ACCA/CAT

Notes：

1. The long-term borrowings are 6% bonds that are repayable in 2012

2. The short-term borrowings consist of an overdraft at an annual interest rate of 8%

3. The current assets do not include any cash deposits

4. Nugfer Co has not paid any dividends in the last four years

5. The number of ordinary shares issued by the company has not changed in recent years

6. The target company has no debt finance and its forecast profit before interest and tax for 2011 is $28 million

Required：

（a）Evaluate suitable methods of raising the $200 million required by Nugfer Co， supporting your evaluation with both analysis and critical discussion. （15 marks）

（b）Briefly explain the factors that will influence the rate of interest charged on a new issue of bonds.（4 marks）

（c）Identify and describe the three forms of efficiency that may be found in a capital market. （6 marks）

（25 marks）

3 WQZ Co is considering making the following changes in the area of working capital management:

Inventory management

It has been suggested that the order size for Product KN5 should be determined using the economic order quantity model（EOQ）.

WQZ Co forecasts that demand for Product KN5 will be 160,000 units in the coming year and it has traditionally ordered 10% of annual demand per order.The ordering cost is expected to be $400 per order while the holding cost is expected to be $5·12 per unit per year.A buffer inventory of 5,000 units of Product KN5 will be maintained,whether orders are made by the traditional method or using the economic ordering quantity model.

Receivables management

WQZ Co could introduce an early settlement discount of 1% for customers who pay within 30 days and at the same time,through improved operational procedures,maintain a maximum average payment period of 60 days for credit customers who do not take the discount.It is expected that 25% of credit customers will take the discount if it were offered.

It is expected that administration and operating cost savings of $753,000 per year will be made after improving operational procedures and introducing the early settlement discount.

Credit sales of WQZ Co are currently $87·6 million per year and trade receivables are currently $18 million. Credit sales are not expected to change as a result of the changes in receivables management.The company has a cost of short-term finance of 5·5% per year.

Required：

（a）Calculate the cost of the current ordering policy and the change in the costs of inventory management that will arise if the economic order quantity is used to determine the optimum order size for Product KN5.（6 marks）

（b）Briefly describe the benefits of a just-in-time（JIT）procurement policy. （5 marks）

（c）Calculate and comment on whether the proposed changes in receivables management will be acceptable. Assuming that only 25% of customers take the early settlement discount,what is the maximum early settlement discount that could be offered? （6 marks）

（d）Discuss the factors that should be considered in formulating working capital policy on the management of trade receivables. （8 marks）

（25 marks）

4 The following financial information refers to NN Co：

Current statement of financial position

NN Co has just paid a dividend of 66 cents per share and has a cost of equity of 12%.The dividends of the company have grown in recent years by an average rate of 3% per year.The ordinary shares of the company have a par value of 50 cents per share and an ex div market value of $8.30 per share.

The long-term borrowings of NN Co consist of 7% bonds that are redeemable in six years'time at their par value of $100 per bond.The current ex interest market price of the bonds is $103.50.

The preference shares of NN Co have a nominal value of 50 cents per share and pay an annual dividend of 8%. The ex div market value of the preference shares is 67 cents per share.

NN Co pay profit tax at an annual rate of 25% per year