Fiance Exercise Book 2021n
Fiance Exercise Book 2021n
Fiance Exercise Book 2021n
Students’ version
VERSION 2021n
Contents
Exercises regarding Chapter 1 – 4: see TIO Exercise book IBEE
In this Exercise book do not take VAT into account, except if this is explicitly mentioned.
All rights reserved. No part of this publication shall be reproduced, stored in a retrieval system, or
published by any means, electronic, mechanical, photocopying, recording or otherwise, without written
permission from the publisher.
Cost
Personnel 300,000 360,000 400,000 420,000
Marketing & Sales 150,000 135,000 110,000 100,000
Depreciation 150,000 125,000 100,000 75,000
Total Costs 600,000 620,000 610,000 595,000
Costs
Personnel 160,000 180,000 200,000 220,000
Maintenance 50,000 60,000 75,000 100,000
Depreciation 70,000 60,000 50,000 50,000
Total Costs 280,000 300,000 325,000 370,000
The investment in the installation takes place at the end of 2021 and amounts to € 250,000. On
December 31st, 2025 the installation will be sold against book value.
2020 -450,000
2021 150,000
2022 200,000
2023 200,000
2024 100,000
A Calculate the payback period if the free cash flows 2021 up until and including 2024 are received
evenly spread during the year.
B Calculate the payback period if the free cash flows 2021 up until and including 2024 are received
at the end of each year.
Project A
The investment in the bus is € 80,000 and has an expected life span of four years, after that period
there is no residual value. The expected annual free cash flows are respectively:
€ 20,000; € 26,000; € 34,000 and € 43,000.
Project B
The truck is more firm than the bus and will last longer. On the other hand, the truck is more
expensive. The truck requires an investment of € 140,000, has an expected life span of five years and
a residual value of € 20,000. The truck will be sold at the end of year 5. The expected annual free
cash flows are respectively:
€ 15,000, € 23,000, € 32,000, € 40,000 and € 40,000 (excluding the receipt of the residual value =
disinvestment).
The free cash flows of both project A and project B are received evenly spread during the year.
A Which choice will the management of the travel agency make if payback period is the only
consideration in making this choice.
B It seems that the free cash flow in the fourth year of project A was calculated incorrectly, this
amount should be € 23,000 instead of € 43,000. Explain whether this has an influence on the
choice being made in section A of this exercise.
For an investment project the free cash flows (in euro) are estimated as follows:
2020 -600,000
2021 100,000
2022 300,000
2023 400,000
2024 250,000
The free cash flows are received and paid evenly spread during the year.
A Compose a graph (a line-diagram; see figure 5.2 page 110 of the Basics book) of the
development of the cumulative free cash flow during these years.
B What is the payback period resulting from this graph?
C Check your answer on section B by calculating the payback period.
Exercise 5.16 Residual Value, Free Cash Flow and Net Present Value (NPV)
The following information on an investment project regarding the development of a new generation
espresso machines is available: this project requires an investment in equipment of € 1,800,000. The
project has a duration of 3 years. The depreciation amounts to € 500,000 per year.
The free cash flows of this project are: 500,000 (year 1), 700,000 (year 2), 1,200,000 (year 3). The
free cash flow in year 3 excludes the proceeds of the sale of the equipment against residual value
(disinvestment). The cost of capital is 7% per year.
The expected free cash flows (in euro) are reflected in the table below. The duration of each project is
four years.
project A project B
The free cash flows of both project A and project B are received evenly spread during the year. The
cost of capital for this company is 6%.
Exercise 5.18 Depreciation, Residual value, Free Cash Flow, Net Present Value (NPV)
A shipping-company considers an investment in a high speed ferry-boat. The purchase price is
€ 300,000. The expected economic lifespan is four years. The residual value of the ferry-boat amounts
to € 20,000. The depreciation is a fixed amount per year. If the investment project goes ahead, the
ferry-boat will be purchased at the end of 2021 and put into operation on January 1st, 2022.
