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The production equipment for the new confectionery line would cost $2 million and an additional initial investment of $750,000 would be needed for working capital. Capital allowances (tax-allowable depreciation) on a 25% reducing balance basis could be claimed on the cost of equipment. Profit tax of 30% per year will be payable one year in arrears. A balancing allowance would be claimed in the fourth year of operation.
The average general level of inflation is expected to be 3% per year and selling price, variable costs, fixed costs and working capital would all experience inflation of this level. BRT Co uses a nominal after-tax cost of capital of 12% to appraise new investment projects.
Required:
(a) Assuming that production only lasts for four years, calculate the net present value of investing in the new product using a nominal terms approach and advise on its financial acceptability (work to the nearest $1,000). (13 marks)
(b) Comment briefly on the proposal to use a four-year time horizon, and calculate and discuss a value that could be placed on after-tax cash flows arising after the fourth year of operation, using a perpetuity approach. Assume, for this part of the question only, that before-tax cash flows and profit tax are constant from year five onwards, and that capital allowances and working capital can be ignored. (5 marks)
(c) Discuss THREE ways of incorporating risk into the investment appraisal process. (7 marks)

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Plant for use on the contract was purchased on 1 January 2010 (three months into the contract as it was not required at the start) at a cost of $8 million. The plant has a four-year life and after two years, when the contract is complete, it will be transferred to another contract at its carrying amount. Annual depreciation is calculated using the straight-line method (assuming a nil residual value) and charged to the contract on a monthly basis at 1/12 of the annual charge.
The correctly reported income statement results for the contract for the year ended 31 March 2010 were:
The percentage of completion is calculated as the agreed value of work completed as a percentage of the agreed contract price.
Required:
Calculate the amounts which would appear in the income statement and statement of financial position of Mocca, including the disclosure note of amounts due to/from customers, for the year ended/as at 31 March 2011 in respect of the above contract.

(a) Your assistant has been reading the IASB’s Framework for the preparation and presentation of financial statements (Framework) and as part of the qualitative characteristics of financial statements under the heading of ‘relevance’ he notes that the predictive value of information is considered important. He is aware that financial statements are prepared historically (i.e. after transactions have occurred) and offers the view that the predictive value of financial statements would be enhanced if forward-looking information (e.g. forecasts) were published rather than backward-looking historical statements.
Required:
By the use of specific examples, provide an explanation to your assistant of how IFRS presentation and disclosure requirements can assist the predictive role of historically prepared financial statements. (6 marks)
(b) The following summarised information is available in relation to Rebound, a publicly listed company:
Income statement extracts years ended 31 March:
Analysts expect profits from the market sector in which Rebound’s existing operations are based to increase by 6% in the year to 31 March 2012 and by 8% in the sector of its newly acquired operations.
On 1 April 2009 Rebound had:
$3 million of 25 cents equity shares in issue.
$5 million 8% convertible loan stock 2016; the terms of conversion are 40 equity shares in exchange for each
$100 of loan stock. Assume an income tax rate of 30%.
On 1 October 2010 the directors of Rebound were granted options to buy 2 million shares in the company for $1 each. The average market price of Rebound’s shares for the year ending 31 March 2011 was $2·50 each.
Required:
(i) Calculate Rebound’s estimated profit after tax for the year ending 31 March 2012 assuming the analysts’ expectations prove correct; (3 marks)
(ii) Calculate the diluted earnings per share (EPS) on the continuing operations of Rebound for the year ended 31 March 2011 and the comparatives for 2010. (6 marks)

The finance director of AQR Co has heard that the market value of the company will increase if the weighted average cost of capital of the company is decreased. The company, which is listed on a stock exchange, has 100 million shares in issue and the current ex div ordinary share price is $2·50 per share. AQR Co also has in issue bonds with a book value of $60 million and their current ex interest market price is $104 per $100 bond. The current after-tax cost of debt of AQR Co is 7% and the tax rate is 30%.
The recent dividends per share of the company are as follows.
The finance director proposes to decrease the weighted average cost of capital of AQR Co, and hence increase its market value, by issuing $40 million of bonds at their par value of $100 per bond. These bonds would pay annual interest of 8% before tax and would be redeemed at a 5% premium to par after 10 years.
Required:
(a) Calculate the market value after-tax weighted average cost of capital of AQR Co in the following circumstances:
(i) before the new issue of bonds takes place;
(ii) after the new issue of bonds takes place. Comment on your findings. (12 marks)
(b) Identify and discuss briefly the factors that influence the market value of traded bonds. (5 marks)
(c) Discuss the director’s view that issuing traded bonds will decrease the weighted average cost of capital of AQR Co and thereby increase the market value of the company. (8 marks)

Bengal is a public company. Its most recent financial statements are shown below:
Income statements for the year ended 31 March
Statements of financial position as at 31 March
Notes
(i) There were no disposals of non-current assets during the period; however Bengal does have some non-current assets classified as ‘held for sale’ at 31 March 2011.
(ii) Depreciation of property, plant and equipment for the year ended 31 March 2011 was $640,000.
A disappointed shareholder has observed that although revenue during the year has increased by 48% (8,250/17,250 x 100), profit for the year has only increased by 20% (500/2,500 x 100). 6
Required:
(a) Prepare a statement of cash flows for Bengal for the year ended 31 March 2011, in accordance with IAS 7 Statement of cash flows, using the indirect method. (9 marks)
(b) Using the information in the question and your answer to (a) above, comment on the performance (including addressing the shareholder’s observation) and financial position of Bengal for the year ended 31 March 2011.
Note: up to 5 marks are available for the calculation of appropriate ratios. (16 marks)