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accounting and finance for non specialists

Questions and Answers of Accounting And Finance For Non Specialists

Helsim Ltd is a wholesaler and distributor of electrical components. The most recent draft financial statements of the business included the following:Notes:1. Land and buildings are shown at their
What other motive may business angels have for becoming closely involved in the business?
What benefits might a listed business gain from the Stock Exchange being an efficient capital market?
Why would you see £100 to be received in a year’s time as not equal in value to £100 to be paid immediately?
When managers are making decisions involving capital investments, what should the decision seek toachieve?
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each
Chaotic Industries is considering an investment in a fleet of ten delivery vans to deliver its products to customers. The vans will cost £15,000 each, which will be payable immediately. The annual
Newton Electronics Ltd has incurred expenditure of £5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed. The directors are
A business is evaluating three competing projects whose profits are shown below. All three involve investment in a machine that is expected to have no residual value at the end of the five years.
C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used cost £540,000 and
Sinclair Wholesalers plc is currently considering opening a new sales outlet in Coventry. Two possible sites have been identified for the new outlet. Site A has an area of 30,000 square metres. It
The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed
What is the payback period of the Chaotic Industries project from Activity 10.2?Data from Activity 10.2Chaotic Industries is considering an investment in a fleet of ten delivery vans to deliver its
Can you see from the above why PP is not a complete answer to the problem concerning the timing of cash flows?
Can you identify the kind of risks that the business may face by buying a machine?
Given that the Billingsgate Battery Company could invest its money at a rate of 20 per cent a year, what is the present (immediate) value of the expected first year receipt of £20,000? In other
See if you can show that the Billingsgate Battery Company would find £27,778, receivable now, as equally acceptable to receiving £40,000 in two years’ time, assuming that there is a 20 per cent
What is the maximum the Billingsgate Battery Company should be prepared to pay for the machine, given the potential benefits of owning it?
What is the NPV of the Chaotic Industries project from Activity 10.2, assuming a 15 per cent opportunity cost of finance (discount rate)?Data from Activity 10.2Chaotic Industries is considering an
How would you interpret this result?
We should recall that, when we discounted the cash flows of the Billingsgate Battery Company machine project at 20 per cent, we found that the NPV was a positive figure of £24,190 (see p. 330). What
What is the internal rate of return of the Chaotic Industries project from Activity 10.2Data from Activity 10.2Chaotic Industries is considering an investment in a fleet of ten delivery vans to
Assume that a project has an IRR that exceeds the business’s cost of capital. Why might it be helpful to consider how much it exceeds it by?
The directors of Manuff (Steel) Ltd are considering closing one of the business’s factories. There has been a reduction in the demand for the products made at the factory in recent years. The
Which other investment appraisal method ignores the scale of investment?
Earlier in the chapter, we discussed the limitations of the PP method. Can you think of a reason why it remains a fairly popular method of investment appraisal among managers?
Trader Ltd is a wholesaler of imported washing machines. The business is partly funded by a bank overdraft and the bank is putting pressure on Trader Ltd to reduce this as soon as possible.Sales
Are retained earnings a free source of finance for the business? Explain.
How does it create an opportunity cost?
From the business’s point of view, ordinary shares represent a less risky form of financing than borrowing. Why is this?
Would you expect the returns to preference shares to be higher or lower than those to ordinary shares?
What do you think is the advantage for the business of having a floating charge rather than a fixed charge on its assets?
Can you suggest how a loan covenant might specify a minimum level of liquidity (the last bullet point in the list above) in the contract between the borrower and lender?
Would you expect the market price of ordinary shares or of loan notes to be the more volatile? Why?
Would you expect the returns on loan notes to be higher or lower than those of ordinary shares?
Why does the value of fixed-interest loan notes rise and fall with rises and falls in interest rates?
In Chapter4 (Example 4.2 ) the point was made that issuing new shares at below their current value is to the benefit of new shareholders and to the detriment of existing ones. In view of this, does
Can you think which type of asset is often subject to a sale-and-leaseback arrangement?
Look back to Example 6.3 and Activity 6.18 (pp. 186–187). What is the effect of financial gearing on the return on ordinary shareholders’ funds (ROSF) when changes occur in the level of operating
In what way is an HP agreement:(a) Similar to(b) Different from a finance lease?
What supporting evidence might a business provide to a bank to show the maximum overdraft and overdraft period required?
Why might this final point be of particular relevance to smaller businesses?
What can we say about the effect of operating gearing on profit when changes occur in the level of sales?
An investor with 2,000 shares in Shaw Holdings plc has contacted you for investment advice. She is undecided whether to take up the rights issue, sell the rights or allow the rights offer to
In considering Goodsports Ltd (in Example 7.3), we saw that the general clothes department should not be closed ‘without any other developments’.What ‘other developments’ could affect this
What factors, other than the immediately financially quantifiable, would you consider when making a make-or- buy decision?
Now assume that Shah Ltd (Activity7.22) has no spare capacity, so it can only produce the component internally by reducing its output of another of its products. While it is making each component,
Shah Ltd needs a component for one of its products. It can outsource production of the component to a subcontractor who will provide the components for £20 each. Shah Ltd can produce the components
A business makes three different products, the details of which are as follows:Fixed cost is not affected by the choice of product because all three products use the same machine. Machine time is
Paul was unemployed and unable to find a job. He therefore decided to embark on a business venture. With Christmas approaching, he decided to buy gift wrapping paper from a local supplier and to sell
On Thursday, the fourth day of his business venture, Paul, the street trader in wrapping paper (see earlier in the chapter, p. 25), bought more inventories for £530 cash. During the day, he sold

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