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Question No 12

The Group Finance Director, Felicity Bunyan, has asked you into her office, where she tells you the following:

“We have been asked to bid for the major Public Pri so far. The government wants to build a new university in Greenfield on the outskirts of Capital City. They suggested that we work with them on a PPP basis because they do not have enough cash to pay this completely.

The construction work will take approximately three years. We would normally set a price of $350 million for a project of this size, with our own costs estimated at $300 million for the construction work.

Once the construction work is over we will maintain and operate the buildings and the site itself. We will be responsible for all support services, including landscaping, repair work, cleaning and catering. The government will appoint the academic and administrative staff and will cover the costs of providing educational services.

We will generate income from three sources. First, the government will pay a fee for annual services, which will cover both the lease cost of the university buildings and our commitment to maintenance and maintenance. Second, the site will include student housing. Students will be able to rent rooms from us for the duration and we will be allowed to charge a commercial rental. Third, university restoration will be a profitable enterprise. We may charge staff and students for meals and snacks.

The proposed contract will run for 20 years after the construction work has been completed. At the end of that time we will sell the buildings, including the student accommodation and catering outlets, to the government for a nominal sum of $1.
This is by far the largest PPP project that we have undertaken. I need you to email me your views on the following:


    Firstly, how will Bild recognise profits from this project? What matters will the company have to consider when deciding how much profit we have earned, if any, in any given year?
    Secondly, what are the specific challenges

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Question No 11: 

AB, CD and EF are listed entities operating in the same business sector. 
At 31 December 2009 their P/E ratios were reported as follows:
AB 17.1 CD 13.2 EF 9.3 Which ONE of the following statements about these P/E ratios is correct? 

A. AB is regarded by the market as the riskiest of the three entities.
B. AB has the highest earnings per share of the three entities.
C. CD represents the safest investment because its P/E lies midway between the other two.
D. EF’s share price may be relatively lower than that of AB and CD because of an adverse effect such as a profit warning

Answer: A

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Question No 10:

The Group Finance Director has left you the following memo:
MEMORANDUM
To: Senior Management Accountant
From: Felicity Bunyan, Group Finance Director
Subject: Debt covenant

As you know, we have significant bank borrowings. The bank has put a number of 'debt covenants' in place. These are conditions that must be met if we are to be allowed to carry on with the loan. If we breach any of those conditions, the bank has the right to demand immediate repayment of their loan and to take possession of the assets that we have pledged as security in the event that we cannot afford to repay.
One of those conditions is that our gearing ratio cannot exceed 37% when we measure debt as a percentage of total long term finance.

Our gearing ratios were as follows over the past few years:

2012 32%
2013 34%
2014 33%

We have a problem on the horizon. As you are aware, in order to maintain flexibility, Bild has used operating leases to finance the majority of its construction equipment. Most of these leases are over three or five years.  Proposed changes to the rules relating to the accounting treatment of leases mean that we may have to recognise additional long term liabilities before the loans are due for repayment. Doing so will put us in technical default with respect to our debt covenant, pushing our gearing to around 40%. Please draft a paper for me that:

•     Analyses our gearing position with respect to the nature of our business and its overall position.
•     Suggests an approach that might be taken to negotiating a change to the loan conditions with the bank so that our technical default might be overlooked.

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Question No 9:

The Group Finance Director, Felicity Bunyan, has asked you into her office, where she tells you the following:
“We have been asked to bid for a major Public Pri have ever undertaken before. The government wishes to build a new college on a greenfield site on the outskirts of Capital City. They do not have sufficient cash available to pay for this outright so they have proposed that we work with them on a PPP basis.
The construction work will take approximately three years. We would normally set a price of $350 million for a project of this size, with our own costs estimated at $300 million for the construction work.

