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This question has been modified, it is years old anyway……
Here’s the video that John did on the original question.
https://www.youtube.com/watch?v=8Y3aIvgXSHUTo identify the new bottleneck resource after increasing the available hours for the pressing process to 450,000 hours, you need to analyze the processing times for each product across all processes (pressing, stretching, and rolling).
With the increased capacity in pressing, you would calculate the production capacity for stretching and rolling to determine which process now has the lowest capacity.Regarding the concern about the lack of clarity in the amount of sheet metal utilised by each product, it is essential to understand that the bottleneck is determined by the process that limits overall production capacity.
Even without specific quantities of sheet metal, the processing times provide sufficient information to identify the bottleneck by comparing the time taken for each process across all products.
When assessing the performance of a divisional manager, ROI is typically calculated using controllable profit, which excludes costs that the manager cannot control, such as head office costs. This allows for a fair evaluation of the manager’s effectiveness in managing the division’s resources.
Conversely, when evaluating the overall performance of a division, net profit may be used, which includes all costs, both controllable and non-controllable. This method provides a comprehensive view of the division’s profitability, reflecting the total impact of all expenses.
In summary, the choice between controllable profit and net profit for ROI calculation hinges on whether the focus is on individual managerial performance or the overall divisional performance.
Thec2nd question
Statement 2 is indeed true as it highlights the concept of asset and liability management in hedging interest rate risk by matching the maturity of assets and liabilities. However, your observation about the statement being incomplete is valid.
While matching the maturity is a crucial aspect, it effectively considers the interest rates of the assets and liabilities. Ideally, the interest rates should be aligned to minimise the risk of interest rate fluctuations affecting cash flows. Therefore in essence the statement does not encompass the full scope of interest rate matching, which includes both maturity and interest rate alignment.In answer to the first question
Option E is incorrect because the net effect of smoothing does not guarantee that the overall interest payment will be fixed. Smoothing aims to balance the exposure to interest rate fluctuations by using a mix of fixed and floating rate debt, but it does not eliminate variability in interest payments. Therefore, while it may reduce the impact of interest rate changes, it does not ensure a fixed overall payment.
Your observation about Option E being more relevant to Matching is valid. Matching focuses on aligning cash flows and interest payments to minimise interest rate risk, which can lead to a more stable payment structure. Basis risk, as you mentioned, can indeed affect the relationship between floating interest rates on borrowings and deposits, adding another layer of complexity to interest rate management strategies.
The final product requires 0.4 kg of steel.
Manufacturing process loses 5% of the steel:
Required steel = 0.4 kg / (1 – 0.05) = 0.4 kg / 0.95 = 0.42105 kg (approximately).
4000 per tonne, which is equivalent to 4.00 per kg (since 1 tonne = 1000 kg).
Therefore, the material cost for the steel used in one garden shear is:
Cost = 0.42105 kg × 4.00 = 1.6842 (approximately $1.68).
Thus, the material cost per garden shear is approximately $1.68.
The ROCE is the annual accounting profit (which is after depreciation) expressed as a % of the average investment.
So the average investment is the investment + sales proceeeds from any scrap (or zero scrap value) / 2
The ROCE is the same as the accounting rate of return which John explains in his free lectures on methods of investment appraisal.
Asymmetry of information refers to a situation where one party in a transaction has more or better information than the other party.
Asymmetry of information refers to a situation where one party, typically the managers of a company, has more or better information about the company’s prospects than the other party, such as investors or lenders.This can lead to mispricing of shares and difficulties in obtaining financing, as lenders may perceive the company as riskier due to the lack of transparency.
In contrast, a large proportion of tangible assets (option D) would not explain capital rationing because tangible assets can serve as collateral, making it easier for the company to secure financing. Therefore, option D is the correct answer to your question about what would NOT explain why the company faces capital rationing
I
Option B is correct because, under the smoothing method, even if a portion of the debt is at a fixed rate, the variable rate portion will still incur higher interest payments if interest rates rise. Therefore, the overall interest payments will increase due to the variable rate debt.
Option E is incorrect because the smoothing method does not guarantee that the net effect will be a fixed overall interest payment. Since the debt portfolio consists of both fixed and floating rate debt, the total interest payments will vary depending on the performance of the floating rate portion, which can lead to fluctuations in the overall interest payments.