The shipping-company expects a revenue of € 400,000 per year from the ferry-services carried out by
this ferry-boat. The operating costs (personnel, maintenance etc.) are budgeted for € 220,000 per
year. The corporate tax is 30% of the profit before tax.
The cost of capital for this company is 8% per year. The boat will be sold after four years (on
December 31st, 2025) against book value.
C Calculate the annual free cash flow for each of the years 2021 up until and including 2025.
D Calculate the net present value of the investment in the ferry-boat.
E Can the investment in the ferry-boat go ahead based on the net present value as calculated in
section D ? Motivate your answer.
Costs
Personnel 270,000 300,000 340,000 340,000
Marketing & Sales 90,000 100,000 110,000 115,000
Rent 150,000 220,000 290,000 290,000
Depreciation 250,000 250,000 250,000 250,000
The free cash flows are received evenly spread during the year.
C Explain whether the investment can go ahead based on the net present value method.
D The general director expects a free cash flow in the first year that is € 100,000 higher. Explain
how much extra funding becomes available in the net present value calculation.
E The internal rate of return of this project is 6,0%. Explain whether the investment can go ahead
based on the internal rate of return.
F Calculate the payback period, without taking the extra funding as mentioned in section D into
account.
G How does the extra funding as mentioned in section D influence the payback period (becomes
shorter, remains the same, becomes longer) ? Motivate your answer without making a
calculation.
Sport Complete LLC is a retail chain preparing an investment in a web shop to sell sports articles on
line. The finance director received the following overview. It states the expected revenue and costs
during 3 years of the web shop to be established. In this overview some information is still missing.
Costs
Purchases 85,000 132,000 165,000
Personnel 45,000 52,000 55,000
Marketing 40,000 45,000 50,000
Other costs 50,000 50,000 50,000
Depreciation
Total costs
G Substantiate, based on a calculation, what the consequence of the lower interest rate is for the
feasibility of the investment in the web shop based on the net present value method.
H What is the influence of the change of the weighted average cost of capital on the payback
period (becomes shorter, remains the same, becomes longer) ? Motivate your answer.
B Did the inventory turnover ratio in 2020 compared to 2019 improve, remain the same, or get
worse? Motivate your answer.
20,000
15,000
10,000
5,000
0
31 March 30-Jun 30 Sep 31 Dec
Calculate:
A the number of purchasing orders per year
B the ordering costs per year
C the average inventory
D total carrying costs per year
E total inventory costs per year
F What are the consequences of this decision on the ordering costs per order (increases, remains
the same, decreases)? Motivate your answer.
G What are the consequences of this decision on the total ordering costs per year (increases,
remains the same, decreases)? Motivate your answer
H What are the consequences of this decision on the total carrying costs per year (increases,
remains the same, decreases)? Motivate your answer without making a calculation.
A How many purchase orders are placed by Top Shoe LLC per year?
B Calculate the sales volume per day.
C At which inventory level ( = reorder point) does Top Shoe place a purchase order for the inventory
to be exactly zero at the time the order is being delivered.
Recently it became clear that the lead time can run up to a period of maximum 9 days. It also occurs
that the demand for shoes during a certain period of time is maximum 10% higher than average.
D What risk occurs as a consequence of the longer delivery time respectively a higher demand than
average if Top Shoe does not change its purchasing policy?
In order to avoid the risk as mentioned in section D Top Shoe starts keeping a safety inventory.
E Calculate the reorder point at which the risk as mentioned in section D is completely ruled out.
F Calculate the level of safety inventory.
Of Edammer & Co LLC, a wholesale trader of cheese, the following inventory cycle is provided:
15,000
12,000
10,000
8,000
6,000
4,000
2,000
0
13 26 39 52 weeks
Furthermore the carrying costs are € 3 per unit per year and the ordering costs are € 70 per order.
B Did the average days sales outstanding in 2020 improve or get worse? Motivate your answer.
