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Cadnam Co is a large company in the support services sector.
Cadnam Co's most recent annual report, for the year ended 31 December 20X5, acknowledged challenges for the company, including financing the major investment programme required to meet its clients' increasing expectations. Cadnam Co also faced upward pressure on employment costs, fuelled by a 'fair wage' campaign which adversely compared wage rises in the support services sector with increases in dividends and directors' remuneration, and a consequent government enquiry into low pay in the sector.
Cadnam Co's board, however, was confident that the company would be able to renew a number of large contracts which were coming up for review. The report stressed the strength of Cadnam Co's senior management team as a vital success factor. Directors' remuneration packages thus reflected the need to retain its directors in a competitive labour market at senior level.
In the stakeholder engagement section of its annual report, Cadnam Co highlighted that it had fulfilled its aim of guaranteeing investors a consistent rise in dividends and its board was confident that Cadnam Co would be able to maintain the recent rate of dividend increase. The report also stated that Cadnam Co was looking to publish a full integrated report over the next couple of years.
Dividend policy
At Cadnam Co's last annual general meeting, there were no questions about the level of profits, dividends or directors' remuneration. However, a recent investment analysts' report on the support services sector highlighted Cadnam Co as a company which might have problems in the next few years. The report suggested that Cadnam Co's investment and dividend policies could not both be maintained. It highlighted one of Cadnam Co's principal competitors, Holmsley Co, as a company whose policies it believed would sustain long-term growth. It highlighted directors' remuneration as an area where Holmsley Co's policies were more likely to encourage long-term value creation and share price increases than Cadnam Co's policies.
Cadnam Co's board is currently considering the comments made by the investment analysts, and also assessing what the dividend for 20X6 should be.
Cadnam Co
Average gearing in the support services sector since 20X1 has been stable at around 34%. There have been no changes in the issued share capital of Cadnam Co and Holmsley Co since 20X1.
Directors' remuneration
Cadnam Co 20X6 forecast
Forecasts prepared by Cadnam Co's finance director for 20X6 predict that:
– Cadnam Co's pre-tax operating profit for 20X6 will be $2,678m, an increase of 3% compared with 20X5. The operating profit margin will be 2%, the same as for 20X5.
– The tax rate will be 30%.
– Average debt in 20X6 will be $10,250m and predicted year-end gearing will be 41·3%. The average pre-tax interest rate on the debt will be 8%.
– The investment required to keep the non-current asset base at its present productive capacity in 20X6 will be $2,430m, which has been included in the calculation of operating profit as depreciation.
– Investment required in additional assets in 20X6 will be $0·25 for every $1 increase in revenue.
Required:
(a) Calculate the forecast dividend capacity of Cadnam Co for 20X6.
(b) Discuss the viability and financial impacts of Cadnam Co seeking to maintain its current dividend policy, supporting your answers with relevant calculations.
Note: 6 marks are available for calculations in part (b).
(c) Discuss the governance and ethical issues associated with Cadnam Co's dividend and directors' remuneration policies.
Cadnam Co is a large company in the support services sector.
Cadnam Co's most recent annual report, for the year ended 31 December 20X5, acknowledged challenges for the company, including financing the major investment programme required to meet its clients' increasing expectations. Cadnam Co also faced upward pressure on employment costs, fuelled by a 'fair wage' campaign which adversely compared wage rises in the support services sector with increases in dividends and directors' remuneration, and a consequent government enquiry into low pay in the sector.
Cadnam Co's board, however, was confident that the company would be able to renew a number of large contracts which were coming up for review. The report stressed the strength of Cadnam Co's senior management team as a vital success factor. Directors' remuneration packages thus reflected the need to retain its directors in a competitive labour market at senior level.
In the stakeholder engagement section of its annual report, Cadnam Co highlighted that it had fulfilled its aim of guaranteeing investors a consistent rise in dividends and its board was confident that Cadnam Co would be able to maintain the recent rate of dividend increase. The report also stated that Cadnam Co was looking to publish a full integrated report over the next couple of years.