The difference in the use of cost of capital versus after-tax cost of capital often depends on the specific instructions given in the question.
Generally, when appraising projects, we always use the after-tax cost of capital to discount investments, as this reflects the tax savings on debt interest. However, if a question explicitly states to ignore tax, then the before-tax cost of capital may be used. It’s essential to carefully read the question to determine which cost of capital is appropriate for that specific scenario.It would make very little difference to your exam marks if you choose the wrong discount rate!
The second example clearly states what is the net cost or benefit of the change in policy?
Not an effective % cost as per example 1It’s asking for something completely different
Is the discount worth doing
Why do you think it’s a cost per annum?You take the total actual quantity
And then apportion it according to the standard proportions
Which is given in the questionSince the machine is purchased on 1 January 20X5, it is indeed considered as occurring at the start of the accounting year, which is typically referred to as time 0.
Therefore, you can treat the cash flow related to the purchase as occurring at time 0. The tax savings from the tax-allowable depreciation will be realized at the end of the accounting period, which is 31 December 20X5 (time 1). You would then discount the tax savings using the discount factor for year 1, as there is no discounting for cash flows occurring at time 0.
Regarding the cost of capital, you generally use the post-tax cost of capital for discounting cash flows that are after tax. In this case, since the tax savings are a cash inflow that will be realised after tax, you should use the post-tax cost of capital for discounting.
The distinction is important because it ensures that the cash flows are evaluated on a consistent basis, reflecting the actual cash available to the company after accounting for taxes.
The reason the capital employed is not adjusted in the ROI calculation is that ROI is typically calculated based on the profit generated relative to the initial investment cost, not the depreciated value of the asset.
The depreciation affects the profit but does not change the initial investment amount used in the ROI formula.
Thus, the calculation reflects the return based on the profit generated before considering the depreciation impact on the capital employed.
Yes, you are correct. When a company uses Money Market Hedging to manage Foreign Exchange Risk, it involves borrowing in one currency and investing in another, typically at fixed interest rates.
While this strategy effectively hedges against exchange rate fluctuations, it does expose the company to interest rate risk. This is because changes in interest rates can affect the cost of borrowing and the returns on investments, potentially impacting the overall financial outcome of the hedging strategy.
Interest-sensitive assets and liabilities refer to financial instruments whose values or cash flows are affected by changes in interest rates. So borrowing and investments with floating interest rates, as their interest payments can fluctuate with market rates.
When determining gap exposure, the focus is primarily on floating interest rate assets and liabilities. Fixed interest rate assets and liabilities are generally not considered in gap exposure calculations because their interest rates do not change over time. Therefore, if there are no changes in interest rates for fixed interest instruments, there would be no gap exposure arising from them.
In Working Capital Management, effective interest rates are often computed to provide a more accurate representation of the cost of financing. This approach allows for a detailed analysis of cash flows and the overall financial health of a business.
Whilst in risk management, particularly regarding interest rate risk, simple interest is typically used because it simplifies calculations and helps in understanding the basic concepts without the complexity of compounding.
In the context of calculating forward rates using interest rate parity, simple interest is often used for ease of calculation and clarity in understanding the relationship between the interest rates of the two currencies over a short period, such as 6 months.
So….the use of simple interest allows for straightforward proportional calculations based on the annual rates divided by the number of periods.The effective half-yearly rates you mentioned (1.489% for 3% and 2.956% for 6%) could be used for more precise calculations, but they are not always necessary for basic forward rate calculations under interest rate parity. Keep things simple.
Again, the retained earnings of $5488 do not increase immediately due to the anticipated profits from the expansion; they will only increase once those profits are realised and reported in the financial statements. Thus, the calculation of the debt-to-equity ratio post-right issue uses the existing retained earnings without the additional profit from the expansion.
Whilst the new equity raised from the rights issue ($2000K) is added to the equity base, the retained earnings remain unchanged until the profits are formally recognised and added to the reserves in future financial statements. expansion; they will only increase once those profits are realised and reported in the financial statements.
Thus, the calculation of the debt-to-equity ratio post-right issue uses the existing retained earnings without the additional profit from the expansion.
You calculate the return on the remaining assets after accounting for the retained profits, which reflects the actual return on the equity that shareholders have invested.
So by deducting the retained profits, you are isolating the return on the assets that are available for distribution to shareholders, thus providing a clearer picture of the return on their investment.
