GRIFFITH COLLEGE DUBLIN

GRIFFITH COLLEGE CORK

GRIFFITH COLLEGE LIMERICK
GLOBE COLLEGE MUNICH

QUALITY AND QUALIFICATIONS IRELAND

EXAMINATION

BACHELOR OF ARTS (HONS) IN BUSINESS STUDIES

STAGE III
FINANCIAL MANAGEMENT
Module Code: BABSH-FM

BACHELOR OF ARTS (HONOURS) IN BUSINESS STUDIES (MARKETING)

STAGE III
FINANCIAL MANAGEMENT
Module Code: BAMH-FM

Lecturer(s): Michael O’Grady/Noel Daly/

David O’Donovan/Michael Grosshans
Ger McCarthy/Eddie Fitzgibbon
External Examiner(s): Theresa Cunningham
Dr Sharon Harris-Byrne

Date: 23rd August 2018 Time: 2.15-5.15

THIS PAPER CONSISTS OF FIVE QUESTIONS

FOUR QUESTIONS TO BE ATTEMPTED
ALL QUESTIONS CARRY EQUAL MARKS

NON PROGRAMMABLE CALCULATORS ARE PERMITTED DURING THIS

EXAMINATION
APPENDIX AT THE BACK OF THE EXAMINATION PAPER

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QUESTION 1
Link plc is a progressive training company with a number of offices in Ireland. It has been approached
by a large international company which has developed a new online training course for senior
management and is willing to partner with Link plc in entering the Irish market.
Link plc wishes to evaluate the possibility of the partnership and has provided you with details of the
proposed new agreement with the international company:
1. Link plc has carried out research on the new courses and has already spent €220,000 in this
evaluation.
2. Link plc will enter a three year licensing arrangement, paying a one-off fee of €450,000 at
commencement.
3. Specialist computer equipment and software must be purchased immediately for €400,000.
This will have an expected resale value of €50,000 at the end of the contract.
4. An annual licensing fee of €50,000 will be paid by Link plc at the end of each year.
5. Link plc’s research on the income potential of the new courses indicate the following:
Year 1 2 3
Number of Clients 2,000 3,500 4,000
Average Income per Course €500 €500 €550
6. A royalty fee of €150 per client must be paid to the international company each year.
7. Link plc must purchase training materials at a cost of €70 per course.
8. A specialist training manager will be employed at an annual salary of €150,000. The manager
will also be paid an annual bonus of €50,000 in any year that the number of clients is greater
than 3,000.
9. A replacement manager will be employed for the four weeks each year while the full time
training manager is on annual leave. This will cost €10,000 per week.
10. Two administrators will be employed at an annual salary of €35,000 each.
11. A contract has been agreed with a maintenance firm. The cost in the first year will be €20,000
each quarter with a 5% annual increase commencing in year two of the contract.
12. Link plc’s cost of capital is 10%.
Link plc assesses potential investments based on a combination of the following criteria:
 A Payback Period within a target of three years, and
 A positive Net Present Value (NPV), using Link plc’s cost of capital of 10%
Required:
(a) Ignoring taxation, prepare a report for the Board of Link plc with your recommendation as to
whether or not it should sign the draft agreement based on the above financial information.
(18 marks)
(b) Outline three non-financial factors the management of Link plc should also consider prior to
making a final decision whether or not to sign the draft agreement.
(7 marks)
Total (25 marks)