The products are sold for 60% in cash and for 40% an invoice is sent, the payment term is one month.
Calculate for the month of February the amount in euro to be received by FETCH from its customers.
A Calculate the average amount of accounts receivable if De Groot receives all payments on
average 1 month after invoice date.
Of the billed revenue 5% is uncollectable (will never be received). The uncollectable outstanding
receivables are written off directly after the payment term has expired.
This trading company want to motivate its debtors to pay sooner. De Groot grants a discount of 2% on
cash payments. De Groot expects that 20% of the revenue will be paid in cash. The billed revenue is
still being received or written off after one month on average.
C Calculate the average amount of accounts receivable after introduction of the discount offer.
D Calculate the total discount per year that De Groot grants to its customers.
E Why would De Groot want to speed up payment from its debtors?
Next to sales on credit (billed revenue) a part of the revenue is paid in cash.
Goods are sold against purchase value + a mark-up of 20% of the purchase value.
Sandra owns a fashion shop (sole proprietorship). In order to draw up a cash flow forecast for next
year she has collected the following data:
Investment in shop equipment (counters, displays etc.) € 6,000, to be purchased in March. The
expected economic lifespan of the equipment is 3 years, residual value zero. For the payment of
the shop equipment a credit term of 1 month applies.
Rent € 18,000 a year, annually to be paid upfront in December for the forthcoming year.
Purchase of clothing per quarter amounts to 70% of the total revenue in that quarter. She
negotiated a credit term of 3 months with her suppliers.
The expected billed revenue is as follows:
o 4th quarter of the preceding year € 12,000
o 1st quarter € 8,000
o 2nd quarter € 6,000
o 3rd quarter € 12,000
o 4th quarter € 14,000
On the invoice Sandra states a payment term of 3 months
The expected revenue received in cash is as follows:
o 4th quarter of the preceding year € 42,000
o 1st quarter € 28,000
o 2nd quarter € 36,000
o 3rd quarter € 26,000
o 4th quarter € 44,000
On January 1st Sandra has a bank loan of € 27,000. Annually she needs to repay € 3,000 on May
1st. The interest percentage amounts to 5% per year. The interest is paid annually on December
31st.
All receipts and expenditures run via the bank account of the shop. The limited revenue paid in
cash in the cash register is transferred to the bank account of the shop on a daily basis.
At the beginning of the year Sandra expects a bank balance of € 1,000 on the bank account of the
shop.
To cover her cost of living, Sandra withdraws € 6,000 per quarter from the bank account of the
shop.
A Draw up the cash flow forecast on a quarterly basis (see lay-out on page 145 of the Basics
book).
B The cash flow forecast periodically shows a negative bank balance. Which measures could
Sandra take in order not to jeopardize the continuity of her shop?
Exercise 7.1 > section 7.1 Equity in Companies with a Non-legal Entity Status
On January 1st Karin de Wit and Jan Zwart start a new company, the legal form is a partnership.
Karin and Jan are both general partners of this company.
Karin contributes €45,000 as equity, Jan contributes €15,000. Both contributions have been fully paid
on January 1st.
The first year the company generated a profit of € 10,000. The profit will be distributed to Karin and
Jan according to the proportion of their equity contribution. Karin and Jan decide that the profit will not
be paid out to them but that it remains in the company.
Exercise 7.2 Profit distribution > section 7.2 Equity in Companies with a Legal Entity Status
The share capital of a company organizing events amounts to € 20,000,000, consisting of 200,000
shares with a par value of € 100 per share. The share capital has been fully paid-up.
At the time the company was established it has been decided that the shareholders will receive 4%
primary dividend. Of the remaining surplus profit 50% will be retained in the company and 50% will be
paid to the shareholders.
Profit after tax for the past financial year was € 2,000,000.
Exercise 7.3 Profit distribution > section 7.2 Equity in Companies with a Legal Entity Status
The issued share capital of Travel Far Inc amounts to € 10 million, consisting of 1.000.000 shares with
a par value of € 10 per share.
