Discuss the merits and limitations of ratio analysis

Assignment Help Financial Management

Reference no: EM133058584

Question 1

a) Calculate the following ratios for Rio Tinto plc for the year ended 31st December 2019

1. Return On Capital Employed
2. Inventory Turnover (stock days)
3. Debtor ratio (debtors' days)
4. Creditor ratio (creditor days)
5. Current ratio
6. Quick ratio
7. Debt/equity ratio
8. Interest cover
9. Return on Equity
10. Price Earnings Ratio (P/E Ratio)

b) Using the 2019 ratios you calculated in question 1 (part a) and the 2020 ratios calculated in class write a brief report (500 words in total) which compares the performance of Rio Tinto plc across both years.

Your marks for this question will not be affected by any errors you may make in the calculations in question 1. If you have been unable to calculate any ratios in question 1 you can assume an answer for 2019 and write your report accordingly.

Question 2

Bonsall Plc are a manufacturing company who produce components for high performance motorcycles. The product research team have been working on a new lightweight handlebar which they are now proposing to launch. The production and sales teams have supplied the following data to you- Bonsall's Finance Manager.

Year	Sales £'s	Fixed costs £'s	Variable costs £'s	Scrap proceeds £'s
Yr1	250,000	120,000	125,000
Yr2	305,000	125,000	152,500
Yr3	375,000	130,000	187,500
Yr4	475,000	135,000	237,500
Yr5	400,000	140,000	200,000
Yr6	0	0	0	5000

A new machine will be required to produce the handlebar at a cost of £150,000 payable immediately.

After 5 years the sales team forecast that the product will become obsolete and hence the handlebar will be withdrawn from sale. At this point the original machine will be sold for an expected scrap value of £5,000

Bonsall use a discount rate of 10% to appraise new investments. For an investment to be authorized it must meet or exceed the following targets:
1. NPV- positive at 10% discount rate 2. IRR- 15%
3. Undiscounted Payback- 3yrs or less

Required
Using the information above for the new project calculate:
1) The undiscounted payback
2) The Net Present Value and
3) The Internal Rate of Return

Considering your answers state whether the project is acceptable.

Question 3
Discuss the benefits and drawbacks of raising funding using the following 3 sources of finance
1) Ordinary shares
2) Preference shares
3) Redeemable bonds

Your answer should consider issues of ownership, financial risk and cost.

Question:4

a) Discuss the merits and limitations of ratio analysis.

b) Explain your understanding of the risk/return relationship and why it is so important in Financial Management.

c) What should be the primary objective of a commercial firm? How does this work in reality and what other objectives might be important for the company?

Reference no: EM133058584

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