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SCHOOL OF BUSINESS AND LAW

BSC (Hons) In Business Management

SEMESTER 1- EXAMINATION 2023/2024

Financial Decision Making in Business

MODULE NO: BAM4013

Date: 04 June 2024 Time: 1400-1700

INSTRUCTIONS TO CANDIDATES

There are Four questions on this paper. Answer all questions in the provided
answer booklet. Please do not write answer or tick on the questions paper as
it will be disregarded.

You are allowed to bring a note of portfolio into the examination Hall.
Non-Programmable calculators are allowed.

The exam duration is 3 Hours.

Total Marks: 100

All Four questions equally carry the same marks.

(Please read the instructions to all questions carefully before answering)

The Ratio analysis Formula and Present Value discount Factors embedded with the Questions Paper
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Question 1
Part-A
Robert company Ltd is considering which of two projects it should accept. You are
the Finance Director (FD) and have decided that the project with the higher NPV
should be chosen, whereas the Managing Director (MD) thinks that the premise is
inaccurate because both projects have the same length of life. The director
anticipates a cost of capital of 10% cashflows of the projects are as follows:
Additionally, the director plans to apply the two main methods of appraisal analysis:
Net Present Value (NPV) and Payback Period. (25 Marks)
Year Project A Project B
0 (100000) (100000)
1 40000 20000
2 40000 30000
3 20000 50000
4 10000 40000
5 10000 30000

Required:
a) Calculate the NPV for projects A and B (3 Marks)
b) Calculate the Payback Period for Projects A and B (3 Marks)
c) Explain the outcomes in (a) and (b) above. (3 Marks)
d) Evaluate the merits of NPV over Payback Period and dispel the managers
director’s confusion. (6 Marks)
Part-B
Answer the Multiple-Choice Questions
(i) What is the difference between cash inflow and outflow? (3 Marks)
a) Receipts from sales and purchase of assets and expenses
b) Receipts on purchases of assets and expenses
c) Purchases and payments of assets and expenses

(ii) Why is the NPV method of investment appraisal superior to all others?(2
Marks)
a) It considers time value of money.
b) It is based on the cash flow of the payback period.
c) It leads to the minimisation of the shareholder’s wealth.

(iii) Which of the following is a decision rule for NPV? (2 Marks)

a) If NPV is zero, the project breaks even.

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b) If payback period is zero, the project breaks even.

c) If NPV is negative and payback is positive, the project is viable.

(iv) Capital investment project is the spending of money now to receive

benefits (or reduce costs) in future years. (3 Marks)
a) True
b) False

Question 2
Businesses keep various financial records to test the strengths and weaknesses in
performances using ratios of the business and to ensure that taxes are paid. These
records include income statements (Table 1) and Statements of Financial Position
(Table 2). (25 Marks)
Table 1: Income Statement (Profit and Loss)

Carl Company Ltd

Income Statement for the year ended 31 December

2021 2022
£ £
Revenue 64000 56000
Cost of sales 42000 34000
Gross profit 22000 22000
Operating Expenses 15000 13000
Operating Profit 7000 9000
Finance cost (Interest payable) 2200 1300
Profit before tax 4800 7700
Tax Carl Company Ltd 350 600
Net Profit
Statement of financial position as at4450
31 December 7100
2021 2022
£ £
Non-Current Assets (Fixed 13850 13600 Table 2:
Assets) Statement of
Financial
Current Assets: Position
Inventory 14000 13500 (Balance
Receivables 16000 15000 Sheet)
Cash and cash equivalent 500 500
Total Current Assets: 30500 29000

Total Assets 44350 42600

Equity and Liabilities:

Equity 14350 14000
Non-current Liabilities 6000 6500
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Current Liabilities:
Trade payables 20000 19100
Tax payables 4000 3000
44350 42600
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Required:
Part A:
Answer the Multiple-Choice Questions (MCQ) below:
Write the answer only for example (i) a b or c
(i) What does an income statement show? (2 Marks)

a) The financial performance of a business

b) A sales projection for a business
c) The value of a business

(ii) What must be taken away from sales revenue to show the gross profit of a
business? (3 Marks)
a) Expenses
b) Expenses and cost of sales
c) Cost of sales

(iii) Select which type (below) is legally required to produce and publish an income
statement? (2 Marks)
a) Partnership
b) Sole trader
c) Limited company

(iv) Which of the following formulas is referred to as a current ratio? (3 Marks)

a) (current assets – closing inventory)/ current liabilities.
b) current assets/ current liabilities
c) cost of sales/ average inventory

