Essentials of Financial Management

Question 1 

Sharon, a long-time classmate, contacted you recently. She is thinking of setting up a business 

with two other ex-colleagues, Mandy and Terence, to design and sell a specialised posture 

corrector belt for women. All three of them are expected to be involved in running the day-to-

day operations and will fund the business with their own savings. They do not wish to lose 

more money than the amount they invest. 

If the business goes according to plan over the next 12 to 18 months (where sales and customer 

based have grown significantly, and payments to suppliers are voluminous), she envisages that 

a finance manager will need to be recruited. Several months down the road, certain decisions 

relating to procurement of new machinery and renovation of a factory in Tuas will need to be 

made. Based on her preliminary computations, the cash flows from assets in the first three years 

is estimated to be -$360,000. 

While there is a vision to expand into neighbouring countries like Malaysia, Thailand and 

Vietnam (where significant funds need to be raised externally), this is not an immediate 

priority. At some point in time, Sharon would like to divest a portion of her business interest, 

and donate the proceeds to Singapore Children’s Society, a charitable organisation.  

You have been appointed by Sharon as a consultant. She has requested for you to draft a 

memorandum to advise her on the matters set-out below.     

(a) Examine which of the three (3) forms of business should be used. (12 marks) 

(b) Prioritise the roles and responsibilities of the finance manager who will be hired within the next year or two. (12 marks) 

(c) Discuss why negative cash flows from assets during the first three years is not necessarily a bad sign for the business. (9 marks) 

Question 2 

800 Super Holdings Limited (“800 Super”) is an established environmental services provider for both the public and private sectors in Singapore. The Company’s environmental services include waste management and waste treatment, cleaning and conservancy, horticultural services and industrial laundry processing. 

The financial statements for the two most recent financial years are denominated in SGD, 000 (thousands) and appended below: 

 

Income Statement 2018 2017 

Revenue 151,115 156,923 

Other income 497 427 

Other losses – net (198) (104) 

Purchase of supplies and disposal charges (26,939) (23,730) 

Sub-contractor charges (3,596) (2,796) 

Depreciation of property, plant and equipment (10,085) (9,019) 

Other expenses (24,559) (21,233) 

Employee benefits expenses (73,587) (78,855) 

Interest expenses (901) (853) 

Profit before income tax 11,747 20,760 

Income tax expense (2,629) (3,665) 

Net profit 9,118 17,095 

 

Balance Sheet 2018 2017 

Current Assets 

Cash and cash equivalents 5,605 25,086 

Trade and other receivables 34,698 30,312 

Inventories 1,367 680 

Other assets 1,786 1,687 

 

Non-Current Assets 

Other assets 1,464 1,495 

Property, plant and equipment 166,023 99,429 

 

Total Assets 210,943 158,689 

 

Current Liabilities 

Trade and other payables 31,894 20,173 

Current income tax 1,127 2,887 

Borrowings 18,545 11,009 

 

Non-Current Liabilities 

Borrowings 70,523 41,001 

Deferred income tax 3,770 2,323 

 

Equity 

Share capital 22,772 22,772 

Other reserves 3,079 48 

Retained profits 59,233 58,476 

 

Total Liabilities and Equity 210,943 158,689 

As a financial analyst of 800 Super, you are required to write a report to the board of directors covering the areas set out below. 

(a) Appraise the liquidity, leverage, efficiency and profitability over the last two years. 

(20 marks) 

(b) Deconstruct the return on equity for both years and discuss your observations. 

(12 marks) 

 

Note that, where relevant, the number of days in the year is assumed to be 365 (three hundred and sixty-five). 

[Hint: Marks are awarded for computation of financial ratios as well as analysing and 

interpreting the same.]  

Question 3 

You are 30 years old today and have $50,000 to invest until you retire at 62. Tim, your financial planner, advises you to invest in real estate investment trusts (REITs) which generates 7% return each year. On reaching 50, he advises to re-allocate the investment to a safer investment i.e. Singapore government securities, which yields 3% return each year.     

(a) Solve the amount you will have on retirement. (8 marks) 

 

(b) Formulate three (3) different strategies to increase the amount on retirement. (6 marks)  

 

(c) On retirement, you intend to use a portion of your investment to purchase an annuity. Two options have been presented to you: 

 

 Standard plan: $9,000 per year 

 Escalating plan: $7,500 in first year, pay-out increase by 2% every year 

Pay-outs for both plans start from 65 years onwards and the upfront premium for both plans are the same. Life expectancy in Singapore is 90 years and the discount rate is assumed to be 3%. Compare both annuities and prioritise your options. (12 marks) 

(d) Due to unforeseen events, there is an urgent need to borrow $15,000 to pay for your family member’s medical bills. You could borrow through your credit cards, which charge an interest of 18.5% per year (compounded daily). Alternatively, you can draw down on a cash line facility which charges interest of 20% per year, calculated on a monthly basis. 

Solve the effective annual rate for the credit cards and cash line facility. Examine which is your preference. (9 marks)