Advanced Business Calculations

Level 3
Series 2 2004 (Code 3003)

Model Answers
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Advanced Business Calculations Level 3

Series 2 2004

How to use this booklet Model Answers have been developed by LCCIEB to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCIEB examinations. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers reproduced from the printed examination paper summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper where appropriate, additional guidance relating to individual questions or to examination technique

(3)

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Advanced Business Calculations Level 3

Series 2 2004
QUESTION 1 (a) Serena has a bank account on which simple interest is earned at 2% per annum on credit balances. Simple interest is charged by the bank at 7% per annum on debit balances. Interest is calculated daily on all balances and is both paid and earned at the end of the month. The account for October is shown below. Date 1 Oct 3 Oct 15 Oct 24 Oct Details Balance b/f Cheque Cheque Deposit Debit 4,500.00 4,000.00 3,151.85 Credit Balance 7,232.08 Cr 2,732.08 Cr 1,267.92 Dr 1,883.93 Cr

The balance at the end of October, before interest and charges, is 1,883.93 in Credit. Serena uses the products method to check the interest she receives from the bank. (i) Copy and complete the following table: Products Method: Balance 7,232.08 2,732.08 1,267.92 --------------------Credit or Debit Credit Number of Days 3 12 7 Total Debit Total Credit (7 marks) (ii) Giving your answer to the nearest penny, calculate the final balance figure on 31 October. (4 marks) Product 21,696.24 32,784.96 11,411.28

Credit -----------------------

(b) Calculate the interest on 35,000 deposited at 2.8% compound interest for 17 years. (4 marks) (Total 15 marks)

Model Answer to Question 1 (a) (i) Products Method: Balance 7,232.08 2,732.08 1,267.92 1,883.93 --------------------Credit or Debit Credit Credit Debit Credit ----------------------Number of Days 3 12 9 7 Total Debit Total Credit Product 21,696.24 32,784.96 11,411.28 13,187.51 11,411.28 67,668.71

(ii)

Interest due = Total debit or credit x annual interest rate 365 Interest owed by Serena = 11,411.28 x 7% 365 = 2.34 Interest owed to Serena = 67,668.71 x 2% 365 = 5.10 Final balance figure = 1,883.93 + 5.10 - 2.34 = 1,886.69 in Credit
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(b) Amount = 35,000 x (1 + 0.028)

= 55,969.44

Interest = 55,969.44 35,000 = 20,969.44

QUESTION 2 An investor bought 7,500 Ordinary Shares (nominal value 0.50) at 420 pence each. After three years, the investor sold the shares at 465 pence. She paid a total of 50 brokers commission. (a) Calculate the capital gain from the purchase and sale of the shares. (3 marks) The dividends declared on the nominal value of the ordinary shares were: Year 1 12% Year 2 10.5% Year 3 11.5%

(b) Calculate the total dividends received by the investor. (4 marks) Instead of investing in Ordinary Shares the investor could have invested the same money in a Unit Trust, buying the units at 5 each and selling them after three years at 5.70 each. Assume that the units are accumulative, that is, the price includes the dividends. (c) Calculate the profit the investor would have made from the Unit Trust and compare the two investments. (5 marks) (Total 12 marks)

Model Answer to Question 2 (a) Cost of shares = 7,500 x 4.20 = 31,500 Income from sale = 7,500 x 4.65 = 34,875 Capital gain = 34,875 - 31,500 - 50 = 3,325

(b) Total percentage dividend = (12 + 10.5 + 11.5)% = 34% Nominal value of shares = 7,500 x 0.50 = 3,750 Total dividend = 3,750 x 34% = 1,275 (c) Number of units purchased = 31,500 5 = 6,300 Net income from units = 6,300 x (5.70 - 5) = 4,410 Net income from shares = 3,325 + 1,275 = 4,600 Shares were better by 190

QUESTION 3 A manufacturers product is sold to customers at 54 per unit. Manufacturing costs are as follows: Fixed costs Variable costs Calculate: (a) the break-even point per period (in units) (b) the total costs at this output (c) the profit or loss at an output of 7,000 units and at 10,000 units per period (d) the output for a profit of 50,000 in a period. (3 marks) (2 marks) (4 marks) (3 marks) (Total 12 marks) 180,000 per period 29 per unit

