Aug 2015 Question 4 – Topic 1: Introduction to FMGT

“We will further expand the scope of our efforts to deliver one UNIQLO article of clothing for
every refugee in the world. We will continue donations in the line with local needs the world
over. Having as many customers as possible bring in items for recycling helps steadily widen
the circle of support, we have created for people living in difficult environment.”

(a) Identify the ethical challenge that Uniqlo is addressing. Are Uniqlo’s actions consistent with
the financial goals of a firm? Briefly explain.

The ethical challenge Uniqlo is addressing is Corporate Social Responsibility (CSR). Uniqlo’s
support of the recycling and donating may affect its profits in the short-term in view of the costs
involved – manpower, time and resources. However, in the long-run, there will be increased
customer loyalty, better company image, lower litigation costs, which helps the value of the
firm to be enhanced.

(b) Who are Uniqlo’s stakeholders? Discuss briefly ‘stakeholders’ interest’ as an ethical
challenge faced by financial managers

 Managers of Uniqlo
 Non-manager level employees
 Creditors, suppliers and customers who have a relationship with the firm.

Although the primary goal of the firm is to maximise the wealth of the owners, the interest of
these stakeholders can influence business decisions.

The ‘stakeholders’ interest’ view prescribes that firms make a conscious effort to avoid actions
that could be detrimental to the wealth position of its stakeholders.

(c) List TWO other Corporate Social Responsibility (CSR) activities that firms may undertake.

Uniqlo recovery assistance project and all-product recycling activities. (ACTIVITIES)

Topic 5: Short-Term Financing Question

Memphis Pte Ltd is also considering two short-term financing options:

Option A: Borrow $2,000,000 from a bank which charges 1% interest every 40 days. Assume
that interest is rolled over (compounding) every 40 days.

Option B: Issue a $2,000,000 face value 90-day commercial paper at 5% per annum interest
rate on a discounted basis. Total transaction fees on issuing commercial paper is 1.5% of the
amount issued. Assume interest is rolled over every 90 days.

What are the Effective Annual Rates of the two options above? Which should Memphis Pte
Ltd choose?
Use a 360-day year for computation, and round your answers to 1 decimal place.

Option A

Compounding periods in a year = 360 / 40

=9

EAR = [1 + 0.01]9 – 1
= 9.4%

Option B

Interest = 0.05 x $2,000,000 x (90/360)

= $25,000

Transaction Fee = (1.5/100) x $2,000,000

= $30,000

90-day cost = $55,000 / ($2,000,000 - $55,000) x 100%

= 2.828%

EAR = [(1 + 0.02828)4 – 1]

= 11.8%
(i) The initial cost of investment

$ $
Cost of new machine 520,000
Add: Installation cost 30,000
Total cost of new machine 550,000

Add: Additional Working Capital

Increase in Inventory 20,000
Increase in Accounts Receivable 60,000
Increase in Accounts Payable (30,000) 50,000

Less: Proceeds from sale of old machine (70,000)

Total Initial Investment 530,000

(ii) The annual incremental cash flows

Annual incremental cash flows

(Years 1 to 4)

$
Year 1 300,000 + 90,000 = 390,000
Year 2 300,000 + 90,000 = 390,000
Year 3 350,000 + 90,000 = 440,000
Year 4 350,000 + 90,000 = 440,000

(iii) The terminal cash flows

$
Recovery of working capital 50,000
Salvage value of asset 30,000
Total Terminal Cash Flow 80,000

(iv) The non-discounted Payback Period of the project

Net After-tax Cash Flow

Year
$
0 - 530,000
1 390,000
2 390,000
3 440,000
4 440,000
4 80,000

Payback Period = 1 + (530,000 – 390,000) / 390,000

= 1.36 years
(v) Net Present Value (NPV) of the project. Should the company go ahead with the project?

Net After-tax Cash

Year PVIF @ 10% PV
Flow
0 -530,000
1 390,000
2 390,000
3 440,000
4 440,000
4 80,000