EXAMINATION QUESTION PAPER - SEMESTER 2, 2007/8

Module code :

ACP005N

Module title:

Corporate Financial Planning

Module leader:

Dr Humphrey Shaw

Date:

13 May 2008

Day / evening:

Day

Start time:

14:00

Duration:

Three Hours

Exam type:

Unseen, Open Book

Materials supplied:

None

Materials permitted:

Calculators may be used. This is an open book

examination and you may bring with you any written
material which you deem relevant

Warning:

Candidates are warned that possession of

unauthorised materials in an examination is a
serious assessment offence.

Instructions to candidates:
Answer the compulsory question in Section A and both questions in Section B

DO NOT TURN PAGE OVER UNTIL INSTRUCTED

Section A
You are advised to spend no longer than 90 minutes on Question One
Please read the Case Study
Black Swan Hauliers
The company has been in the road haulage business for over sixty years. The
company began by delivering coal to houses and local factories from a former builders
yard. Today the company has over twenty trucks and three computerised warehouses
which are located in Bristol and Rugby and Lille in Northern France.
The company has benefited greatly from the internet shopping revolution and has won
a number of contracts with internet retailers. With the advance in modern day
computers and logistics a purchase can be delivered anywhere in mainland Europe
within forty eight hours of the order. This has meant that the company has had to
form partnerships with several European Logistic firms so that it can meet its
demanding delivery times.
The company is currently in talks with another firm which operates a parcel delivery
service in the North of England. After extensive talks a sales price of 2.5 million has
been agreed. The sellers would receive 1 million in cash and the balance would be
in shares.
The new business would need a further 750,000 invested in new computers to make
the business competitive with its rivals. Black Swan Hauliers would need to raise a
bank loan of 2 million to fund the purchase and has entered into talks with its bank
as to how best to raise the money. The bank have suggested a ten year term loan with
a bullet repayment in 2018. The bank are prepared to fund the purchase but now
require an interest rate of 10% with security for the loan being required on the
directors houses and the company agreeing to a series of covenants. If the loan is
taken the bank have also said that with the onset of the credit crisis it will have to
reduce the firms committed facilities from 750,000 to 400,000 if it takes the loan
and that its overdraft facility will also be reduced from 80,0000 to 60,000.
The company has prepared a forecast of its future earnings if it takes over the new
business and these are shown below;
The company have prepared its current cashflow for 2008 and its forecast cashflows
for 2009-2010

PBIT
Depreciation
Net Capital Expenditure

2008
,
800
43
(300)

2009
,
925
54
(420)

2010
,
1,055
62
(450)

(Increase) Decrease in W.C.

Interest Paid
Tax Paid
1)
2)
3)

(120)
(130)
(200)

(150)
(220)
(180)

(170)
(240)
(190)

The company borrows at 10% and has a tax rate of 25%

Debt is expected to be 25% of equity in the long run
The company has a beta of 1.25 the risk free rate is 5% and the equity risk
premium is 7% gross.

Question One
1)

Calculate the firm=s current and forecast operating and free cash flow (10
marks)

2)

Explain the difference between accounting and market measures of value and
outline why lenders are placing more emphasis on a firms free cash flow than
its return on capital employed (20 Marks)

3)

Calculate the firm=s weighted average cost of capital and the present value of its
future cashflows and explain how recent changes in the UK LIBOR will affect
the management of the firms working capital. (20 marks)

Section B
Question Two
Explain how the current credit crisis has affected lenders attitude to risk and how the
credit crisis could impact upon the firm and its future operating plans. (25 marks)
Question Three
Critically evaluate how Environmental Variables could affect the business and using a
strategic model of your choice show how it can assist management formulate its
corporate financial planning with regards to assessing its future net cash flow (25
marks)
End of Examination