Model Answer to Question 3 (a) Contribution per unit = 54 29 = 25 Break-even point = Fixed costs Contribution = 180,000 25 = 7,200 units (b) Total costs = 180,000 + (7,200 x 29) = 388,800

(c) Number of units different from break-even = break-even number of units At 7,000 units, difference = 200 At 10,000 units, difference = +2,800

Profit or loss = Number of units difference x Contribution At 7,000 units, loss = -200 x 25 = -5,000 (loss) At 10,000 units, profit = 2,800 x 25 = 70,000 (profit) (d) Difference in units from break-even = Profit contribution = 50,000 25 = 2,000 Output = break-even + 2,000 = 9,200 units

QUESTION 4 A retailers Balance Sheet at the end of the first year of trading is shown below: Balance Sheet as at 31 December 2003 Fixed Assets premises equipment furniture van Current Assets stock debtors bank cash Amounts due within 12 months trade creditors Net current assets Amount due after 12 months mortgage on premises Financed by capital Add net profit Less drawings

52,000 15,500 4,700 8,850 81,050 8,827 3,730 3,580 256

16,393

6,305 10,088 91,138 (58,000) 33,138 25,000 12,238 (4,100)

33,138

(a) Using the above figures, calculate: (i) (ii) Current ratio Borrowing ratio (capital gearing ratio) (3 marks) (3 marks) (3 marks)

(iii) Acid test ratio (quick-asset ratio; liquid capital ratio).

(b) Give a brief interpretation of your figure for current ratio. Your interpretation should include a brief explanation of the ratio, together with a judgement of the value obtained. (4 marks) (Total 13 marks)

Model Answer to Question 4 (a) (i) Current ratio = Current assets = 16,393 = 2.6 Current liabilities 6,305

(ii)

Borrowing ratio = Total borrowings = 58,000 = 1.75 Net worth 33,138

(Or: Borrowing ratio = Total borrowings = 58,000 = 0.64 Net worth + mortgage 91,138

(iii) Acid test ratio = Cash + bank + debtors = 7,566 = 1.2 Current liabilities 6,305

(b) The current ratio compares the current assets with current liabilities. This tells us whether a company has enough trading assets in total to cover current liabilities. For this company the ratio is more than 2. This is good liquidity and is a good situation for the company.

QUESTION 5 A business owner has a choice of 2 investment projects. The estimated costs and returns are as follows: Project One (2,750,000) (150,000) outflow 2,250,000 1,950,000 Project Two (2,500,000) 200,000 inflow 1,500,000 1,920,000

Cost Year 0 Year 1 cash flow Year 2 cash inflow Year 3 cash inflow

(a) For Project One calculate the payback period. Give your answer in years and months. (4 marks) (b) The payback period for Project Two is 2 years 5 months. Advise the business owner which project is the better investment. Give a reason. (2 marks) (c) Using a discount factor of 16%, and the following table, calculate the net present value for Project One. Discounting factor Year 1 Year 2 Year 3 16% 0.862 0.743 0.641 (5 marks) At a discount factor of 18% the net present value of Project One is (74,000) ie negative. (d) Using this information and your answer to part (c), estimate the internal rate of return of Project One. (3 marks) (Total 14 marks)

Model Answer to Question 5 (a) For Project One () Cost 2,750,000 Year 1 2 3 Net Cash Flow (150,000) 2,250,000 1,950,000 Cumulative Cash Flow (150,000) 2,100,000 4,050,000

Investment is paid back during year 3: 2,750,000 2,100,000 = 650,000 Number of months: 650,000 = 1,950,000 1 year = 4 months 3

Hence payback period = 2 years 4 months

(b) On the basis of the payback period Project One is the better investment. It has a shorter payback period.

