Financial performance of Shaybah Plc
Question 1
Required:
1.1 Calculate the following ratios for Madeira Plc:
Gross Profit Margin
Net Profit Margin
Current Ratio + Quick Ratio
Net Asset Turnover
Receivable Days
Payable Days
Return on Capital Employed
Capital Gearing
(12 marks)
1.2 Comment on the financial performance of Shaybah Plc between the years 2021 and 2023
using the ratios above and any other financial measure you feel appropriate.
(10 marks)
1.3 In 2021 the share price of Shaybah was 20 BD per share. Today the share price is 25 BD per
share. The finance director has attributed this success to the company maximising the sales.
Carefully consider if this is true and what other goals might the company consider?
(8 marks)
Question 2
UAE Invest Co is currently planning to buy a new machine which will cost AED 200,000. It is
expected to generate new cash sales of AED 165,000 per year. The machine will be used for 5
years and at the end of this period it will be scrapped and not replaced. The scrap value of the
machine is expected to be AED 30,000. Annual material and operating costs are estimated to be
AED 105,000 per year.
PBP plc uses a discount rate of 10% in the investment appraisal process. The company has a
target Return on Capital Employed (ROCE) of 20% per year and a maximum payback period of
3 years. Ignore taxation.
Required:
(a) Calculate the following figures for the project that PBP is appraising:
(1) Payback period;
(2) Return on Capital Employed (accounting rate of return);
(3) Net Present Value.
(4) Internal Rate of Return
Comment on the acceptability of the investment based on your evaluations.
a. Consider the theoretical cost of Debt, Preference Shares and Ordinary Shares rank them from
most expensive to cheapest.
(5 marks)
b. Recently one of your company directors has attended a finance conference, on their return
the director has decided the company should fund all projects with internal sources of
financing as they are essentially ‘free’. Another director argues that these funds are the same
cost of equity.
Critically discuss these statements, which do you agree with and why?
(10 marks)
c. Discuss whether the company should raise finance (via any means) if it has a
project available with a net present value of BD 100 million
(8 marks)
d. Give an example of a type of business which might utilize high leverage (gearing)
fully explaining how this would benefit them from a financial management
perspective