FM202: Small Business Finance

Faculty of Business and Economics / School of Accounting & Finance

Final Examination Revision Package

Semester 2, 2018
Face-to-Face & Blended Mode

**All the best**

Theory

For theoretical section including Multiple Choice, students should focus more on the tutorials and chapter
readings as provided in the format and guide.

For Case Study, the following case studies are good guides to study for this section:
How an entrepreneur found a market niche (T10)
A start-up addict learns from experience (T8)
Take a number (T7)
Just screening for success (T6)
The need for financial control (T4)
Calculations

Question 1

Two years ago you invested in a start-up called Eat-Fresh. Today, Eat-Fresh has become one of the popular
eating hangout places in Suva. Due to popular demand, you are considering opening an outlet at Damodar
City. You plan to have an investment period of 5 years. After a thorough feasibility study, you gather the
following information:
 Leasing a shop would involve payment of $55,000 per year for 5 years.
 Another shop, identical to the shop being offered on lease and located just next door, is up for
sale and the current owners are asking a cash price of $240,000. To consider this option, you
would need to obtain a SME loan under Eat-Fresh for the full amount at 6% per annum with annual
ordinary repayments. Interest is applied using reducing balance method.
 Other costs associated with buying the shop would be per year maintenance costs of $2,000.
 As per local tax laws, the applicable tax rate is 20% and straight-line depreciation is allowed.
 After-tax cost of capital would be 3%.

Required:
1. If you consider buying the shop, prepare an amortization table (using the format below) to show
repayment of SME loan over the 5 years.
Period Opening Total Interest Principal Closing
Principal Repayment Repayment Balance

2. Calculate the present total cost of buying the shop.

3. Calculate the present total cost of leasing the shop.
4. Based on (1) above, what would be your final decision?
 Question 2

ABC Ltd. 2017 Income Statement

Sales $205,227
Cost of Goods Sold 138,383
Depreciation 5,910
Earnings before Interest and taxes $60,934
Interest paid 1,617
Taxable Income 59,317
Taxes 20,760
Net Income $38,557

Dividend $14,300
Addition to retained earnings 24,257

ABC Ltd. Balance Sheets as at 30 June 2016 and 2017

2016 2017 2016 2017
Assets Liabilities & Owner's Equity
Current Assets Current Liabilities
Cash 4,607 4,910 Accounts Payable 3,413 3,846
Accounts Receivable 6,702 8,149 Notes Payable 2,768 3,416
Inventory 17,357 19,350 Other 138 165
Total $28,666 $32,409 Total $6,319 $7,427
Fixed Assets Long-term Debt $22,500 $19,000
Net Plant & Equipment $58,688 $76,810 Owner's Equity
Ordinary Shares 38,000 38,000
Retained Earnings 20,535 44,792
Total $58,535 $82,792
Total Assets $87,354 $109,219 Total Liabilities & Owner's Equity $87,354 $109,219
Calculate:

1. Current Ratio
2. Quick Ratio
3. Cash Ratio
4. Total Debt Ratio
5. Debt-Equity Ratio
6. Equity Multiplier
7. Total Asset Turnover
8. Profit margin
9. Return on Equity
10. Return on Assets

Question 3

Ben’s Trading Ltd. is a successful SME dalo exporter and the company has been growing. The company
has recently been working on its capital structure so it can finance its’ business growth sustainably. With
the help of the accountant, the company has set a target debt-equity ratio of 0.60. Its cost of equity is
14% and its cost of debt is 9%. The tax rate is 30%.

a. Calculate the company’s WACC under a classical tax system?

b. After consultation with Ben, the accountant is proposing a WACC of 9.3% with the company’s cost of
equity and debt to be 10.25% and 5.5% respectively. The tax rate is 30%. Calculate Ben Trading’s target
debt-equity ratio.
Question 4
You currently have two small business ideas in mind, either to start up a small grocery shop or a pre-loved
clothes shop. After analysing the two investment options, you seek assistance from your friend who is a
Finance Analyst and he provides you with the following projections:

Year Small Grocery Shop Pre-Loved Clothes Shop

0 (268,000) (268,000)
1 130,000 93,000
2 116,000 107,000
3 98,000 120,000
4 90,000 131,000
5 100,000 110,000

Required Return = 11%

a. Calculate the Payback Period of each project. Assume you desire a 2.5 year cut-off period, explain
which project you would choose based on this criterion.

b. Calculate the Profitability Index of each project. Explain which project you would choose based
on this criterion.

c. Calculate the NPV of each project. Explain which project you would choose based on this criterion.

d. Based on all the above investment criteria’s, which project would your finally accept and why?