Project DEF is a three-year project which has an initial cost of $6,000,000 with depreciation of $2,000,000 p.a. and a scrap value at the end of the project of nil.
Assessments
FNSACC608
Evaluate organisation’s financial performance
FNS60215
Advanced Diploma of Accounting
Based on the prescribed Textbook:
Financial Performance & Risk Analysis
Richard Hughes & Godfrey Senaratne
National Core Accounting Publications (2016)
FNSACC608 Evaluate organisation’s financial performance
Assessment Questions
Question 1
Project cost $50,000
Estimated life 5 years
Annual net profit after tax $15,000
Required rate of return after tax 10%
Tax Rate (payable in the year of income) 30%
Required: Calculate:
(a) Accounting rate of return
(b) Payback period
(c) Internal rate of return
(d) Net present value
Answer:
Question 2
Project DEF is a three-year project which has an initial cost of $6,000,000 with
depreciation of $2,000,000 p.a. and a scrap value at the end of the project of nil.
The average cost of capital is 9% p.a.
The net profit after tax for the project for each of the 3 years is expected to be:
Year l: $2,000,000
Year 2: $3,000,000
Year 3: $4,000,000
Required:
(a) Accounting Rate of Return on original investment.
(b) Calculate the total cash receipts from the project.
(c) The Payback Period.
(d) Internal Rate of Return.
(e) Net Present Value.
Answer:
Question 3
Using the following probability distribution of returns covering different economic conditions.
Conditions Returns %
Company X Market
Good 6 8
Fair 9 10
Average 14 12
Poor 18 15
Required: Calculate the expected return and standard deviation for the company and the market.
Answer:
Question 4
Sleeman Ltd has a capital structure of:
Ordinary shares 6,000,000@$1 $6,000,000
10% debentures $8,000,000
$14,000,000
The company is considering a $6 million expansion program that it can finance with one of the following options:
• All ordinary shares at $1.50 per share. The current market price is $1.80 per share.
• 12% debentures for $2,000,000 and 10$ preference shares for $4,000,000
? Half ordinary shares at $1.50 per share and half 12% debentures
The company tax rate is 30%
Required:
(a) Calculate the earnings per share, for each of the alternative methods of finance, for an EBIT of $5,000,000, which is expected earnings after the expansion.
(b) Construct an EBIT—EPS chart indicating points of indifference
(C) Determine mathematically the indifference points between:
Option 1 and Option 3
(c) Calculate the degree of financial leverage for each option.
Answer:
Question 5
Define a lease contract. Who are parties to a lease? What is their essential rights and obligations?
Answer:
Question 6
What is the difference between a direct and indirect investment?
Answer:
Question 7
What is the difference between marketability and liquidity?
Answer:
Question 8
Jones Ltd. produces a single product which it sells for $75.00 per unit. The
product requires $45.00 per unit in variable costs to produce and sell, and
fixed costs per annum are $720,000.
Determine the unit sales volume necessary to break even.
Answer:
Question 9
The Jacob Corporation is considering a sale and leaseback of its major Sydney
property, consisting of land and building.
Low Row Ltd, an overseas property developer has offered to purchase the
property for $10,000,000 and lease it back to Jacob for $1,250,000 per annum
payable in advance for ten years.
Jacob would continue to pay all rates and maintenance estimated at $200,000 per annum.
It is forecast that the leased asset will increase in value by 35% over the next ten
years.
If the sale and leaseback is not undertaken now, the property will be sold
at the end of the ten-year period. There is no capital gains tax.
The income tax rate is 30% and is paid in the year of income, and the discount
rate 9%.
Required: Should the Offer to sell and leaseback be accepted?
Answer:
Question 10
The directors of Excelsior Corporation are considering expansion of the company. The company will need $500,000 to finance this expansion. The existing capital structure comprises 1,000,000 ordinary shares of $1 and no interest bearing debt.
Three methods of financing are under consideration:
(i) Issue 500,000 ordinary shares of $1.00 each
(i) Issue 13% Debentures.
(iii) Issue 250,000 ordinary shares of $1 each and $250,000 13% debentures
The company's tax rate is 30%.
Required:
(a) Calculate the earnings per share under each alternative assuming earnings before interest and taxes are $400,000
(b) Calculate the degree of financial leverage for each proposal
(C) Calculate the indifference point using (EBIT) between alternatives (1) and (2).
Explain the meaning of your answer.
Answer:
Assessment Mapping
FNSACC608 Evaluate organisation’s financial performance
Element Performance Criteria Questions
1. Evaluate returns to operations 1.1 Trend cash flow and profitability patterns to identify current position and expected returns from investments and projected operations
1.2 Disaggregate averaged returns to assess strengths and weaknesses in organisational performance
1.3 Evaluate investment returns against risk, profit and capital budget requirements Question 1
Question 2
Question 3
Question 4
2. Determine short-term and long-term needs 2.1 Identify resources required by organisation to meet short-term and long-term obligations, and cost using standard financial analysis techniques
2.2 Establish and review financial priorities based on reported performance and identified trends, organisational objectives and expected returns to operations and investments
2.3 Review financial options and conduct analysis of range of possible assets and liabilities to optimise capital mix to support operations and trading need
2.4 Evaluate and document organisational policy and procedures for expenditures and investments to ensure relevance to changing personnel profiles
2.5 Analyse debt to equity targets in terms of organisation’s expected performance and establish in line with organisational objectives using standard accounting techniques Question 5
Question 5
Question 6
Question 7
Question 8
3. Review performance 3.1 Ensure forecasts made are justifiable given observed trends, information, events and assumptions, with standard errors calculated to produce levels of accuracy suitable for planning purposes
3.2 Regularly review forecasts in line with actual performance and alternative sources of information
3.3 Assess risk strategies for long-term viability and harmonise with short-term goals and obligations Question 9
Question 10
FNSACC608
Evaluate organisation’s financial performance
FNS60215
Advanced Diploma of Accounting
Based on the prescribed Textbook:
Financial Performance & Risk Analysis
Richard Hughes & Godfrey Senaratne
National Core Accounting Publications (2016)
FNSACC608 Evaluate organisation’s financial performance
Assessment Questions
Question 1
Project cost $50,000
Estimated life 5 years
Annual net profit after tax $15,000
Required rate of return after tax 10%
Tax Rate (payable in the year of income) 30%
Required: Calculate:
(a) Accounting rate of return
(b) Payback period
(c) Internal rate of return
(d) Net present value
Answer:
Question 2
Project DEF is a three-year project which has an initial cost of $6,000,000 with
depreciation of $2,000,000 p.a. and a scrap value at the end of the project of nil.