Dividend policy
At Cadnam Co's last annual general meeting, there were no questions about the level of profits, dividends or directors' remuneration. However, a recent investment analysts' report on the support services sector highlighted Cadnam Co as a company which might have problems in the next few years. The report suggested that Cadnam Co's investment and dividend policies could not both be maintained. It highlighted one of Cadnam Co's principal competitors, Holmsley Co, as a company whose policies it believed would sustain long-term growth. It highlighted directors' remuneration as an area where Holmsley Co's policies were more likely to encourage long-term value creation and share price increases than Cadnam Co's policies.
Cadnam Co's board is currently considering the comments made by the investment analysts, and also assessing what the dividend for 20X6 should be.
Cadnam Co
Average gearing in the support services sector since 20X1 has been stable at around 34%. There have been no changes in the issued share capital of Cadnam Co and Holmsley Co since 20X1.
Directors' remuneration
Cadnam Co 20X6 forecast
Forecasts prepared by Cadnam Co's finance director for 20X6 predict that:
– Cadnam Co's pre-tax operating profit for 20X6 will be $2,678m, an increase of 3% compared with 20X5. The operating profit margin will be 2%, the same as for 20X5.
– The tax rate will be 30%.
– Average debt in 20X6 will be $10,250m and predicted year-end gearing will be 41·3%. The average pre-tax interest rate on the debt will be 8%.
– The investment required to keep the non-current asset base at its present productive capacity in 20X6 will be $2,430m, which has been included in the calculation of operating profit as depreciation.
– Investment required in additional assets in 20X6 will be $0·25 for every $1 increase in revenue.
Required:
(a) Calculate the forecast dividend capacity of Cadnam Co for 20X6.
(b) Discuss the viability and financial impacts of Cadnam Co seeking to maintain its current dividend policy, supporting your answers with relevant calculations.
Note: 6 marks are available for calculations in part (b).
(c) Discuss the governance and ethical issues associated with Cadnam Co's dividend and directors' remuneration policies.
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Section A – BOTH questions are compulsory and MUST be attempted
1、The Bassett Group (the Group) is a publisher of newspapers and magazines, academic journals, and books. The Group, a listed entity, has a financial year ending 30 April 2018, and your firm, Whippet & Co, was appointed as Group auditor in September 2017. Whippet & Co will audit all Group companies with the exception of Borzoi Co, a foreign subsidiary, which is audited by a local firm of auditors, Saluki Associates. The Group aims to comply fully with relevant corporate governance requirements.
You are the manager responsible for the Group audit, and the audit engagement partner has just sent the following email to you:
Background information and results of analytical procedures
The Group operates globally, with sales being made in over 100 countries. The Group has 20 subsidiaries which have been acquired over the last 30 years. All Group companies are located in the same country, with the exception of Borzoi Co, a foreign subsidiary whose operations focus on the translation of published content into a variety of different languages.
The Group’s publishing activities can be categorised into three operating segments, each of which are cash generating units for the purpose of impairment reviews: newspapers and magazines, academic journals, and books. The revenue and total assets for 2018 (projected) and 2017 (actual) for the Group in total and for each segment is as follows:
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Posie is a large business which manufactures furniture. It is made up of two autonomous divisions in Deeland. The manufacturing division purchases raw materials from external suppliers, and performs all manufacturing and packaging operations. All sales are made through the retail division which has 95 retail stores in Deeland, as well as through Posie’s own well-developed website. Posie has retail operations in eight other countries as well as in Deeland. These overseas businesses operate as independent subsidiaries within the Retail Division, each with their own IT and accounting functions.
The furniture is sold in boxes for customers to assemble themselves. About 10% of the products sold by Posie are purchased already packaged from other manufacturers. All deliveries are outsourced through a third party distribution company.
Posie’s corporate objective is to maximise shareholder wealth by producing ‘attractive, functional furniture at low prices’. This is how customers generally perceive the Posie brand. The CEO of Posie is concerned about increasing levels of returns made by customers and increasing numbers of consumers complaining on online forums about products purchased from Posie.
