Reference no: EM132167692
Assignment Questions
Question 1: Understanding Financial Statements
Conday and Co. Ltd, in operation for three years, produces antique reproduction furniture for the export market. Its most recent set of accounts is set out below. The company has asked the investors to invest $200,000 by purchasing 50,000 new ordinary shares at $4 each and the funds will be used to finance expansion.
|
Conday and Co. Ltd
Statement of financial position as at 30 November 2017
|
|
|
$'000
|
$'000
|
|
Current assets
|
|
|
|
Accounts receivable
|
820
|
|
|
Inventory
|
600
|
|
|
|
|
1,420
|
|
Non-current assets
|
|
|
|
Plant and machinery at cost
|
942
|
|
|
Less accumulated depreciation
|
(180)
|
762
|
|
Freehold land and buildings
|
|
228
|
|
|
|
990
|
|
Total assets
|
|
2,410
|
|
Current liabilities
|
|
|
|
Bank overdraft
|
385
|
|
|
Accounts payable
|
665
|
|
|
Taxation
|
95
|
1,145
|
|
Non-current liabilities
|
|
|
|
12% debentures
|
|
200
|
|
Shareholders' equity
|
|
|
|
Paid-up capital (issued at $1 each)
|
|
700
|
|
Retained profits
|
|
365
|
|
|
|
1,065
|
|
Total liabilities and shareholders' equity
|
|
2,410
|
|
Conday and Co. Ltd
Statement of comprehensive income for the year ended 30 November 2017
|
|
|
$'000
|
|
Sales
|
2,600
|
|
Less cost of sales
|
(1,620)
|
|
Gross profit
|
980
|
|
Less other expenses
|
(660)
|
|
Profit for the year
|
320
|
|
Income tax
|
(95)
|
|
Profit for the year after tax
|
225
|
|
Proposed dividends
|
(160)
|
|
Retained profit for the year
|
65
|
Required:
1) Apply ratio analysis and assess Conday's financial position and performance, and comment on any features you consider to be significant.
2) State, with reasons, whether or not the investors should invest in the company on the terms outlined.
Question 2: Understanding Financial Statements
Pindara Ltd has been in the business of supply of sanitary-ware. It has decided to expand its business to other major cities in the year ended 30 September 2015. The management is concerned over the expansion which has resulted in the company using its overdraft and loan facilities.
The following ratios have been calculated from the financial statements of Pindara Ltd:
|
|
|
2015
|
2014
|
|
Gross profit margin
|
=
|
Gross profit
|
|
33%
|
40%
|
|
Sales
|
|
Net profit margin
|
=
|
Net profit
|
|
15.5%
|
25%
|
|
Sales
|
|
Current ratio
|
=
|
Current assets
|
|
1.12:1
|
2.11:1
|
|
Current liabilities
|
|
Quick ratio
|
=
|
Current assets - inventory
|
|
0.68:1
|
1.78:1
|
|
Current liabilities
|
|
Accounts receivable days
|
=
|
Accounts receivable
|
X 365
|
40.6 days
|
29.2 days
|
|
Credit sales
|
|
Accounts payable days
|
=
|
Accounts payable
|
X 365
|
62.1 days
|
51.3 days
|
|
Credit purchases
|
|
Inventory turnover days
|
=
|
Inventory
|
X 365
|
31.6 days
|
17.1 days
|
|
Cost of goods sold
|
|
Gearing ratio
|
=
|
Long-term Loans
|
|
11.1%
|
7.7%
|
|
Equity
|
Required:
1) Analyse on the changes in the above ratios of Pindara Ltd from 2014 to 2015, and provide possible reasons that may have caused these results.
2) State any matters that Pindara Ltd should take into consideration when making a business expansion.
3) Discuss any limitations in the use of ratio for the analysis of a business.
