Welcome to your SL 02 Mock Exam

01. Explain whether the acquisition of Hela Transformers is justifiable with special emphasis on;
a ) The method applied to acquire
b ) Financial considerations
c ) Strategic fit to the group
02. Recommend how EOSL group can improve its profitability through restructuring of its investments and finances. Recommend suitable investment and financing strategies to restructure it’s income statement to improve the profits
03. Critically analyze the company’s existing investment policy and its impact to gearing and shareholder value
04. Derive different values for EOSL based on the following methods using suitable assumptions

Net assets

P/E method

The company is contemplating adjusting its financing and dividend policies and some shareholders have suggested that the company should declare a dividend pay out of 50% on the profit after tax from future profits. Assuming the company is going to maintain the dividend pay out ratio of 50% in the future, and it’s capital structure is going to change to 1:2 (debt to equity) as a result; calculate the following

  • it’s cost of equity and WACC using suitable assumptions (Justify your assumptions). Pre tax cost of debt is 13%
  • Using FCFF method, calculate the value of this company and the value of equity
  • Calculate the value of ordinary shares of EOSL based on dividend valuation method
05. The company has identified that one of the pressing issues facing the entire group as “Poor working capital management”. The company’s inventory management and debtors’ management is so poor that the company has to wait for more than one year to collect money for the goods it purchases leading to short term working capital issues. This has resulted in an overdraft and the company is currently paying overdraft interest which is almost equal to the interest income it’s receiving from money market investments. It has been identified that the company has to expedite the collection from debtors as it seems the debt collection has taken a backseat in the past and the pressure is now felt in the form of increasing interest costs across the group.

At the moment, the company is writing off 0.5% of sales each year due to bad debts which are written off and included under S&D

The GM finance has come out 2 proposals;

  1. Convert short-term borrowing to a long-term fixed borrowing facility to support the working capital requirements
  2. To obtain the services of a factoring organization based on the following terms;

A factor would take on the task of debt administration and credit checking on a non- recourse basis, for an annual fee of 2.5% of credit sales. The company would save Rs. 3MNa year in administration costs. The payment period would be 30 days.

The factor would also provide an advance of 80% of invoiced debts at an interest rate of 14%.  The company can obtain an overdraft facility to finance its accounts receivable at a rate of 12% per annum

  1. To implement a strict credit controlling policy of maximum 3 months of credit, to be in line with the industry policy. It’s assumed that this will negatively affect the sales volume and the volume can reduce by about 10% annually. The company can avoid the bad debts in this case
  2. To give a discount of 10% for all customers who pay within 3 months and to charge penal interest of 1% per month for customers who settle after passing 3 months. It’s assumed that 60% of customers will settle within 3 months and the rest will be as follows. No bad debts
  3. Further 10% will pay within 4 months
  4. Further 20% will pay within 5 months
  5. Further 10% will pay within 6 months

Evaluate the proposals by highlighting the pros and cons of each proposal with suitable calculations assuming the revenue of 2020, GP margin of 2020 and credit period of 2021.

06. Herbert wants to assist his brother Rehan, who has previously resigned and started IOSL. IOSL is now continuing some discussions with EOSL for a possible acquisition.

Critically evaluate this acquisition by discussing the pros and cons of this acquisition to EOSL with suitable calculations to show the financial viability of IOSL.

07. Since EOSL is predominantly a company importing various communication and electrical equipment, critically analyze the government’s import restrictions and the impact of the policy to the operations of EOSL. If the exchange rate is allowed to float, explain the alternative strategies that would be available to mitigate the exchange rate risk .