Part B: Calculation of Ratios

(a) Using Tables 1 and 2, calculate the different ratio categories listed in Table 3
below for 2021 and 2022. (12 Marks)

(Show your workings on Table 3)

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b) Based on the outcome in Question A of Part-B: Evaluate the trend in

performance for 2021 and 2022 in relation to the ratio types calculated. (3 marks)

Table 3: Ratio Analysis

Profitability Ratios: 2021 2022
Gross profit margin
Net profit margin
Liquidity Ratios:
Current Ratio
Quick Test (Acid Test)
Efficiency:
Receivable collection
period
Payable payment period

Question 3
Mehedi Company Ltd uses Break-even analysis (also known as Cost-Volume-Profit
(CVP) analysis) to study the effects on its future profit in respect to changes in fixed
cost, variable cost, sales price, and quantity. This helps the company in its short-term
decision making. (25 Marks)
Part A:
Answer the MCQs on Breakeven by selecting the right choice.
(i) What is the break-even point? (2 Marks)

a) The point at which a business makes a profit.

b) The point at which a business makes a loss.
c) The point at which revenue and total costs are the same, meaning the
business makes neither a profit nor a loss.

(ii) Choose the correct formula for computing break-even point? (3 Marks)
a) Variable costs ÷ (selling price − fixed costs)
b) Fixed costs ÷ (selling price − variable costs)
c) Selling price ÷ (fixed costs − variable costs)

(iii) If fixed costs are £21,000, the selling price is £7 and the variable cost is £4
per unit, what is the break-even point? (3 Marks)
a) 7,000 units
b) 4,000 units
c) 4,500 units

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(iv) What does the margin of safety show? (2 Marks)

a) The amount by which sales exceed the break-even point.
b) The number of sales a business needs to make to break even.
c) The maximum number of sales a business can make.

Part B:
Mehedi Company Ltd would like to improve its sales for toiletries. The following data
are available in Table 4:
Table 4:
Carson soap Dove soap
Sales Volume Units 4300 5600
£ £
Unit Selling Price 8 10
Unit Variable Costs 4 5
Fixed Costs 7000 20000

From Table 4

a) Calculate the Breakeven points (in units) for the coconut and
pomegranate. (6 Marks)
b) Calculate Margins of Safety for the coconut and pomegranate. (5 Marks)
c) Critically review the benefits and drawbacks of Breakeven point. (4 Marks)

Question 4
Mediterranean Ltd (a medium-sized private company) and Oceanic Ltd (a small-
sized private company) both trade in the hospitality industry. The Board of directors
of both corporations are confronting a variety of options to decide on how their
business might be financed to merge their business.

Required:
Part-A
a. Distinguish between merger and acquisition of business with the
examples. (7 Marks)

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b. Categorize and critically discuss the principal sources (long-term and

short-term options) of finance that the above LTD Companies may get
access to. Explanation must come with an example. (8 Marks)

Part-B

1) What is the purpose of a cash budget? (2 Marks)

a) To show planned receipts and payments and to help make decisions.

b) To show the profit or loss of a business

c) To show the value of a business

2) What does business expansion mean? (2 Marks)

a) When a owner sells a share in their business

b) When a business moves to a different supplier

c) When a business increases the size and scale of their operations

3) Which method of growth will allow a business to keep its own values? (2 Marks)

a) Internal (organic)

b) Merger

c) Acquisition

4) Which is a method of internal (organic) growth? (2 Marks)

a) Acquisition

b) Merger

c) Franchising

5) What outcome would you expect if more cash is leaving a business than
coming into it? (2 Marks)

a) A surplus closing balances.

b) Sales will be seen to increase.

c) A closing balance showing a deficit.

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END OF QUESTIONS

RATIO FORMULA

Profitability Ratios Profitability Ratios

Gross profit x 100

Gross profit margin Revenue

Operating profit x 100

Operating profit margin Revenue

Net profit x 100

Return on equity Total equity

Profit from operations x 100

Return on Capital Employed Total equity + Non-current liabilities

Liquidity Ratios Liquidity Ratios

Current assets
Current Ratio Current liabilities

Current assets – inventory

Quick ratio/Acid test Current liabilities

Cash and cash equivalents

Cash Ratio Current liabilities

Efficiency Efficiency

Inventories x 365
Inventory holding period Cost of sales

Receivables x 365
Receivables collection period Revenue

Payable x 365
Payables payment period Cost of sales

An Excerpt of Discount Factor/Present Value Table

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