Answering Questions

  • Read each question carefully.
  • When you answer a question, your answer will automatically be saved.
  • You can revisit questions and change your answers at any time during the exam.
  • The only permitted characters for numerical answers are:
    • Numbers
    • One full stop as a decimal point if required
    • One minus symbol at the front of the figure if the answer is negative.

              For example: -10234.35

No other characters, including commas, are accepted.

Navigating between questions

  • Click Next Button to move to the next question.
  • Click Previous Button to move back to the previous question.
  • Click on a question number from the Exam Progress Details panel (see next page) to move directly to that question.
  • A message will be displayed when you click to move away from a question which has been partially attempted. You can choose to stay on the question and review your answer(s) or continue.
  • When reviewing your answer(s) for partially attempted questions ensure you read any message displayed in red text below the question in Section A or below the question
    part(s) in Section B
    .

TFR (June 07 – Amended)

TFR is a small, profitable, owner-managed company which is seeking finance for a planned expansion. A local bank has indicated that it may be prepared to offer a loan of $100,000 at a fixed annual rate of 9%. TFR would repay $25,000 of the capital each year for the next four years.

Annual interest would be calculated on the opening balance at the start of each year. Current financial information on TFR is as follows:

Current revenue:

$210,000

Net profit margin:

20%

Annual taxation rate:

25%

Average overdraft:

$20,000

Average interest on overdraft:

10% per year

Dividend payout ratio:

50%

Shareholders' funds:

$200,000

Market value of non-current assets

$180,000

As a result of the expansion, revenue would increase by $45,000 per year for each of the next four years, while net profit margin would remain unchanged. No tax allowable depreciation would arise from investment of the amount borrowed.

TFR currently has no other debt than the existing and continuing overdraft and has no cash or near-cash investments. The non-current assets consist largely of the building from which the company conducts its business. The current dividend payout ratio has been maintained for several years.

Required:

A. Assuming that TFR is granted the loan, calculate the following ratios for TFR for each of the next five years:

(i) interest cover
(ii) medium to long-term debt/equity ratio
(iii) return on equity
(iv) return on capital employed.

B. Comment on the financial implications for TFR of accepting the bank loan on the terms indicated above.

Leave a Reply

Your email address will not be published. Required fields are marked *