Birmingham Business School

MSc International Business - Dubai

07 30480
A 33989

International Finance and Accounting

Exam Paper

Date: 28th May 2022

Time Allowed: 1 hours

The examination consists of a single question with several tasks. The questions are
designed to test both Accounting and Finance and all sections are compulsory.
The allocation of marks within each question is stated in the question sheet.

PLEASE START THE ANSWER TO EACH QUESTION ON A SEPARATE PAGE

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Question 0ne (must attempt each task)
Mr Prince have been in business in the UAE for over 25 years and in that period, he has
acquired a diverse portfolio of investments.
You are part of the strategic planning and operations team. The role of the team is to
provide advice on new projects, resources allocation and the strategic review of existing
portfolio of the business.
As part of the strategic review for the next AGM, Mr Prince wants a review of the entire
business. The Financial Director has assigned you the following tasks. Each of these
tasks are based on issues identified as part of the initial review of the business
operations.

Task 1: Introduction of a new product

A Ltd, 100% owned by Mr Prince, assemblies and sell toys. The company is planning
on introducing a new product in 2023. The capacity of the plant is 4000 toys per
period. The projected sales data and product cost is as follows:

Selling price 50
Direct material 15
Direct labour 10
Variable overhead 5

The estimated fixed overhead for the new product is £40,000

Required:
(i) Based on the above data, calculate the break-even point (BEP) in units? (4)

(ii) The aim is to use the full capacity of the plant. As it is a new product, the
marketing manager is suggesting that we reduce the selling price by 10%.
What would be the break-even point if this proposal is accepted? (6)

(iii) Mr Prince expects a minimum return of 15% on every investment. The

initial investment for the product is £100,000.
a. Calculate the amount in units that must be sold in order to have the
desired return in investment. (3)
b. A profit statement to show that the required return will be achieved (4)

(iv) Comment briefly on any non – financial factor that should be taken in to
consideration when making these decisions. (3)
(20 marks)

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Task 2 - Managing scarce resources
Mr Prince acquired Alma Ltd 10 years ago. It manufactures three (3) products – J, M
and C. The products are different but all required a specific finish. The finishing process
is the only mechanised part of the production process. As part of the strategic review,
the business will be investing in new machines for the finishing department and some
of the existing machines will be decommissioned. As a result, available machine hours
will be restricted to 2,500 hours.
Information is given below of each product:

Products
(Per unit in £)

J M C

Selling price 60.00 34.00 42.00

Variable cost 26.00 12.00 18.00

Fixed production cost* 20.00 16.00 12.00

Other fixed cost 4.00 2.00 7.00

Profit 10.00 4.00 5.00

* The production overhead is charged to the product based on machine hours

using a rate of £4.00 per hour.

Budgeted production for the 300 180 200

period (per product)

Required:
(i) Based on the current availability of machine hours, prepare a brief report
advising on the production plan that will optimise the profit during the
period of the planned improvement. (You must include all relevant
calculations)
(20 marks)

(ii) Discuss briefly two sources of finance that might be available to Alma Ltd.

(10 marks)

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Task 3 Acquiring a new business
Mr Prince is considering acquiring a Start-Up company (US-based) since he is aiming at
a strategic vertical integration within the Food Processing Industry. The CFO of the
target company, Ayla PLC, provided you with the forecasted projected results for the
next five financial periods (we assume the company will only last 5 years with no residual
value at the end of its existence).
Further analyses proved that.:
- the 3-month US Treasury bill is currently traded at a 0.5% rate
- the average S&P 500 index return is 6%
- AYLA Plc Reported the following results in the last annual report
o Assets: 500,000
o Equity: 150,000
o Debts: 350,000 (no trade liabilities recorded)
o Interest expenses 14,000
o Average Income tax rate: 20%
- Damodaran’s Website reported updates in the section “Total Betas by Sector (for
computing private company costs of equity) – US” are presented in the Appendix.

Required:

(A) Calculate the Cost of Equity (re) for Ayla PLC using:
(i) CAPM (10 marks)

(ii) WACC (10 marks)

Below are listed the Values (both nominal and already discounted) of the EBIT and Net
Earnings for AYLA PLC.

(B) Determine the Equity Value and the Enterprise Value of Ayla Plc
(10 Marks).

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(C) Given that the owner of Ayla Plc (currently holding 100% of the shares) is willing
to sell the total amount of the company’s shares at a market price not lower than
$200,000, advise Mr Prince if the purchase of this company is a good deal (make
reference to the results of Task B).

Required:

(i) Calculate the Net Present Value of the potential investment

(10 Marks)
(ii) Justify your investment decision and provide suitable comments
(10 Marks)

[Total marks = 100]

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Appendix – Damodaran’s Website Results

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