(c) Project One Discounting Factor 0.862 0.743 0.641 Net Cash Flow () (2,750,000) (150,000) 2,250,000 1,950,000 Present Value () (2,750,000) (129,300) 1,671,750 1,249,950 42,400

Year 0 1 2 3

Net Present Value = 42,400 (d) Internal rate of return = 16% + 42,400 x 2% = 16.7285% 16.7% (estimated) 42,400 + 74,000

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QUESTION 6 Andreas is owed 35,000 by Unlucci plc. When Unlucci plc is declared bankrupt, Andreas finds he is an unsecured creditor and eventually receives only 21,700 in payment. (a) Calculate the rate in the which is payable to unsecured creditors. (2 marks) The total owed to unsecured creditors by Unlucci plc is 110,000. They also owe 34,000 to secured creditors. The expenses of winding up the business are 5,800. (b) Calculate the value of the assets of the business. (3 marks) (c) Express the assets as a fraction of the liabilities. Give the fraction in its lowest terms. (3 marks) (d) Express the assets as a percentage of the liabilities. (2 marks) (Total 10 marks)

Model Answer to Question 6 (a) Proportion paid to unsecured creditors = Amount received Amount owed = 21,700 x 1 = 0.62 = 62p in the 35,000

(b) Total paid to unsecured creditors = 0.62 x 110,000 = 68,200 Total assets = 68,200 + 34,000 + 5,800 = 108,000

(c) Total liabilities = 110,000 + 34,000 = 144,000 Business assets as a fraction of liabilities = 108,000 = 3 144,000 4

(d) Business assets as a percentage of liabilities = 108,000 x 100% = 75% 144,000

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QUESTION 7 The following is an extract from a depreciation table based on the equal instalment method of depreciation: Annual depreciation () Initial cost Year 1 Year 2 Year 3 Year 4 Year 5 (a) Copy and complete the table. (6 marks) (b) Calculate the percentage of the initial cost that is to be written off each year. (2 marks) A factory machine is depreciated by the diminishing balance method with a rate of depreciation of 30% per annum and an estimated residual value after 5 years of 20,000. (c) Giving your answer correct to the nearest 1,000, calculate the initial cost of the machine. (5 marks) (Total 13 marks) 56,400 75,200 62,400 Cumulative depreciation () Book value at end of year ()

Model Answer to Question 7 (a) Annual depreciation = 75,200 56,400 = 18,800 Annual depreciation () Initial cost Year 1 Year 2 Year 3 Year 4 Year 5 18,800 18,800 18,800 18,800 18,800 Cumulative depreciation () 18,800 37,600 56,400 75,200 94,000 Book value at end of year () 100,000 81,200 62,400 43,600 24,800 6,000

(b) Percentage to be written off each year = 18,800 x 100% = 18.8% 100,000

(c) 1 d = 1 0.3 = 0.7 (1 d) = (0.7) = 0.16807 Original cost = 20,000 = 118,998 = 119,000 0.16807
5 5

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QUESTION 8 (a) An index of industrial production at January 2004 is shown below: Group Mining and quarrying Construction Gas, electricity, water Manufacturing Transport Weight 158 282 200 129 231 Index (Jan 2003 = 100) 86 84 107 95 99

Calculate the composite index of industrial production at January 2004, with January 2003 = 100. (5 marks) (b) The price of a particular item in April 2001 was 5.60 and the price of the same item in April 2002 was 6.72. (i) Calculate the price index and price relative for the item for April 2002 with April 2001 as the base period. State clearly which of your answers is which. (4 marks) The price relative for April 2003 with April 2002 as the base period is 1.5. Calculate the price in April 2003. (2 marks) (Total 11 marks)

(ii)

Model Answer to Question 8 (a) Group Mining and quarrying Construction Gas, electricity, water Manufacturing Transport Totals Weighted index = Weight(W) 158 282 200 129 231 W = 1,000 Index(I) 86 84 107 95 99 WI 13,588 23,688 21,400 12,255 22,869 WI = 93,800

WI / W = 93,800 / 1,000 = 93.8 = 94

(b) (i)

Proportional increase = 6.72 / 5.60 = 1.2 Price relative = 1.2 Price index = 1.2 x 100 = 120

(ii)

April 2003 price = 1.5 x 6.72 = 10.08

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