Mackenzie Limited manufactures and sells marine equipment. Its income statement for the year 2015 and balance sheet as of December 2015 are shown below:

 

 

Income statement for the year 2015

 

 

 

Balance Sheet as of December 31, 2015

 

 

 

 

Question 1

 

Assess the amount of new equity to be issued if:

 

Sales are expected to increase by 20%.

 

Cost of goods sold, Selling and Administrative Expenses, Inventory, Receivables, and Accounts Payables will increase in the same proportion as sales.

 

New fixed assets will be purchased for $1 million which will be depreciated over 4 years to zero salvage value.

 

The cash balance will be maintained at $ 1 million by the end of 2016.

 

The amount of long-term and notes payable will remain the same and so will the interest payment.

 

Additional financing will be provided by issue of new equity.

 

Assume that the dividend pay-out ratio remains constant.

 

(20 marks)

 

 

Question 2

 

As part of its overall planning, the company prepares its cash budget every month. The details for the 3 months, July, August and September are shown below:

 

 

 

 

 

 

One quarter of the firm’s sales are for cash and the balance is received one month later. All credit purchases are paid for with one month delay.

 

Prepare cash budget for July to September.

(20 marks)

 

 

 

 

Question 3

 

Examine the factors that should be considered while the company is planning its capital structure.

 

(15 marks)

 

 

 

 

 

 

 

 

Question 4

 

Mackenzie Limited is considering a project to supply 25,000 tons of machine screws annually to its major customer. It requires an initial $3,600,000 investment to get the project started. This project will last for 5 years. It is estimated that annual fixed costs will be $850,000 and that variable costs will be $185/ton. The fixed assets will be depreciated using straight line depreciation to zero salvage value over 5 years. The estimated salvage value at the end of 5 years is $500,000.

 

The marketing department estimates that the selling price will be $280 per ton. It is estimated that the net working capital of 10% of sales will have to be provided at the beginning of the project which will be recovered at the end of the project.

 

The beta of Mackenzie Limited is 1.2. The risk free rate is 5% and the market risk premium is 7%.

 

Estimate the relevant cash flows and calculate the net present value and recommend the decision about this project.

 

(20 marks)

 

 

Question 5

 

Mackenzie Limited plans to raise the needed funds of $3,600,000 through issue of new shares in the form of rights. The company plans to set the subscription price 10% below its current market price of $12 per share. The number of shares outstanding is 1 million.

 

Apply the technique of rights issue by calculating:

 

The number of new shares to be issued

 

The number of rights to be issued to buy a new share

 

Value of right

 

(15 marks)

 

 

 

 

Question 6

 

Analyse how the concepts of the degree of operating leverage and financial leverage are important for management decisions.                                                                       (10 marks)