Assessment Activity 1 - Knowledge Questions
This assessment activity is based on knowledge questions. Answer the following task. You must answer all task to get satisfactory performance in this assessment activity.
Task 1.1
Describe the expectations and objectives of a client that can fulfil clients' goals.
TASK-1.2
Clients must meet legal and financial obligation in order to establish business structure and finance of a business. Identify clients' legal and financial requirements.
TASK-1.3
Financial option can assist clients to make plan and achieve financial goals. Lists some financial options. Briefly explain at least two.
TASK-1.4
It is important to review business performance against set criteria. Lists the agreed criteria need to be followed and communicated to clients.
TASK-1.5
Clients' needs are not static: what are the internal and external factors that need to be identified and monitored to ensure clients financial objectives are met. (1.5)
TASK-1.6
List and explain three ways you could use to obtain feedback on financial services. (1.6)
TASK-1.7
From your personal experience, or from the experiences of others, what are three possible shortfalls in financial service standards? Suggest some methods to sort them out. (1.7)
TASK-1.8
List appropriate authorities and sources from where reliable and accurate data can be sorted. (2.1)
TASK-1.9
Briefly describe how reconciliation of date can ensure statements are accurate comply with organisational procedures and statutory requirement.
TASK-1.10
Ratio analysis is powerful tools to analyse revenue and cost. Mention five ratio Analysis with formula.
Current Ratio =
Quick Ratio =
Working Capital =
Gross Margin Ratio =
Net Profit Margin Ratio =
TASK-1.11
List four financial techniquescan be used to analyse data.
TASK-1.13
List some aspects that need to be considered when preparing financial advice for the clients. (3.1)
TASK-1.14
There are many methods of presentation to communicate with the clients. Lists some suitable methodsof presentation which canconvey information to client
TASK-1.15
Give some examples of potential risks that need to be identified and quantified to the client.
TASK-1.16
Describe the sources and features of short-term and long-term finance.
Assessment Activity 2: Case study
This assessment activity is about The Gale Clothing Co Ltd., which has provided its latest financial results for analysis and interpretation. The company is a well-established firm and has been in business for 30 years, with control of the company being kept by members of the Gale family. Recently the chairperson of the board, Don Gale, relinquished his position on entry into politics and a new board has been appointed. The business has had a reputation for stable, cautious management but in the last few years has been slowly losing its percentage share of the retail market. The new chairperson, Brenda Gale, has recently graduated from the Castle Hill University of Business and has requested that a study be made possible causes for the fall in the retail market share. At present, the company employs 250 people. Look at the following information and answer the required tasks:
Gale Clothing Co. Ltd
Income statement for the year ended 30 June 2015
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($000)
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($000)
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Sales
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16,000
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Less cost of goods sold
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Stock at 1 July
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850
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Purchases
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3,700
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4,550
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Less Stock at 30 June
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950
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3,600
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Gross Profit
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12,400
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Less operating expenses (including depreciation $800)
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9,970
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Profit before interest and taxes
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2,430
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Less interest
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450
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Profit before tax
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1,980
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Less Taxation expense
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780
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Net profit
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1,200
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Gale Clothing Co. Ltd
Statement of appropriation of profits for the year ended 30 June 2015
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($000)
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($000)
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Retained earnings at 1 July
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900
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Add profit after taxation
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1,200
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2,100
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Less Dividends provided for :
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Preference shares
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40
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Ordinary shares
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460
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500
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Less Transfers to reserves:
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General reserve
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600
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Retained earnings at 30 June reporting date
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1,000
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Gale Clothing Co. Ltd
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Balance sheet as at 30 June 2015
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($000)
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Current assets:
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Debtors
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2990
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Stock
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950
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3940
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Non- current assets:
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Investments
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Shares in listed companies
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601
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Land, buildings
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4459
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Plant, equipment
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10000
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Less accumulated depreciation
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7800
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2200
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Intangible assets
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Goodwill
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800
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8060
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Total assets
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12000
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Current liabilities:
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Creditors
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1030
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Provision for dividends
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500
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Provision for taxation
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780
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Bank overdraft
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120
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2430
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Non- current liabilities:
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Mortgage on land, buildings
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1270
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Debentures
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1500
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2770
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Total liabilities
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5200
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Net assets
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6800
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Equity:
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Preference shares $1 fully paid
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Ordinary shares $1 paid to 75c each
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500
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Share capital
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4500
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5000
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General reserve
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800
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Retained earnings
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1000
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Total equity
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6800
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Additional information
- All sales were made on credit.
- A study of comparative figures from the 30 June 2014 statements showed an accounts receivable balance of $3050 and a total equity position of $6600. The market value of the company's shares at 30 June 2010 was 85c.
Investment plan and improve cash flow:
Gale Clothing Co Ltd. is planning to expand business. Managing director of the company is not sure whether he should invest or not. The following information has been supplied by financial analysis to evaluate which project would be more beneficial.
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Project A
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Project B
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Purchase cost
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$300,000
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$375,000
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Expected life
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5 years
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5 years
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Scrap value
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Nil
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Nil
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Purchase date
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Now
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Now
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Depreciation
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Straight
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Straight
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Net profit before tax and depreciation
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$95,000
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$104,000
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Additional information:
i) Company tax rate is 30% payable at the end of the year.
ii) Cost of capital is 10% after tax.
Working capital management
Gale Clothing Co Ltd retail has another business that sells 35 000 units of product annually, which it buys for $17 per unit. The cost of placing each order is $6, while the annual carrying cost is $3.50 per unit.