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QUESTION 2
Kula is a new company which will commence business from 1st January 2018. In advance of a
meeting with its bank to discuss future funding it must prepare a Cash Budget for the first five months
of operations. It is now December 2017.
The owner of the company will invest €75,000 in initial share capital on 1st January 2018 and has
prepared the following estimates.
1. Sales volumes and unit prices are forecasted as follows:
January February March April May
Units 1,000 1,200 1,500 1,500 1,600
Price €40 €40 €42 €44 €44
2. All sales will be on credit. Based on industry knowledge, 4% of total sales will turn out to be
bad debts. The remaining sales will be split equally between those taking one month credit and
those taking two months credit.
3. Materials represent 45% of total sales revenue and are purchased as required in the month the
sales occur. Credit terms of one month have been negotiated with the supplier.
4. Packaging costs 10% of total sales revenue and is paid in the same month as the sale.
5. A specialist machine costing €72,000 will be purchased in January. The machine has a life of
three years and will be depreciated in the company’s accounts at the rate of €2,000 per month.
The machine supplier will grant one month’s credit.
6. Kula has recently signed a lease for its new premises, at an annual rent of €60,000. The lease
will run from 1st January 2018 and requires Kula to pay the rent in arrears at the end of each
quarter.
7. Kula will hire four staff at an average annual salary of €18,000 each. Staff will be paid on a
monthly basis. As business increases it is expected that a fifth staff member will be hired from
the beginning of April at the same annual salary as the other staff.
8. Distribution costs represent 15% of total sales revenue and will be paid in the month following
sale.
9. To promote the new business Kula will spend €5,000 on advertising and marketing in each of
the first two months of operation. This will be reduced to €2,000 per month from March
onwards.
Required:
(a) Outline three main reasons why a company prepares a Cash Budget.
(6 marks)
(b) Prepare a Cash Budget for Kula for the first five months of 2018, showing the closing cash
balance at the end of each month.
(13 marks)
(c) Suggest three ways by which Kula could improve the cash position for the period as calculated
above.
(6 marks)
Total (25 marks)

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QUESTION 3
Duden has recently carried out a review of its cash position and in particular the amount of credit
which its customers are currently taking.
The current position can be summarised as follows:
 Duden allows credit of 30 days to its customers but on average they take 50 days to pay.
 Bad debts amount to 1.75% of sales value.
 Sales for the forthcoming year are forecasted at €12m.
 Duden uses an overdraft on which the bank charges interest at 12% per annum.
Following the review, in order to improve the cash position Duden is proposing to alter the terms as
follows:
1. The credit period will be relaxed from 30 days to 45 days and the new collection period will be
strictly enforced.
2. As a result of the increased credit period sales revenue is expected to increase by 5% over the
next year.
3. A new credit controller will be hired at an additional cost of €65,000 per annum. This will
enable bad debts to be reduced to 1.50% of sales value.
4. To handle the increased volume it is estimated that additional administration costs of €25,000
per annum will be incurred.
5. There will be no change to the variable cost element of sales, which is currently 80%.
Required
(a) Evaluate the proposed scheme and advise Duden whether it should proceed with its
introduction.
(17 marks)
(b) Outline four sources which may be used by Duden in evaluating the creditworthiness of a
potential new customer.
(8 marks)
Total (25 marks)

QUESTION 4
Nadel is a successful Irish company which has been in existence for a number of years. The most
recent Profit Before Tax was €10m. and this is expected to be repeated next year.
Nadel has recently reviewed an investment opportunity and the results are very attractive. The cost of
the investment is €25m. and Nadel estimates that it will increase the existing Profit Before Tax by 20%
next year.
Nadel has decided to proceed with the investment and is considering the best method of financing the
€25m. cost. Two methods are being considered:
1. Borrow €25m by issuing 7% Loan Stock
or
2. Issue Ordinary Shares at a price of €5 per share

Page 4 of 5
Nadel’s current capital structure is:
€’000
Ordinary Shares (€1) 20,000
Reserves 15,000
10% Loan Stock 10,000
45,000
Nadel pays Corporation Tax at the rate of 20% and has a policy of paying all earnings as dividends to
shareholders.
Required:
(a) Calculate the current Earnings Per Share (EPS) and Gearing (Debt/Equity) of Nadel.
(6 marks)
(b) Calculate the impact on the EPS and Gearing of Nadel for next year if it proceeds with the
investment and finances it by means of:
(i) The issue of 7% Loan Stock, or
(ii) the issue of Ordinary Shares.
(12 marks)
(c) Based on your calculations above, write a report to Nadel on the factors to consider before
deciding how to finance the investment.
(7 marks)
Total (25 marks)

QUESTION 5
(a) Green plc has the opportunity to invest €10m. in a project which will produce expected income
of €2.1m. at the end of each of the next six years and a final lump sum of €3.4m. when the
project ends at the end of year six.
Green plc has a policy of only investing in projects which produce an internal rate of return
(IRR) of 15% or more.
Required
Calculate the Internal Rate of Return (IRR) of the investment and advise Green plc whether it
should accept the project or not.
(9 marks)
(b) Briefly explain the meaning of Factoring and the various services which a Factor may offer
your company.
(8 marks)
(c) Your company is planning to raise €30m. by issuing 9% Convertible Loan Stock. Explain
what this means and outline three benefits to the company of using this method of raising
funds.
(8 marks)
Total (25 marks)

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