Once the construction work is over we will maintain and operate the buildings and the site itself. We will be responsible for all support services, including landscaping, repair work, cleaning and catering. The government will appoint the academic and administrative staff and will cover the costs of providing educational services.
We will generate revenues from three sources. Firstly, the government will pay an annual facilities charge, which will cover both the cost of leasing the college buildings and our commitment to maintenance and upkeep. Secondly, the site will include student accommodation. Students will be able to rent rooms from us during term time and we will be permitted to charge a commercial rent. Thirdly, the college catering will be a profit-making venture. We will be able to charge staff and students for meals and refreshments.
The proposed contract will run for 20 years after the construction work has been completed. At the end of that time we will sell the buildings, including the student accommodation and catering outlets, to the government for a nominal sum of $1.
This is by far the largest PPP project that we have undertaken. I need you to email me your views on the following:

•     Firstly, how will Bild recognise profits from this project? What matters will the company have to consider when deciding how much profit we have earned, if any, in any given year?
•     Secondly, what are the specific challenges

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Question No 8: 

Mark Grassington, Managing Director of Bild Civil Engineering, has asked for your advice.
“We have been receiving from some of our larger complaints sub-contractors about our working relationships. They feel that time and effort are being wasted because we do not properly manage our relationship with them.

To put this in perspective, Bild Civil Engineering has seventeen major subcontractors on its list of preferred suppliers. Some are general builders who provide most of the major trades, from digging foundations to bricklaying and other trades. Others are more specialised and focus on drainage or other specific tasks. We find that the specialists are more expensive than the general builders, but they have greater expertise and so they may be used for difficult tasks, such as installing drainage in unstable soil.

The regional subsidiaries of Bild Civil Engineering usually contract for a project and then invite the subcontractors to tender for the work. Subcontractors have very little input into the contract specification itself. They also find it difficult to manage their commitments because they are often invited to tender for work by more than one Bild subsidiary at the same time, even though they would not have the capacity to accept all of the work if all of their tenders were successful.

There have been times when it has been difficult to find a subcontractor for a project because many of our preferred subcontractors would choose to work with our competitors rather than with us when they have a choice.

Could you give me some ideas that I can present to the next board meeting?

•     Firstly, I have always been impressed by the balanced scorecard diagrams that you prepare for other aspects of the business. Could you outline a set of measures that could be developed into a balanced scorecard for managing the whole process of working with subcontractors? Please also provide a brief explanation for each measure.
•    Secondly, advise the company regarding processes and controls that we could adopt to manage the  whole  process of  the collaboration with

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 Question No 7:

JAC operates a defined benefit pension plan for its employees.The fair value of the plan assets at 1 June 2008 was $3,100,000. JAC made contributions of $300,000 to the plan in the year to 31 May 2009 and the expected return on assets has been calculated at $190,000.The pension plan paid out a total of $225,000 in benefits in the period and the fair value of the plan assets at 31 May 2009 was $3,340,000.The actuarial gain or loss in respect of the pension plan assets of JAC’s defined benefit pension plan for the year ended 31 May 2009 is:

A. $125,000 loss
B. $25,000 loss
C. $25,000 gain
D. $125,000 gain

Answer: D

 

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Cima G1 Exam Question No 6:

The Group Finance Director has left you the following memo:
MEMORANDUM
To: Senior Management Accountant
From: Felicity Bunyan, Group Finance Director
Subject: Debt covenant

As you know, we have significant bank borrowings. The bank has put a number of 'debt covenants' in place. These are conditions that must be met if we are to be allowed to carry on with the loan. If we breach any of those conditions, the bank has the right to demand immediate repayment of their loan and to take possession of the assets that we have pledged as security in the event that we cannot afford to repay.

One of those conditions is that our gearing ratio cannot exceed 37% when we measure debt as a percentage of total long term finance.

Our gearing ratios were as follows over the past few years:

2012 32%
2013 34%
2014 33%
We have a problem on the horizon. As you are aware, in order to maintain flexibility, Bild has used operating leases to finance the majority of its construction equipment. Most of these leases are over three or five years.  Proposed changes to the rules relating to the accounting treatment of leases mean that we may have to recognise additional long term liabilities before the loans are due for repayment. Doing so will put us in technical default with respect to our debt covenant, pushing our gearing to around 40%. Please draft a paper for me that:

    Analyses our gearing position with respect to the nature of our business and its overall position.
    Suggests an approach that might be taken to negotiating a change to the loan conditions with the bank so that our technical default might be overlooked.