Question 1.
The Hotbake shop only sells bread made on the day of sale. Each loaf produced has a variable cost of $3 and sells for $5. Fixed costs are estimated at $3,000 per day.
1.What is the breakeven point of sales expressed in units?
2.How many loaves must be produced to earn a profit of $500 per day?
The bread is produced by a fully automated machine which mixes the dough, divides it into 500 gram pieces which are put into separate baking tins, which then pass through an oven. Out of each batch, on average 10% are rejected for being underweight or burnt. In order to reduce the cost of producing unsaleable loaves, the company is considering hiring a maintenance engineer to ensure the rejection rate will not be greater than 5% of production.
3.Should the company hire the engineer for $150 per day if the usual production level is 1700 units per day?
Question 2.
A company is considering a significant increase in the automation of its Management Information System. The hardware for the system would require an initial outlay of $3,000,000. Software and staff training costs would cost $1,000,000 per year for the first two years of operation and $200,000 per year after for the next three years. After 5 years the system would be due for replacement. The company does not believe the equipment will have any value at the end of the 5 year period. Whilst scrapping the current system will not provide any immediate cash flow, operating costs would decrease by $1,500,000 per year.
The company would use a combination of debt and equity finance to pay for the new system, using its current debt to equity ratio of 25% debt to 75% equity. The company’s borrowing cost is 8% per annum, and its tax rate is 30%. The company has a cost of equity capital of 12%.
Required
1.Determine the Net Present Value of the proposed investment using the Weighted Average Cost of Capital.
2.Should the company undertake it?
Question 3.
The following ratios have been taken from the Morningstar database for four companies in the same industry. Each is as at June 30 of the respective year.
Required
Based on this limited information, rank the companies from best to worst, with respect to which would be:
1.Most attractive to a lender.
Most attractive to an investor.
Question 4.
The February 2021 report of the NSW inquiry into Crown Resorts found that the company was unfit to hold a casino license for its new $2+ billion development at Barangaroo Wharf at Sydney’s Darling Harbour. Among other issues, the inquiry determined that Crown, mainly through its flagship Melbourne casino, facilitated money laundering – despite warnings, allowed special bank accounts to be used by patrons for deposits for gambling; film was shown of bags of cash being exchanged for gambling chips; they failed to protect employees and in fact encouraged them to behave illegally by promoting illegal gambling junkets from China; and even though he was not a director, albeit a 36% shareholder, passed daily and weekly information on the finances of the casino to James Packer. Subsequent royal commissions have opened in Western Australia and Victoria. Since the initial hearings, senior executives have left and the board changed. Finally, the entire company is now the subject of a takeover.
Required
Discuss these events in the light of the ASX recommended principles on corporate governance.
