Company Information

Green Food Ltd was established in Riyadh, Saudi Arabia five years ago. The company manages the distribution of fresh fruit and vegetables into Gulf Countries and has been performing well to date. In the last number of years there has been more competition in this market due to an increase in the amount of food imports into the Gulf region. As a result the directors of the company have asked you to analyse the performance of the company to see where improvements can be made in the future.

The following information has been extracted from the books of Green Group Ltd for the year ended 31 December 2012.

Income Statement of Green Group Ltd for the year ended 31 December 2012
2012 2011
SAR SAR

Revenue 786,000 899,000
Cost of Sales 432,000 622,000
Gross Profit 354,000 277,000
Administration Expenses 122,000 98,000
Distribution Expenses 85,000 67,000
Other Expenses 22,000 13,000
Operating profit 125,000 99,000
Finance Cost 75,000 60,000
Profit Before Tax 50,000 39,000
Tax 2,000 2,500
Profit After Tax 48,000 36,500

Statement of Financial Position of Green Group Ltd as at 31 December 2012

2012 2011
SAR SAR
Non-Current Assets
Property, Plant & Equipment (note) 1,045,000 995,000
1,045,000 995,000
Current assets
Inventory 130,000 85,000
Receivables 62,000 78,000
Cash at bank 140,000 189,000
332,000 352,000

Total Assets 1,377,000 1,347,000

Equity and Liabilities
Share capital (fully paid SAR1 shares) 400,000 300,000
Share Premium 100,000 –
Revenue Reserves 378,000 345,000
878,000 645,000

Non-Current Liabilities
Long Term Loan 375,000 600,000

Current Liabilities
Bank overdraft 40,000 –
Trade Payables 67,000 82,000
Dividend Proposed 17,000 20,000
124,000 102,000

Total Equity and Liabilities 1,377,000 1,347,000
Additional Information:

Note 1

Property, Plant and Equipment
Cost 1,210,000 995,000
Accumulated Depreciation 165,000 0
NBV at 31 December 1,045,000 995,000

Note 2

During the year to 31 December 2012, fixed assets originally costing SAR500,000 were sold for SAR100,000. The accumulated depreciation on these assets as at the 31 December 2012 was SAR350,000.

Note 3

Dividend for the year 31 December 2012 was SAR15,000
Requirements:

a) Using the above information, prepare a Statement of Cash Flows for the year ended 31 December 2012 in accordance with IAS 7 Statement of Cash Flows.
(45 marks)

b) Explain why the information presented in a Statement of Cash Flows is useful for users of financial statements.
(5 marks)

c) Using the above information assess (calculate ratios and briefly comment on performance) the financial performance of Green Group Ltd for the last two years under the following headings:

Profitability
Liquidity
Efficiency
Gearing
(30 marks)

d) Based on the information in the Statement of Cash Flows and the ratios calculated above, advise the company on THREE steps they can take in the future to improve the performance of the company.
(15 marks)

e) Outline FIVE limitations of using ratio analysis to assess the performance of a business.
(5 marks)
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As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection. In addition, you have been asked to evaluate two projects, incorporating risk into the calculations.

You have also agreed to provide an 8-10 page report, in good form, with detailed explanation of your methodology, findings, and recommendations.

Company Information

Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.

Required:

Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?
The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?
The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?

Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above. Both investments will cost $120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year’s after tax cash flow is given in the table below.

Investment B

Investment C
Probability

After Tax

Cash Flow

Probability

After Tax

Cash Flow

0.25

$20,000

0.30

$22,000

0.50

32,000

0.50

40,000

0.25

40,000

0.20

50,000

What is the expected value of each project’s annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.
Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.