Professional Documents
Culture Documents
June 2006
delivered locally, recognised globally
Mark Scheme
Larnaca Limited
Profit and loss account for year ended 31 March 2006
Working
Turnover
900000
Cost of sales*
560751
Gross profit
339249
213100
Administrative expenses*
W1
OF
145100
68000
Working
Admin Exps
W2
R of Directors
32000
Office Exps
74800
Depr on Prem
12000
Depr on Mach
25500
2800
OF
123349
11000
W2
112349
Interest payable
10000
Int on Loan S
102349
Int on Debs
OF
Dividends
Retained profit for the year
R of Auditors
OF
Corporation tax
Profit on ordinary activities after tax
800
OF
126149
Interest payable*
W1
OF
145100
800
2000
2800
Retained earnings brought forward
19000
102349
OF
121349
W3
Shop at cost
Fixed Assets
Tangible
Leasehold workshop*
W3
OF
108000
Machinery*
W4
OF
117500
Current Assets
Stock
Prepaid expenses
Debtors
86000
700
95200
Cash at bank
25789
207689
225500
OF
W5
OF
76840
OF
OF
356349
25000
10000
8% Loan stock
W4
Machinery
160000
+additions
-prov for depr
10000
-52500
117500
Creditors
50500
Accruals
Corp Tax
Prop Dividend
5340
11000
10000
76840
(no if incorrect
headings for cl and
ltl)
20x=10 marks
35000
321349
Financed by:
Capital and reserves:
Share capital
Retained earnings
OF
200000
121349
321349
72000
108000
O
F
W5
130849
180000
(b) Assess the value to Larnaca Limited of retaining profits at the end of its
financial year.
Up to 12 available in total.
Award up to 6 for reasons for retaining profits
Award up to 4 for reasons for alternatives to retaining profits (share dividend)
Award up to 2 for conclusion
Reasons for retaining profits
To provide funds for the growth of the company
To provide for the replacement of fixed assets
To provide for dividends in the future if in a given period there are not enough
profits
Can be used to issue bonus shares
Award up to 2 for a relevant pointmax 3 points and max 6
Reasons for alternative...i.e. paying share dividend
To reward shareholders for investing in firm
To encourage further investment by shareholders
Award up to 2 for a relevant pointmax 2 points and max 4
Conclusion
Award up to 2 for an appropriate conclusionmust be related to Larnaca Ltd
Example
Larnaca Ltd is in a position both to retain profits for the reasons given above and to
distribute dividend . I would advise taking a middle line between the two so that
the shareholders are satisfied with both the present (in terms of dividend) and the
future (in terms of investment from retained profits)
Total 12 = 6 marks
Total 26 marks
Question 2
(a) In the books of Sun Ltd
Realisation Account
Jan
1
Buildings
Machinery
Stock
Debtors
Bank
Sundry Shareholders (Pr on
Rls)
Jan
1
SunLand Ltd
70000
20000
2300
1500
18800
Creditors
SunLand Ltd
(PP)
4600
148000
c
c
0F
152600
100000
8000
40000
148000
Total 14
(a) + (b)
Calculation of Purchase Price
Goodwill
Buildings
Machinery
Vehicles (40 000 - 3
800)
Stock
Debtors
Bank (12 000 + 3 000)
Less Creditors
PURCHASE PRICE
2300
1500
18800
152600
4600
148000
296000
Total shares
OF
40000
15260
0
Sun Ltd
20000
90000
20000
Land
Ltd
14000 c
80000 c
36200
21000
14050
15000
180250
3450
176800
c
c
c
c
c
0F
353600 OF
Double
10 x = 5 marks
PP
649600
c
c
OF
(c)
Balance Sheet of SunLand Limited at 1 January 2006
Fixed Assets of(nc)
Buildings
90000
Machinery
100000
Vehicles
36200
Goodwill
34000c 260200
OF
c
c
Bank
Less Current Liabilitiesof(nc)
Creditors
Net Current Assets
23300
15550
33800
c
72650
c
c
c
OF
8050 c
Financed by
Share Capital
649 600 shares of 50 p each
64600 OF
324800
324800 OF
Total 16
(d) Sunland Limited intends to raise 200 000 for investment. The intention is to
issue 160 000 ordinary shares at a premium of 75p per share or issue 200 000 1 6%
Redeemable Debentures. Evaluate the relative strengths of each method and
recommend an appropriate course of action.
Up to 12 available in total
Award max 6 for relative strengths of ordinary shares
Award max 6 for relative strengths of debentures
Overall max 10
Award up to 2 for conclusion
Relative strengths of Ordinary shares
In comparison to debentures there is no necessary charge on the firm since
ordinary dividend is an appropriation of profit (and need not be made) rather than
a charge like debentures
There is no need to repay the share holders (unlike debenture holders) at some
time in the future
Relative strengths of Debentures
Since debentures do not carry a vote ..there is no possible loss of control for the
Directors (unlike with ordinary shares)
Debentures can be considered more secure than ordinary shares because debenture
holders will be repaid before ordinary shareholders
Debentures may be secured on the fixed assets again giving greater security in
the event of winding up
Conclusion
Up to 2 for an appropriate conclusion selecting and justifying a course of action.
