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 specialized 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 the 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 neighboring 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 organization.
You have been appointed by Sharon as a consultant. She has requested 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.
(b) Prioritize the roles and responsibilities of the finance manager who will be hired within the next year or two.
(c) Discuss why negative cash flows from assets during the first three years is not necessarily a bad sign for the business.
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:
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.
(b) Deconstruct the return on equity for both years and discuss your observations.
Note that, where relevant, the number of days in the year is assumed to be 365 (three hundred and sixty-five).
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 generate a 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 a 3% return each year.
(a) Solve the amount you will have on retirement.
(b) Formulate three (3) different strategies to increase the amount of retirement.
(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 the 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 is the same. Life expectancy in Singapore is 90 years and the discount rate is assumed to be 3%.
Compare both annuities and prioritize your options.
(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 interest of 18.5% per year (compounded daily). Alternatively, you can draw down on a cash line facility that 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.