Explain the concept of shareholder wealth maximisation and critically evaluate which project Jazaer should select. In your answer, consider the distinction between profit maximisation and shareholder wealth maximisation

Assignment

Total:90 Marks

Answer all the Questions. (Word Limit-2500-3000 words)

Awali Trading Company

All values in SAR Millions

Income statement for the year ended 30th Sept 2026

Assume all current liabilities are trade payables.

Sector average ratios:

Return on capital employed 16%

Net profit margin 25%

Current ratio 1.0 Times

Debt/equity ratio (book value basis) 60%

Return on equity 19%

Question 1

Required:

1.1 Calculate the following ratios for Awali Trading:

Gross Profit Margin Net Profit Margin Net Asset Turnover Receivable Days Payable Days

Return on Capital Employed Debt / Equity Ratio

Return on Equity

(10 marks)

1.2 Comment on the financial performance of Awali Trading between the years 2024 and 2026 using the ratios above and any other financial measure you feel appropriate. Highlight any areas of concern relating to their financial performance, solvency and levels of corporate debt. (10 marks) Question 1 Total 20 marks

Question 2

Jazaer Construction is a listed construction company considering two alternative investment projects. The company has limited funds and can undertake only one project.

• Project A is expected to generate high accounting profits over the next three years and is likely to increase the directors` annual performance bonuses. However, the project requires substantial borrowing and exposes the company to greater financial risk.
• Project B is expected to generate lower accounting profits in the short term but has a positive net present value of BD 80 million and is expected to strengthen the company`s long-term competitive position.

The senior management of the firm receive their bonuses based on year-end profits.

The CEO of your firm favours Project A because it will improve reported profitability, while several shareholders argue that the company should select the project that creates the greatest long-term value.

Required:

Explain the concept of shareholder wealth maximisation and critically evaluate which project Jazaer should select. In your answer, consider the distinction between profit maximisation and shareholder wealth maximisation, the importance of risk, cash flows and the time value of money, and the potential conflict of interest between directors and shareholders. (10 marks)

Question 3

Riffa Investments is looking to take on a new investment. The company will evaluate two mutually exclusive projects, whose details are given below. The company’s cost of capital is 6%.

1. Calculate the Payback period (3 marks)
2. Accounting Rate of Return (6 marks)
3. Calculate the Net Present Value (NPV) (6 marks)
4. Calculate the Internal Rate of Return (IRR) (6 marks)
5. Critically discuss the merits of each investment appraisal method, then discuss the result of the evaluations you have made of the two projects and advise the company which project should be undertaken (9 marks) Question 3 Total 30 marks

Question 4

Dammam Logistics is considering acquiring a new automated warehouse scanning system. The company can either purchase the equipment outright or lease it from a specialist supplier.

The purchase price of the equipment is SAR 180,000 and it has an expected useful life of 7 years. If Dammam Logistics purchases the equipment, it will finance the investment using capital with a cost of 9% per year. Annual maintenance and software support costs are expected to be SAR 8,000 per year.

Alternatively, the company can lease the equipment for SAR 35,000 per year for 7 years, with lease payments payable at the start of each year. Under the lease agreement, the lessor will cover all maintenance and software support costs.

Required:

Evaluate whether Dammam Logistics should lease or buy the warehouse scanning system. Support your recommendation with appropriate financial calculations.

1. What are the respective present value costs of purchasing the machine/software or leasing it? (8 marks)
2. Consider the theoretical cost of Debt, Preference Shares, and Ordinary Shares; rank them from most expensive to cheapest. (7 marks)
3. Recently, one of your company`s directors has attended a finance conference. On their return, the director has decided the company should fund all projects with external debt finance since this is lower cost when compared to equity.

Critically discuss the statement, outline if this is a realistic proposition. (8 marks)

For any company that is considering a project that will generate cash flows over the next five years. Discuss why the timing of these cash flows should be considered when deciding whether to undertake the investment. (7 marks) Question 4 Total 30 marks.