Much of the recent discussion of the role of the firm deals with a range of...

   

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Much of the recent discussion of the role of the firm deals with a range of stakeholder interests, rather than the previous emphasis on the shareholder only. Identify two stakeholders other than the shareholders and briefly explain why their interests might conflict with those of the shareholders. [5] Many large companies issue debentures as a means of raising long term finance. These are often quoted on the stock exchange. Describe the risks associated with investing in such debentures. [5] A major quoted company has announced that it has amassed a cash "mountain". It proposes to return this cash to the shareholders 18 months after the date of the announcement. Rather than do so by means of a dividend, the company will buy a proportion of each shareholders' shares back at a small premium to the prevailing market price. (1) (11) Explain why management might want to return cash to the shareholders instead of retaining it in the company. Explain how the company's share price might react to this purchase: (a) (b) on the announcement of the buy-back at the time of the buy-back [4] [8] (iii) Explain why the company might have chosen to purchase shares rather than make a dividend payment of the same amount. [4] (iv) Explain why the company has announced this transaction 18 months in advance. [Total 20] The following balances have been extracted from the books of JK plc, as at 31 August 2005: Advertising Cash at bank Creditors Debtors Directors' remuneration Head office running costs Interest on long term loans Investment income Investments (long term) Long term loans Materials and other manufacturing costs Ordinary dividend paid Ordinary share capital Plant and machinery - cost Plant and machinery - depreciation at 31 August 2004 Premises - cost Premises depreciation at 31 August 2004 Profit and loss at 31 August 2004 Sales Stock at 31 August 2004 Wages and salaries-administrative staff Wages and salaries - manufacturing staff Wages and salaries - sales staff Additional information: £000 90 8 52 134 85 200 9 20 450 400 800 60 900 250 100 1,200 15 374 2,200 210 110 400 55 1. Premises are to be depreciated at the rate of 2% on cost and plant and machinery at 20% reducing balance. The directors of Vapor receive a set of financial statements every month for discussion at their regular board meetings. The report for the month of February has just been prepared, along with comparative figures for the month of January. Income statements for the month of: Revenue Cost of goods sold Operating costs Profit for the month Property, plant and equipment Current assets February £000 Statements of financial position at the end of: February £000 Inventory Trade receivables Cash 900 (368) 532 (240) 292 1,898 32 1,010 1,042 2,940 January £000 700 (175) 525 (250) 275 January £000 1,500 220 720 12 952 2,452 Vapor's directors receive a short table of accounting ratios to accompany their monthly financial statements. The production director has suggested that this table should be extended to include the figure for return on capital employed. The finance director has replied that the return on capital employed ratio should not be calculated on a monthly basis, but should be monitored annually. (i) (ii) (iii) Calculate the following ratios for January and February, making appropriate adjustments to the figures in respect of the information provided concerning the purchase of the new equipment and the sale to the charity: • • current ratio gross profit margin • trade receivables turnover in days • trade payables turnover in days [8] Explain the reasons for the adjustments that you made in part (i) in respect of the information provided concerning the purchase of the new equipment and the sale to the charity. [6] Discuss the finance director's argument that the return on capital employed ratio should be reviewed annually, but not monthly. [6] [Total 20] Much of the recent discussion of the role of the firm deals with a range of stakeholder interests, rather than the previous emphasis on the shareholder only. Identify two stakeholders other than the shareholders and briefly explain why their interests might conflict with those of the shareholders. [5] Many large companies issue debentures as a means of raising long term finance. These are often quoted on the stock exchange. Describe the risks associated with investing in such debentures. [5] A major quoted company has announced that it has amassed a cash "mountain". It proposes to return this cash to the shareholders 18 months after the date of the announcement. Rather than do so by means of a dividend, the company will buy a proportion of each shareholders' shares back at a small premium to the prevailing market price. (1) (11) Explain why management might want to return cash to the shareholders instead of retaining it in the company. Explain how the company's share price might react to this purchase: (a) (b) on the announcement of the buy-back at the time of the buy-back [4] [8] (iii) Explain why the company might have chosen to purchase shares rather than make a dividend payment of the same amount. [4] (iv) Explain why the company has announced this transaction 18 months in advance. [Total 20] The following balances have been extracted from the books of JK plc, as at 31 August 2005: Advertising Cash at bank Creditors Debtors Directors' remuneration Head office running costs Interest on long term loans Investment income Investments (long term) Long term loans Materials and other manufacturing costs Ordinary dividend paid Ordinary share capital Plant and machinery - cost Plant and machinery - depreciation at 31 August 2004 Premises - cost Premises depreciation at 31 August 2004 Profit and loss at 31 August 2004 Sales Stock at 31 August 2004 Wages and salaries-administrative staff Wages and salaries - manufacturing staff Wages and salaries - sales staff Additional information: £000 90 8 52 134 85 200 9 20 450 400 800 60 900 250 100 1,200 15 374 2,200 210 110 400 55 1. Premises are to be depreciated at the rate of 2% on cost and plant and machinery at 20% reducing balance. The directors of Vapor receive a set of financial statements every month for discussion at their regular board meetings. The report for the month of February has just been prepared, along with comparative figures for the month of January. Income statements for the month of: Revenue Cost of goods sold Operating costs Profit for the month Property, plant and equipment Current assets February £000 Statements of financial position at the end of: February £000 Inventory Trade receivables Cash 900 (368) 532 (240) 292 1,898 32 1,010 1,042 2,940 January £000 700 (175) 525 (250) 275 January £000 1,500 220 720 12 952 2,452 Vapor's directors receive a short table of accounting ratios to accompany their monthly financial statements. The production director has suggested that this table should be extended to include the figure for return on capital employed. The finance director has replied that the return on capital employed ratio should not be calculated on a monthly basis, but should be monitored annually. (i) (ii) (iii) Calculate the following ratios for January and February, making appropriate adjustments to the figures in respect of the information provided concerning the purchase of the new equipment and the sale to the charity: • • current ratio gross profit margin • trade receivables turnover in days • trade payables turnover in days [8] Explain the reasons for the adjustments that you made in part (i) in respect of the information provided concerning the purchase of the new equipment and the sale to the charity. [6] Discuss the finance director's argument that the return on capital employed ratio should be reviewed annually, but not monthly. [6] [Total 20]

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Answer Question 1 1 Two stakeholders other than shareholders are employees and customers Employees may prioritize job security fair wages and benefits which could conflict with shareholders interests ... View the full answer