The average cost of capital is 9% p.a.
The net profit after tax for the project for each of the 3 years is expected to be:
Year l: $2,000,000
Year 2: $3,000,000
Year 3: $4,000,000
Required:
(a) Accounting Rate of Return on original investment.
(b) Calculate the total cash receipts from the project.
(c) The Payback Period.
(d) Internal Rate of Return.
(e) Net Present Value.
Answer:
Question 3
Using the following probability distribution of returns covering different economic conditions.
Conditions Returns %
Company X Market
Good 6 8
Fair 9 10
Average 14 12
Poor 18 15
Required: Calculate the expected return and standard deviation for the company and the market.
Answer:
Question 4
Sleeman Ltd has a capital structure of:
Ordinary shares 6,000,000@$1 $6,000,000
10% debentures $8,000,000
$14,000,000
The company is considering a $6 million expansion program that it can finance with one of the following options:
• All ordinary shares at $1.50 per share. The current market price is $1.80 per share.
• 12% debentures for $2,000,000 and 10$ preference shares for $4,000,000
? Half ordinary shares at $1.50 per share and half 12% debentures
The company tax rate is 30%
Required:
(a) Calculate the earnings per share, for each of the alternative methods of finance, for an EBIT of $5,000,000, which is expected earnings after the expansion.
(b) Construct an EBIT—EPS chart indicating points of indifference
(C) Determine mathematically the indifference points between:
Option 1 and Option 3
(c) Calculate the degree of financial leverage for each option.
Answer:
Question 5
Define a lease contract. Who are parties to a lease? What is their essential rights and obligations?
Answer:
Question 6
What is the difference between a direct and indirect investment?
Answer:
Question 7
What is the difference between marketability and liquidity?
Answer:
Question 8
Jones Ltd. produces a single product which it sells for $75.00 per unit. The
product requires $45.00 per unit in variable costs to produce and sell, and
fixed costs per annum are $720,000.
Determine the unit sales volume necessary to break even.
Answer:
Question 9
The Jacob Corporation is considering a sale and leaseback of its major Sydney
property, consisting of land and building.
Low Row Ltd, an overseas property developer has offered to purchase the
property for $10,000,000 and lease it back to Jacob for $1,250,000 per annum
payable in advance for ten years.
Jacob would continue to pay all rates and maintenance estimated at $200,000 per annum.
It is forecast that the leased asset will increase in value by 35% over the next ten
years.
If the sale and leaseback is not undertaken now, the property will be sold
at the end of the ten-year period. There is no capital gains tax.
The income tax rate is 30% and is paid in the year of income, and the discount
rate 9%.
Required: Should the Offer to sell and leaseback be accepted?
Answer:
Question 10
The directors of Excelsior Corporation are considering expansion of the company. The company will need $500,000 to finance this expansion. The existing capital structure comprises 1,000,000 ordinary shares of $1 and no interest bearing debt.
Three methods of financing are under consideration:
(i) Issue 500,000 ordinary shares of $1.00 each
(i) Issue 13% Debentures.
(iii) Issue 250,000 ordinary shares of $1 each and $250,000 13% debentures
The company's tax rate is 30%.
Required:
(a) Calculate the earnings per share under each alternative assuming earnings before interest and taxes are $400,000
(b) Calculate the degree of financial leverage for each proposal
(C) Calculate the indifference point using (EBIT) between alternatives (1) and (2).
Explain the meaning of your answer.
Answer:
Assessment Mapping
FNSACC608 Evaluate organisation’s financial performance
Element Performance Criteria Questions
1. Evaluate returns to operations 1.1 Trend cash flow and profitability patterns to identify current position and expected returns from investments and projected operations
1.2 Disaggregate averaged returns to assess strengths and weaknesses in organisational performance
1.3 Evaluate investment returns against risk, profit and capital budget requirements Question 1
Question 2
Question 3
Question 4
2. Determine short-term and long-term needs 2.1 Identify resources required by organisation to meet short-term and long-term obligations, and cost using standard financial analysis techniques
2.2 Establish and review financial priorities based on reported performance and identified trends, organisational objectives and expected returns to operations and investments
2.3 Review financial options and conduct analysis of range of possible assets and liabilities to optimise capital mix to support operations and trading need
2.4 Evaluate and document organisational policy and procedures for expenditures and investments to ensure relevance to changing personnel profiles
2.5 Analyse debt to equity targets in terms of organisation’s expected performance and establish in line with organisational objectives using standard accounting techniques Question 5
Question 5
Question 6
Question 7
Question 8
3. Review performance 3.1 Ensure forecasts made are justifiable given observed trends, information, events and assumptions, with standard errors calculated to produce levels of accuracy suitable for planning purposes
3.2 Regularly review forecasts in line with actual performance and alternative sources of information
3.3 Assess risk strategies for long-term viability and harmonise with short-term goals and obligations Question 9
Question 10
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