FIN203 Tutor-Marked Assignment

You must answer ALL questions. (Total 100 marks)

Question 1

At a recent board meeting of Bedok Limited, the CEO made the following remark ‘When it comes to making financial decisions, our primary goal is to increase our market share.’

(a) Discuss, in a balanced manner, your views regarding the CEO’s remark.
(6 marks)

Bedok Limited is one of the major supermarket chains in Singapore and is listed on SGX Mainboard. Pioneer Pte. Ltd. is Bedok’s competitor, but it is a private company that is closely owned by the Tan family.

(b) Examine which company will suffer from the agency problem, and the costs associated.
(8 marks)

The Statement of Profit or Loss and Statement of Financial Position of Bedok for FY 2020 and 2019 are shown below. An extract of the Statement of Cash Flows is also included.

Statement of Profit or Loss

2020

2019

$’000

$’000

Revenue

1,393,998

991,284

Cost of sales

(1,012,140)

(724,426)

Gross profit

381,858

266,858

Other income

41,243

8,933

Selling and distribution expenses

(7,222)

(7,669)

Administrative expenses

(245,159)

(172,787)

Other expenses

(4,580)

(2,752)

Operating profit

166,140

92,583

Finance expense

(2,016)

(2,014)

Finance income

984

1,338

Profit before tax

165,108

91,907

Tax expense

(25,975)

(16,152)

Profit for the year

139,133

75,755

Statement of Financial Position

2020

2019

$’000

$’000

Property, plant and equipment

340,299

356,189

Inventories

77,911

82,166

Trade and other receivables

19,949

17,981

Cash and cash equivalents

253,901

76,419

Total assets

692,060

532,755

Share capital

235,373

235,373

Reserves

(65,522)

(66,298)

Accumulated profits

205,248

146,285

Equity

375,099

315,360

Deferred tax liabilities

3,615

3,042

Term loan

15,000

0

Lease liabilities

23,129

30,239

Non-current liabilities

41,744

33,281

Trade and other payables

208,089

140,766

Current tax payable

29,754

16,605

Term loan

15,000

0

Lease liabilities

22,374

26,743

Current liabilities

275,217

184,114

Total equity & liabilities

692,060

532,755

Statement of Cash Flows (Extract)

2020

2019

$’000

$’000

Cash flows from opearting activities

274,148

117,322

Cash flows used in investing activities

(16,117)

(52,182)

Cash flows used in financing activities

(80,549)

(75,906)

Net increase/(decrease) in cash

177,482

(10,766)

Cash at the beginning of the year

76,419

87,185

Cash at the end of the year

253,901

76,419

(c) Compose a memorandum to the Board analyzing Bedok’s liquidity, leverage and asset management ratios for FY 2020 and 2019. In doing so, you should at least include the following ratios:

(i) Current ratio

(ii) Quick ratio

(iii) Debt-equity ratio

(iv) Times interest earned

(v) Inventory days

(vi) Receivable days
(22 marks)

(d) Hypothesize the reason(s) why Bedok’s FY 2020 operating profit of $166M is significantly different from cash flows from operating activities of $274M. (Note: Cash flows from operating activities is not in our lecture notes. You might rely on online resource to understand the concept.)
(6 marks)

(e) Decompose Bedok’s FY2020 and 2019 return on equity using the DuPont equation and discuss your observations.
(6 marks)

Question 2

You are planning for retirement over the next 20 years and intend to invest $400 a month in an equity index fund and $200 a month in a bond index fund. The expected annual return on the equity and bond index fund is 9% and 3% respectively. When you retire, you will combine your money from both the equity and bond index funds into a bank account that pays an interest of 1.2% per year.

(a) Solve the amount you will have on retirement.
(8 marks)

(b) Solve the amount you can withdraw each month assuming a 15-year retirement period.
(5 marks)

(c) Formulate
three (3)
strategies you can adopt to increase the monthly withdrawal amount during retirement period.
(6 marks)

An insurance company is offering a new product in the market. This policy is intended to be bought by a parent for their child at birth. The purchaser shall make five annual payments, starting with $1,000 on the child’s first birthday and increasing $200 in subsequent years. No further payments are required. When the child reaches the age of 60, he or she will receive $100,000. The annual interest rate is 5%.

(d) Judge whether this policy is worth buying.
(12 marks)

You are trying to choose among three investments described below:

· Investment A: Up-front investment of $45,000 and returns $120,000 in six years.

· Investment B: Up-front investment of $60,000 and returns $8,000 per year forever.

· Investment C: Invest $10,000 per year for three years starting today and returns $15,000 each year for 10 years starting at the end of year 8.

(e) Prioritize the investments in the order of return.
(12 marks)

Raffles Bank pays 4% simple interest on its deposit account, whereas Bugis Bank pays interest on its deposit account compounded monthly.

(f) Formulate the quoted and effective interest rates that Bugis Bank should set if it wants to match Raffles Bank, assuming a 5-years horizon period.
(9 marks)

—- END OF ASSIGNMENT —-
SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 2 of 5




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