Of this capital € 4 million still needs to be paid.
In the corporation’s articles of association, the following has been determined with respect to the profit
distribution:
The shareholders receive 5% primary dividend.
Of the remaining profit 40% is retained and 60% is paid to the shareholders.
Profit after tax for the past financial year was € 1.5 million.
A On January 1st 15,000 shares were issued in total. Calculate the par value per share.
On July 1st 2,000 new shares were issued against a price of €60 per share.
Exercise 7.7
Of a Corporation the following abridged balance sheet before profit distribution is provided:
The par value per share is € 10. The share capital is fully paid-up.
From the profit after tax shareholders receive a primary dividend of 10%.
Of the profit after deduction of the primary dividend 20% is added to the reserves (retained earnings),
the employees receive a profit payment of € 50,000 and the remaining profit will be paid to the
shareholders as secondary dividend.
The remaining profit will be distributed 50%/50% between the common shareholders and
the retained earnings of the company.
After the dividend has been paid out the common share capital is increased by 10,000 shares at
an issue price of € 25 per share.
D Which balance sheet item(s) on the equity and liability section will be affected by this share issue
and by what amount?
The value of the buildings are adjusted from the historical value to the much higher market value.
This concerns an increase in the value of the properties by € 250,000.
E Which balance sheet item(s) will be affected by this value increase and by what amount?
© Tio University of Applied Sciences 2021n
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In September of the next year the company pays € 100,000 interim dividend on common shares
out of the retained earnings: € 40,000 as cash dividend and € 60,000 as stock dividend.
F Which balance sheet item(s) will be affected by this and by what amount?
A If the hotel entrepreneur makes use of the trade credit, what are the costs of this credit in euro?
B A line of credit from the bank will cost the hotel entrepreneur 14% on an annual basis.
Which credit is cheaper: the trade credit or the line of credit?
A Calculate the amount the client may deduct from the invoice amount if he pays within 10 days.
B Calculate the cost of the trade credit on an annual basis.
Indicate for each of the following events for which amount the balance sheet, the income statement
and the cash flow overview is affected in the respective year:
Revenue 1,200,000
Interest 6,000
Tax 9,000
A Calculate the net profit (= profit after deduction of interest and tax) of Aspen.
Use the following scheme for your calculation:
Operating income (EBIT)
minus interest
= Profit before tax
minus tax
= Net profit
B Calculate the return on equity before tax van Aspen.
C Calculate the return on equity after tax van Aspen.
D What is the relation between the answers to section B and C ?
The company has an average invested equity of € 5,000,000 and an average debt of € 2,000,000. The
profit before tax (after deduction of interest) amounts to 500,000 euro; the interest is € 140,000.
This company wants to increase its return on equity before tax by making use of the financial
leverage effect. After refinancing the capital structure of the company the average invested equity
amounts to € 4,000,000 and the average debt € 3,000,000. The ACD remains the same as
calculated in section B. Assume that the operating income also remains the same.
1,749,300 1,749,300
*) The loan agreement needs to be repaid after 4 years as a one-off payment for the full amount.
Underneath please find the balance sheet (per December 31st, amounts in euro) and a part of the
income statement 2020 (amounts in euro) of bicycle wholesale trader Jelle Inc.
EBIT 250,000
Interest 83,000
Tax 35,000
The finance director of a production company presents the following balance sheet per January 1st:
*) The loan agreement needs to be repaid after eight years as a one-off payment for the full amount.
The company purchases raw materials for an amount of € 200,000 and pays these using the line of
credit.
G Which balance sheet item(s) will be affected by this purchase and by what amount?
H What is the effect of this purchase on the net working capital (improved, remains the same or
deteriorated)? Motivate your answer based on changes that occurred in the balance sheet.
I What is the effect of this purchase on the acid test ratio (improved, remains the same or
deteriorated)? Motivate your answer based on changes that occurred in the balance sheet.