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EXAMINATION QUESTION PAPER - SEMESTER 2, 2007/8

M o d u l e c o d e : ACP005N

Mo d u l e t i t l e: Corporate Financial Planning

Mo d u l e l e ad e r : Dr Humphrey Shaw

Date: 13 May 2008

D a y / e v e n i n g : Day

Start t ime: 14:00

D u r a t i o n : Three Hours

E x a m t y p e : Unseen, Open Book

Ma t er i a l s s u p p l i e d : None

Ma t er i a l s p e r mi t t e d : Calculators may be used. This is an open bookexamination and you may bring with you any writtenmaterial which you deem relevant

W a r n i n g : Candidates are warned that possession ofunauthorised materials in an examination is a

serious assessment offence.

I n s t r u c t i o n s t o c a n d i d a t e s :

Answer the compulsory question in Section A and both questions in Section B

DO NOT TURN PAGE OVER UNTIL INSTRUCTED

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SectionA

Y ou are advised to spend no longer than 90 minutes on Question One

Please read the Case Study

Black Swan Hauliers

T he company has been in the road haulage business for over sixty years. T hecompany began by delivering coal to houses and local factories from a former buildersyard. T oday thecompany has over twenty trucks and three computerised warehouseswhich are located in Bristol and Rugby and L ille in Northern France.

T he company has benefited greatly from the internet shopping revolution and has won

a number of contracts with internet retailers. With the advance in modern daycomputers and logistics a purchase can bedelivered anywhere in mainland Europewithin forty eight hours of the order. T his has meant that the company has had toform partnerships with several European L ogistic firms so that it can meet itsdemanding delivery times.

T he company is currently in talks with another firm which operates a parcel deliveryservicein the North of England. After extensive talksa sales price of 2.5 million hasbeen agreed. T hesellers would receive 1 million in cash and the balance would bein shares.

T he new business would need a further 750,000 invested in new computers to makethe business competitive with its rivals. Black Swan Hauliers would need to raise abank loan of 2 million to fund the purchase and has entered into talks with its bankas to how best to raise the money. T hebank have suggested a ten year term loan witha bullet repayment in 2018. T hebank are prepared to fund the purchase but nowrequire an interest rateof 10% with security for the loan being required on thedirectors houses and the company agreeing to a series of covenants. If the loan istaken the bank have also said that with the onset of the credit crisis it will have toreducethe firms committed facilities from 750,000 to 400,000 if it takes the loan

and that its overdraft facility will also bereduced from 80,0000 to 60,000.

T he company has prepared a forecast of its future earnings if it takes over the newbusiness and these are shown below;

T he company have prepared its current cashflow for 2008 and its forecast cashflowsfor 2009-2010

2008 2009 2010, , ,

PBIT 800 925 1,055

Depreciation 43 54 62N et C apital Expenditure (300) (420) (450)

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(Increase) Decrease in W.C. (120) (150) (170)Interest Paid (130) (220) (240)

T ax Paid (200) (180) (190)

1) T he company borrows at 10% and has a tax rate of 25%2) Debt is expected to be 25% of equity in the long run3) T he company has a beta of 1.25 the risk free rate is 5% and the equity risk

premium is 7% gross.

Question One

1) Calculate the firm=s current and forecast operating and free cash flow (10marks)

2) Explain the difference between accounting and market measures of value andoutlinewhy lenders are placing more emphasis on a firms free cash flow thanits return on capital employed (20 M arks)

3) Calculate the firm=s weighted average cost of capital and the present value of itsfuture cashflows and explain how recent changes in the UK L IBOR will affectthe management of the firms working capital. (20 marks)

SectionB

Question T wo

Explain how the current credit crisis has affected lenders attitudeto risk and how thecredit crisis could impact upon the firm and its future operating plans. (25 marks)

Question T hree

Critically evaluate how Environmental Variables could affect the business and using a

strategic model of your choice show how it can assist management formulate itscorporate financial planning with regards to assessing its future net cash flow (25marks)

End of Examination