Reference no: EM132278531
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:
|
|
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.