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Financial Management Test 2: Answer ALL Questions

Mustard Berhad's financial statements and dividend policies are analyzed. Based on a residual dividend policy, shareholders would receive RM7.70 per share in dividends this year and the maximum investment the company could undertake is RM20.83 million. With a constant dividend payout ratio, shareholders would receive RM7.29 per share in dividends this year. Royal Yellow Berhad's break-even sales, operating and financial leverage, and earnings per share with a 30% sales increase are calculated. Lemon Yellow Berhad's projected disbursements for August and receipts for September are determined based on sales projections and payment terms.

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404 views3 pages

Financial Management Test 2: Answer ALL Questions

Mustard Berhad's financial statements and dividend policies are analyzed. Based on a residual dividend policy, shareholders would receive RM7.70 per share in dividends this year and the maximum investment the company could undertake is RM20.83 million. With a constant dividend payout ratio, shareholders would receive RM7.29 per share in dividends this year. Royal Yellow Berhad's break-even sales, operating and financial leverage, and earnings per share with a 30% sales increase are calculated. Lemon Yellow Berhad's projected disbursements for August and receipts for September are determined based on sales projections and payment terms.

Uploaded by

hemavathy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Management

Test 2: Answer ALL Questions

Question 1
Mustard Berhad had total earnings last year of RM12,000,000, but expects total earnings to
increase to RM12,500,000 this year because of the launching of new models. There are
currently 1,000,000 shares of common stock outstanding. The company has RM8,000,000
worth of investments to undertake this year. The company finances 40% of its investments with
debt and 60% with equity capital. The company paid RM7 per share in dividends last year.

Required:

a) If the company follows a pure residual dividend policy, how large a dividend will each
shareholder receive this year? What is the maximum investment the company could
undertake without raising additional equity?
(6 Marks)

b) If the company maintains a constant dividend payout ratio each year, how large a dividend
will each shareholder receive this year?
(4 Marks)

Answer:
a) Based on residual dividend policy,
Dividend = Net income – [equity ratio * capital investment]
From question, Net income = 12.5 million; equity ratio = 60%; Investment = 8 million

Hence,
Dividend = 12.5m – 0.6*8 = 7.7m
Dividend per share DPS = Dividend / no. of shares = 7.7m / 1m = RM7.70

At maximum investment M, dividend should be minimum or 0. Hence,

0 = 12.5m – 0.6*M
Solving the equation, M = 12.5m /0.6 = RM20.83 m

b) Last year payout ratio = Dividend (or DPS) / earning (or EPS) (Last year)
= 7/12 (EPS = 12m/1m)
= 0.583
This year DPS = Payout ratio * EPS (this year)
= 0.583 * 12.5 (EPS = 12.5m/1m)
= RM7.29
Question 2
Royal Yellow Berhad reports sales of RM6,000,000, variable costs of RM1,000,000 and
fixed operating costs of RM1,800,000. The company’s total debt is RM2,000,000 with an
interest rate of 10% and its marginal tax rate is 28%.

Required:

a) Calculate the break-even in sales dollar for the firm.


(1.5 Marks)

b) What is Royal Yellow Berhad’s degree of operating leverage, degree of financial


leverage and degree of total leverage at this level of output?
(4.5 Marks)

c) Calculate the new EPS for Royal Yellow Berhad next year when sales increase by 30%.
Currently the firm has 1,000,000 shares outstanding.
(4 Marks)
Answer:
a) Breakeven ($) = Total fixed cost / (Contribution /sales)
= 1.8m / (5m/6m) [contribution = 6m – 1m]
= 2.16 m
[Alternate solution: Fixed cost could include interest cost, which is 2m*0.1 or 0.2m;
Total fixed cost = 1.8m+0.2m = 2m, solve the equation give answer as 2.4m]

b) DOL = contribution / EBIT = 5m / 3.2m [EBIT=5m -1.8m]


= 1.56
DFL = EBIT / (EBIT – Interest) = 3.2m / 3m =1.07
DTL = DOL * DFL = 1.56*1.07 = 1.67

c) If sales increase by 30%, Earning will increase by DTL*30% = 1.67*30% = 50%


Profit (now) = (EBIT – Interest )* (1-t) = 3m*(1-0.28) = 2.16m
Profit (new) = 2.16m*(1+0.5) = 3.24m
EPS (new) = 3.24m/1m = RM3.24

Question 3
Lemon Yellow Berhad projected sales for the second half of 2019 are given below:

July RM1,500,000 Oct RM1,800,000


Aug RM1,600,000 Nov RM1,900,000
Sept RM1,700,000 Dec RM1,800,000

70% of sales are collected in the month of the sale, 25% are collected in the month following
the sale, and 5% are written off as uncollectible. Cost of goods sold is 60% of sales.
Purchases are made the month prior to the sales and are paid during the month the
purchases are made (for example, goods sold in July are bought and paid for in June).

Total other cash expenses are RM120,000/month. Depreciation is RM25,000 per month.
The company’s cash balance as of July 1, 2019 will be RM120,000. Excess cash will be
used to retire short-term borrowing (if any). Lemon Yellow Berhad has no short-term
borrowing as of 30 June 2019.
Assume that the interest rate on short-term borrowing is 1% per month. The company must
have a minimum cash balance of RM100,000 at the beginning of each month. Round all
answers to the nearest RM100.

Required:

a) Based on the information given, calculate Lemon Yellow Berhad’s projected total
disbursements for August.
(5 Marks)

b) What is Lemon Yellow Berhad’s projected total receipts (collections) for September?
(5 Marks)

Answer:
Note: though question ask for August, it is good to show working.
a) Disbursement in August

July August Sept Oct


Sales (‘000) 1500 1600 1700 1800
60% COGS 900 960 1020 1080
Purchased and 960 1020 1080
paid 1-month
Other cash 120 120 120 120
expense
Total collect 1080 1140 1200
Depreciation is a non-cash expense, hence exclude from cash budget.

b) Receipts in September

July August Sept Oct


Sales (‘000) 1500 1600 1700 1800
70% current 1050 1120 1190 1260
25%1-month 0 375 400 425
Total collection 1050 1495 1590 1685

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