Concerned about the impact on the Posie brand and the cost-leadership strategy, the CEO has asked you as a performance management expert to help Posie implement the six sigma technique to reduce the number of products returned and in particular to define customers’ requirements and measure Posie’s existing performance. The production director has been appointed to sponsor the project and you will be supported by a small team of managers who have recently received training in six sigma. The board member responsible for manufacturing quality recently resigned because she thought it was unfair that the manufacturing division was being held responsible for the increased level of customer returns.
You have been given access to some information concerning the reasons why customers return goods to help you measure existing performance in this area (Appendix 1). This is an extract from the management reporting pack presented to the board at their monthly meetings. The returns data, however, are only compiled every six months due to the lengthy analysis required of data from Posie’s overseas retail operations. It is included twice a year in the board report along with the KPIs for customer satisfaction. The last time this information was produced 93% of customers indicated they were satisfied with the quality of the manufacture of Posie’s products.
The CEO has heard that six sigma requires ‘large amounts of facts and data’. He suggested that the returns data contain insufficient detail and that as part of your project you may need to do more analysis, for example, on why customers are not satisfied with the manufacturing quality.
He also added, ‘I’m not sure that our current IT systems are capable of generating the data we need to identify which responsibility centres within the manufacturing division are the root causes of the problem of customer returns. We are planning to change the designation of the overseas retail businesses from profit centres to revenue centres, but again we need to know first how this will affect the information requirements of the business and any potential problems with doing so.’
Appendix 1
Reasons given by customers for returning goods
Required:
(a) Advise the board how the six sigma project at Posie to reduce returns from customers could be implemented using DMAIC methodology.
(b) Evaluate the impact on Posie’s information requirements arising from:
(i) The need to identify and improve on the level of customer returns.
(ii) The proposed re-designation of the overseas subsidiaries from profit centres to revenue centres.
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Section B – TWO questions ONLY to be attempted
3、The audit of Davis Co’s financial statements for the year ended 30 November 2017 is nearing completion and the auditor’s report is due to be signed next week. Davis Co manufactures parts and components for the aviation industry. You are conducting an engagement quality control review on the audit of Davis Co which is a listed entity and a significant new client of your firm. The draft financial statements recognise revenue of $8·7 million, assets of $15·2 million and profit before tax of $1·8 million.
You have identified the following issues as a result of your review:
(i) The planned audit approach to trade payables was to place reliance on purchasing controls and keep substantive tests to a minimum. During controls testing on trade payables, from a random statistical sample, the audit team identified three purchase orders which had not been authorised by the procurement manager. On review of the supporting documentation, the audit team concluded that the items were legitimate business purchases and therefore concluded that no additional procedures were required. (4 marks)
(ii) Following a review of petty cash transactions, the audit assistant identified that the petty cashier paid for taxi fares for personal, non-business journeys with a total value of $175. Following discussions with the audit assistant, you have ascertained that he did not report the matter further as the amount is immaterial. The audit assistant also commented that the petty cashier is his brother and that he did not want to get him into trouble. (6 marks)
(iii) Cut-off testing on revenue has identified two goods despatch notes, dated 2 December 2017, for items sent to Chinn Co, with a combined sales value of $17,880 which had been included in revenue for the year ended 30 November 2017. The client’s financial controller, David Mount, has explained that Chinn Co does not order on a regular basis from Davis Co. In the absence of a regular payment history with Chinn Co therefore, and in order to minimise the receivables collection period from this particular customer, the sales invoice is raised and sent to the customer on the same day that the sales order is received. The average time period between the receipt of an order and despatching the goods to the customer is approximately one to two weeks. The audit working papers have concluded that no further investigation is necessary. (6 marks)
(iv) The finance director, Leslie Gray, has not completed the tax computation for the year ended 30 November 2017. He has recently asked the audit assistant to calculate the company’s tax payable for the year on the basis that as a recently qualified chartered certified accountant, the audit assistant was more up to date with recent changes in tax legislation. (4 marks)
Required:
Evaluate the quality control issues and the implications for the completion of the audit including any further actions which should be taken by your audit firm. Your answer should include the matters to be communicated to management and to those charged with governance in relation to the audit of Davis Co.
Note: The split of the mark allocation is shown against each issue described above.
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努力造就实力 · 态度决定高度
脚踏实地沉着备战 相信自己相信未来