forecast updates, what would be your concerns in deciding on approval or denial of the loan request? Use the companyâ€™s capital structure ratios for 2016 and 2017 in your explanation.
(8 marks)
Question 2: Financial Management and Time Value of Money (38 Marks)
2.1
Answer the following:
1. a) Â Discuss FOUR basic principles of Finance (4 marks)
2. b) Â Explain the role of securities markets as intermediaries in
inging companies and investors together. (4 marks)
3. c) Â Why is the goal of financial management to maximize the cu
ent value of the companyâ€™s stock? In other words, why isnâ€™t the goal to maximize the future value?
(4 marks)
4. d) Â Discuss how company shareholders can encourage their managers to act in a way which is consistent with the objective of shareholder wealth maximiz (4 marks)
2.2 After completing your Bachelor of Business degree, letâ€™s assume that you secured a permanent position as an accountant. Your financial plan is to retire in 35 years from now. So you are thinking about creating a fund that will allow you to receive $36,000 at the end of each year for 25 years after your retirement. Your expected return on savings is 6.25% per annum during the 25-year retirement period.
Required:
1. To provide the 25- year, $36,000 a year annuity, calculate how much should be in the
fund account when you retire in 35 yearsâ€™ time. (2 marks)
2. How much will you need today as a single amount to provide the fund calculated in part
(a) if you earn 6.35% per year during the 35 years preceding retirement? (2 marks)
3. What effect would an increase in the interest rate, both during and prior to retirement,
have on the values calculated in parts (a) and (b)? Explain why. (2 marks)
4. Assume that you will earn 6.95% per annum on your savings during the 35 years preceding your retirement and 6.55% during the 25-year period after your retirement. To fund the 25- year stream of $36,000 annual annuity payments, you will be making end-of-year deposits for 35 years. How much do you need to deposit annually?
(3 marks)
2.3
Suppose you are planning to buy a residential property for $650,000 and wanted to take a 20- year loan for 80% of the property value. The interest rate is 4.25% per annum, and payments are required to be made annually at the end of each year.
a) Calculate the annual mortgage payment on the loan (1 marks)
) Construct a mortgage amortisation table showing loan balance at the beginning of each period, annual repayment amount, interest payment, the amortisation of the loan and the loan balance for each year. (10 marks)
c) Draw a graph showing the interest portion and repayment of the principal amount and comment on the change in the proportion of interest paid and the principal amount over the period (2 marks)
Question 3: Capital Budgeting and Investment appraisal (22 marks)
Ecoosa Organic Mattresses Manufacturers Limited (EOMML) is planning to purchase a new material handling machine for its manufacturing unit. The company is considering the following four mutually exclusive investments. The required payback period is five and a half years. The financial data regarding the four machines is given below (ignore taxes).
Machine/asset
Machine A
Machine B
Machine C
Machine D
$
$
$
$
Revenue
66,000
62,500
58,500
47,000
Operational costs
31,000
29,000
26,610
22,100
Depreciation
8,750
10,250
11,600
12,000
Interest
12,600
11,250
10,440
8,850
Cost of the machine
140,000
120,000
116,000
98,000
Machine life (years)
16
12
10
8
The manufacturing department has requested the chief financial offer (CFO) to evaluate the above investment opportunities using both payback period and internal rate of return methods. The CFO is seeking your help to calculate each machine's payback period, internal rate of return and determine appropriate hurdle rates.
Required:
(a) Calculate each machineâ€™s payback period and state which alternative should be accepted based on this criterion. (6 marks)
(b) Calculate each machine's internal rate of return (IRR), and using a hurdle rate of 25% state which of the alternatives is acceptable by this criteria. (10 marks)
(c) Explain two probable circumstances in which EOMML is choosing ONE machine from among the four mutually exclusive investments. (6 marks)