Reference no: EM132280798

Assignment Questions

Question 1: Understanding Financial Statements

Business A and business B are both retailers, but seem to take a different approach to this trade according to the information available, which consists of a table of ratios:

Ratio	Business A	Business B
Return on capital employed	20%	17%
Return on owners' equity	30%	18%
Average settlement period for accounts receivable	63 days	21 days
Average settlement period for accounts payable	50 days	45 days
Gross profit percentage	40%	15%
Profit percentage	10%	10%
Inventory turnover period	52 days	25 days

Required:

1)  Discuss what this information indicates about the differences in each business's approach.

2)  If one of them prides itself on personal service and the other on competitive prices, which do you think is which, and why?

3)  Based on the given information, which business tends to require more external financing and what types of external financing you would recommend.

Question 2: Understanding Financial Statements

 You are presented with the following financial report extracts for Rocky Ltd:

	2015	2014	2013	2012
	$	$	$	$
Income statement
Sales	370,000	310,000	270,000
Cost of sales	174,000	140,000	116,000
Interest	17,000	9,000	4,000
Taxation 30%
Other expenses	60,000	56,000	54,000
Statement of financial position
Current assets
Inventory	18,000	15,000	17,000	18,000
Accounts receivable	62,000	41,000	31,000	29,000
Total current assets	110,000	72,000	62,000
Non-current assets
Property, plant and equipment	140,000	120,000	110,000
Total non-current assets	210,000	190,000	150,000
Total assets	320,000	262,000	212,000	180,000
Current liabilities
Accounts payable	30,000	17,000	12,000	11,000
Total current liabilities	70,000	52,000	42,000
Total non-current liabilities	110,000	80,000	30,000
Total liabilities	180,000	132,000	72,000
Total shareholders' funds	140,000	130,000	140,000

Note: that there are also other current assets, non-current assets, and current liabilities that are not specifically listed in the extracts shown above.

Required:

1)  Prepare a ratio analysis from the available information to cover profitability, liquidity, efficiency and capital structure.

2)  Based on the above ratio analysis, prepare a report indicating potential strengths and weakness in the management of this business.

3)  Identify additional information you would require to improve your analysis of this company over the period specified.

Question 3: Understanding Cash Flow Statement

The cash flow statements for retailing giant Discount Bonanza Ltd spanning the period 2012-2015 are as follows:

12 Months Ending

	31/12/2015 ($ millions)	31/12/2014 ($ millions)	31/12/2013 ($ millions)	31/12/2012 ($ millions)
Net profit	13,000	12,000	11,000	10,000
Depreciation expense	6,500	6,300	5,000	4,000
Changes in working capital	1,200	2,300	2,400	1,000
Cash from operating activities	20,700	20,600	18,400	15,000
Capital expenditure	(16,000)	(14,500)	(14,000)	(12,300)
Cash from investing activities	(16,000)	(14,500)	(14,000)	(12,300)
Interest and financing costs	(350)	(250)	(350)	100
Total cash dividend paid	(3,600)	(2,800)	(2,500)	(2,200)
Issuance (retirement) of shares	(8,000)	(1,500)	(3,600)	(4,500)
Issuance (retirement) of debt	1,500	(100)	4,000	4,100
Cash from financing activities	(10,450)	(4,650)	(2,450)	(2,500)
Net change in cash	(5,750)	1,450	1,950	200

 Required:

1) Describe Discount Bonanza's sources of financing in the financial markets over the last four years.

2) Prepare a brief narrative that describes the major activities of Discount Bonanza's management team over the last four years.

3) Explain the three perspectives from which financial statements can be viewed.

Question 4: Time Value of Money 

A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years. They believe that they can earn 8% interest on retirement savings.

Required:

1)  If they make annual payments into a savings plan, how much will they need to save each year? Assume the first payment comes in 1 year.

2)  Would the answer to part 1) change if the couple also realize that in 20 years, they will need to spend $60,000 on their child's college education?

3)  Explain what the time value of money is and why it is so important in the field of finance.

Question 5: Time Value of Money 

Babu is planning to save for his son's university education. His son is currently 11 years old and will begin university in 7 years. Babu has an index fund investment of $17,500 earning 9.5 per cent annually. Total expenses currently at the University of Sydney where his son says he plans to go, currently costs $25,000 per year but are expected to grow at roughly 4 per cent every year.

Babu plans to invest a certain amount in an investment fund that will earn 11 per cent annually to make up the difference between the education expenses and his current savings. In total, Babu will make seven equal investments with the first starting today and with the last being made a year before his son begins university. Assume the discount rate is 6 per cent.

Required:

1) What will be the present value of the 4 years of education expenses at the time that Babu's son starts university?

2) What will be the value of the index fund when his son just starts university?

3) What is the amount that Babu will have to have saved when his son turns 18 if Babu plans to cover all of his son's university expenses?

4) How much will Babu have to invest every year in order for him to have enough funds to cover all his son's expenses?

Question 6: Risk and return 

Assume you have invested in two shares Woolworth (WOW) and Village Roadshow (VRL). Woolworth is a leading retail company in Australia and Village Roadshow is an Australian film producer and distributer. Consider the following information associated with the two shares:

Probability of return	WOW Rate of return	VRL Rate of return
0.30	0.02	- 0.20
0.40	0.32	0.12
0.30	0.18	0.40

The market risk premium is 12%, and the risk-free rate is 4%.

Required:

1)  Calculate and explain which share has the most systematic risk?

2)  Calculate and explain which share has the most total risk?

3)  Discuss which share is actually the 'riskier' share based on the concept of diversification.

4)  Discuss the importance of CAPM and SML in determining the trade-off between risk and return.