12 = 6 marks
Total 26 marks
Question 3
(a)
Apr 15
Apr 20
Apr 30
Mar 31
Dec 1
May 1
May 1
Ord Sh Cap
Bank
Ord Sh Cap
Balance c/d
Bonus Shares
Ord Sh Cap
Share Prem
50000
67500
117500
100000
37500
75000
37500
250000
combine
is OK
95000 OF
595000
595000 OF
20000 cash/bank OK
75000
95000
112500
112500
Ord Sh Cap
95000
OF
Dec 1
Share Prem
95000
2 for all dates correct OF
28 =14 marks
(b) Show your calculation of the dividend payable on the ordinary shares
for year ended 31 March 2006.
10% of ord share capital held for 1 Yr
% Divi
Dividend
Ordinary share capital held for
one Year
250000
0.1
25000
Rights and Bonus shares
TOTAL
345000
0.05
17250 OF
42250 OF
6 = 3 marks
P/L Appropriation
Ord Share Divi
Being provision of Ordinary share dividend
Mar 31
Dr
42250 OF
Cr
42250 OF
42250 OF
42250 OF
6 = 3 marks
Question 4
(a)
BEP
=
BEP =
Fixed Cost
Contribution
360 000
30 - 12
360 000
18
BEP =
20,000
Calculation of Profit
Total
Contribution
50 000 x 18
less Fixed
Costs
PROFIT
OF
900 000 OF
360 000
540 000 OF
6 x = 3 marks
200 000
30 - 18
200 000
12
BEP =
16,667
OF
Question 5
Sylett Supplies
Cash Budget for 2 months Ended 30 September 2006
August
September
Receipts
Sales
21000
15250
Dividend from investment
2000
Total Receipts
21000
17250
Payments
Purchases
17000
13000
Wages
3600
3500
Expenses
2800
3200
Interim dividend
5000
Total
23400
24700
Balance b/d
Receipts less Payment
1000
-2400
-1400
-7450
Balance c/d
-1400 OF
-8850 0F
14 = 7 marks
(b) Using the cash budget, indicate whether Sylett Supplies Ltd will be in a
position to pay the interim dividend.
Sylett supplies will not OF be in a position to pay the interim dividend because if it
does so it will be overdrawn on cash by 8850 according to the cash budget given
above OF
2 x = 1 mark
(c)
Forecast Profit for 2 months ended
Sales (15000 + 7000)
less expenses
Purchases (12000 + 14000)
Wages (3200 + 3600)
Expenses (2800 + 3200)
add dividend from investment
Net Loss
30 September 2006
32000
26000
6800
6000
38800
2000
-4800
10 x = 5 marks
of(nc)
Total 16 marks
Question 6
(i) Calculate the earnings per share
Earnings per share =
1136 - 360
16 000
of
4.85p
(ii) Calculate the price earnings ratio
Price earnings ratio =
Market price
Earnings per share
64p
4.85p (OF)
of
13.2
(iii) Calculate the dividend yield
Dividend yield =
9 000
x 100
19 060
of
of
47.2%
(b) Commenting on the price earning ratio, dividend policies, and gearing advise
Andreas in which company to invest.
Up to 4 for each appropriate comment made on each of the 3 elements max 12
Award 1 for decision based on comments
Award up to 3 for summarising giving a conclusion
Total 16 = 8 marks
Example
P/E Ratio
The p/e ratio shows that investors have more confidence in the management and
prospects of Athena plc The chances are, therefore, that this confidence will
translate into more improvement in the price of shares in Athena plc
Dividend policy
Athena plc is pursuing a more prudent and sustainable dividend policy. While
earning 6.4p per share, it is paying a dividend of only 4.5 p per share. As the
dividend cover ratio shows, it will be able to maintain this level of dividend.
Thessaloniki plc on the other hand is earning 4.85p per share and paying a dividend
of 5p per share. Even at current levels of earnings its dividend policy is not
sustainable
Gearing
Athena plc is not geared at all. Thessaloniki plc is significantly geared (though not
highly geared). Any downturn in performance will, therefore, have a more
than proportionate impact on the amounts available to ordinary shareholders in
Thessaloniki plc.
Total 12 = 6 marks
Decision and Conclusion
My comments indicate that on the basis of these three ratios Andreas should invest
in Athena plc
The p/e ratio is higher, the dividend per share, although lower, is sustainable
and the gearing protects the ordinary shareholder against a downturn in profits
Total 4 = 2 marks
Question 7
(a) Distinguish between each of the following investment appraisal methods:
(i)
payback period;
(ii)
accounting rate of return.
Award up to 3for acceptable definition
Example
(i) payback period is the amount of time it takes to recover or receive the
income in cash required to match the amount spent on the investment
(ii) accounting rate of return is the average profit expressed as a percentage
of the capital invested in the project
6 x = 3 marks
(b) Calculate the net cash flows of the
machine
Cash inflow
Cash outflow
2007
105000
75000
2008
144000
90000
2009
153000
102000
replacement
8 x = 4 marks
14552
( )
c ..of(nc)
Others
Estimated total profit
Estimated initial investment
Gearing =