Question 3: Understanding Cash Flow Statement
Goggle Ltd is an Internet firm that has experienced a period of vary rapid growth in revenue over the period 2012-2015. The cash flow statements for Goggle Ltd spanning the period are as follows:12 Months Ending
|
|
31/12/2015
($ millions)
|
31/12/2014
($ millions)
|
31/12/2013
($ millions)
|
31/12/2012
($ millions)
|
|
Net profit
|
4,000
|
3,000
|
1,500
|
400
|
|
Depreciation expense
|
1,000
|
600
|
300
|
150
|
|
Changes in working capital
|
600
|
50
|
50
|
(250)
|
|
Cash from operating activities
|
5,600
|
3,650
|
1,850
|
300
|
|
|
|
|
|
|
|
Capital expenditure
|
(3,600)
|
(7,000)
|
(3,300)
|
(2,000)
|
|
Cash from investing activities
|
(3,600)
|
(7,000)
|
(3,300)
|
(2,000)
|
|
|
|
|
|
|
|
Interest and financing costs
|
400
|
600
|
0
|
5
|
|
Total cash dividend paid
|
0
|
0
|
0
|
0
|
|
Issuance (retirement) of shares
|
24
|
2,400
|
4,400
|
1,200
|
|
Issuance (retirement) of debt
|
0
|
0
|
(2)
|
(5)
|
|
Cash from financing activities
|
424
|
3,000
|
4,398
|
1,200
|
|
|
|
|
|
|
|
Net change in cash
|
2,424
|
(350)
|
2,948
|
(500)
|
Required:
1) Based on the cash flow statements, write a brief narrative that describes the major activities of Goggle's management team over the last four years.
2) Explain the fundamental difference between an income statement and a statement of cash flow. Why do decision-makers need both reports?
Question 4: Time Value of Money
Your uncle has agreed to loan you $6,000 so you can go on holiday today. Because you are his favourite nephew, he has agreed to loan you the money at a below market interest rate of 6 percent per year. He has also agreed to a grace period of 3 years during which time no payments will be due. Your first payment is due exactly 4 years from today and you will have to make payments at the end of each year to repay the loan.
Required:
1) Given the payments are all equal, calculate the size of each repayment. Make any assumption to support your calculation.
2) This question is an example of using the time value of money in making personal financial decision. Now give three examples of how the time value of money might take on importance in business decisions.
Question 5: Time Value of Money
Your aunt heard that you are studying managerial finance this semester. She has asked your advice on the dilemma she is facing. Your task is to consider her situation and provide her a financial advice.
Your aunt's situation: She has just celebrated her 40th birthday. She has two children. One will go to university overseas 10 years from now and requires four beginning-of-year payments for university expenses of $10,000, $11,000, $12,000 and $13,000. The second child will go to another overseas university in 15 years from now and require four beginning-of-year payments for university expenses of $15,000, $16,000, $17,000 and $18,000. In addition, your aunt plans to retire in 20 years. She wants to be able to withdraw $50,000 per year (at the end of each year) from an account throughout her retirement. She expects to live 30 years beyond retirement. The first withdrawal will occur on her 61st birthday.
Required:
1) What equal, annual, end-of-year amount must your aunt save for each of the next years to meet these goals, if all savings earn a 12 percent annual rate of return?
2) What if your aunt expects to receive a lump sum gift cheque on her 61st birthday for $400,000? Show all workings.
3) What are the other actions that your aunt could take to accumulate more savings for her retirement?
Question 6: Risk and return
In the middle of 2010, Charlotte Lynch had been working for a year as an analyst for an investment company that specialises in serving very wealthy clients. These clients often purchase shares in closely held investment funds with very limited numbers of shareholders. In late 2008, the market for certain types of securities bases on real-estate loans simply collapsed as the sub-prime mortgage scandal unfolded. Charlotte's firm, however, saw this market collapse as an opportunity to put together a fund that purchase some of these mortgage-back securities that investors have shunned by acquiring them at bargain prices and holding them until the underlying mortgages are repaid or the market for these securities recovers. The investment company began putting together sales information concerning the possible performance of the new fund and made the following predictions regarding the possible performance of the new fund over the ensuing year as a function of the performance of the economy:
|
State of the economy
|
Probability
|
Fund return
|
|
Rapid expansion
|
10%
|
50%
|
|
Modest growth
|
50%
|
35%
|
|
No growth
|
35%
|
5%
|
|
Recession
|
5%
|
? 100%
|
In addition to the information provided above, Charlotte observed that the risk-free rate of interest for the following year was 4.5%, the market risk premium was 5.5% and the beta for the new investment was 3.55. Charlotte's boss asked her to perform a preliminary analysis of the new fund's performance potential for the coming year.
Required:
1) Calculate the expected rate of return and standard deviation. What is the reward-to-risk ratio for the fund based on the fund's standard deviation as a measure of risk?
2) Calculate the expected rate of return for the fund based on the CAPM. Based on your analysis, do you think the proposed fund offered a fair return given its risk? Explain.
3) Describe what the CAPM tells us and how to use it to evaluate whether the expected return of an asset is sufficient to compensate an investor for the risks associated with that asset and any limitations associated with this model.
Attachment:- Written Assessment.rar