Estimated Cash collection:
CEO of Gale Clothing Co Ltd Electronic asked you to prepare Estimated working capital (Estimated cash) for the first half of 2016 and have provided you with the following information:
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Quarter
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Sales ($)
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3 rd. Quarter 2014
4th Quarter 2014
1st Quarter 2015
2nd Quarter 2015
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100,000
90,000
105,000
110,000
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- Seventy per cent of sales are collected in the same quarter they were made, 25% in the following month and 5% in the second following month.
Cost of capital :
Gale Clothing Co Ltd request you to estimate the discount rate as the WACC in order to determine the value of the share held XYZ, Inc for potential acquisition. The company parameters are as follows:
- Book value of equity is $700,000.
- Seller is prepared to carry a note of $300,000 at 8.25% annual interest.
- ABC Bank has offered to finance part of the purchase price with a loan of $100,000 at 9.25% annual interest.
- The company tax rate is 40%.
- The equity discount rate is 35%.
- You project the first year net cash flow to be $80,000.
- You expect net cash flow to grow at 7.73% on average.
Fixed deposit:
Gale Clothing Co Ltd has fixed deposit of $8250 with Bendigo Bank for three years earning at 5.5% simple interest per annum?
Capital structure decisions
Manager of Gale Clothing Co Ltdcame to you with income statement and wants to get more understanding about business operations in terms of finance. Following is the income statement. (2.3)
Statement of financial performance
31st December 2015
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$
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$
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$
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Sales
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80 000
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100 000
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120 000
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Variable costs
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40 000
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50 000
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60 000
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Contribution margin
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40 000
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50 000
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60 000
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Fixed costs
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9 000
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9 000
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9 000
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EBIT
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31 000
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41 000
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51 000
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Interest
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2 500
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2 500
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2 500
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28 500
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38 500
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48 500
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Tax 30%
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8 550
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11 550
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14 550
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Earnings after tax
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19 950
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26 950
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33 950
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FINANCIAL POTENTIALITY OF BUSINESS:
Gale Clothing Co Ltdis considering two investment schemes.
Scheme 1 has a cost of $150 000 and an economic life of 5 years and has a residual value of $30 000.
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Year
1
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Year
2
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Year
3
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Year
4
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Year
5
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Profit after tax
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200
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8000
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9500
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9000
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10000
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add Depreciation
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6000
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6000
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6000
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6000
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6000
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Net cash inflows
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6200
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14000
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15500
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15000
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16000
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Cumulative cash inflows
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6200
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20200
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35700
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50700
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66700
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Scheme 2 has a cost of $160000 and an economic life for 5 years. The annual after-tax profits are expected to be $11000 annually.
The company requires a return on average assets employed of 12%. Depreciation is calculated using the straight line basis.
LEASE OR PURCHASE THE FURNITURE:
Gale pty ltd will require six month period variety of office furniture. The company can borrow funds at 12% per annum after tax and purchase the furniture for $14,300 or lease the furniture $2000 per month payable in advance. If purchased, it will have be insured for premium of $70, but if leased, insurance will be affected by lessor. Furniture is depreciable for tax purpose at the rate of 30%. The estimated sale value at the end of six month would be $6,500. Assume the tax effects occur at the end of lease.
REQUIRED:
Task 2.1
Ratio analysis is standard financial analysis technique to analyse financial report and data. Base on financial statement calculate the following ratio. (Pc-2.3, 2.4, 2.5, 2.6, 2.7)
Current ratio
Liquid ratio
Stock turnover
Collection period days
Fixed asset turnover
Assets turnover
Assets employee ratio:
Gross profit margin (%): Gross/Sales X 100=
Net profit margin (%)
Return on net worth
Return on total assets (%)
Profit per employee
Debt to equity (%)
Total debt to total assets (%)
Earning yield
Task 2.2
Based on ration analysis advise client to improve financial performance. (Pc-3.1)
Task 2.3:
According to client request review investment plan by using Capital budgeting technique that may include payback period and Net present, value (NPV). Calculate the payback period and Net Present Value for both proposals and advice client whether or not to accept the proposal and provide the reasons (pc-1.4, 3.1)
Task 2.4: Client is notsure how much working capital (inventory) need to be maintained. Advise appropriate plan and calculate economic order quantity and umber of orders to be placed each year. (Pc-1.3, 1.4
Task 2.5:
Being a financial analyst calculate the Weighted Average cost of capital (WACC) to assess the financial potential of business(use book value of business equity). (PC-2.7, 1.3)
Task 2.6:
Based on fixed deposit client is expecting to achieve future financial goal. What will be the future value of the deposit in three years? (1.3)
Task 2.7: Based on case study capital structure decision solve the following problem:
- Over the range of sales level, what is the increase in sales between 80 000 and 120 000?
- Over the range of sales level, what is the % increase in EBIT between 80 000 and 120 000?
- What is the degree of operating leverage at sales of $80 000, $100 000 and $120 000?
- What is the degree of financial leverage at sales of $80 000, $100 000 and $120 000?
- What is the combined leverage at sales of $80 000, $100 000 and $120 000?
Do the calculation and answer all the questions.
Task 2.8: As per CEO of Gale requirement prepare estimate cash collection for Four Quarter. (Pc-1.3, 1.4, 3.3)
Task 2.9: Gale ltd has two investment schemes. Assess the financial potentiality of investment based on accounting rate of return on total investment and advise which scheme should be selected. (Pc 2.7)
Task 2.10: Analyse revenue and cost of potential office furniture and advise client should it be leased or purchased. (PC-2.3)
Task 2.11
After completing all tasks of this assessment activity, do a meeting with your trainer for minimum 10 minutes (assuming him or her as the new chairperson, Brenda Gale) in this meeting discuss the following:
- Verify the business goals with client ( Brenda gale)
- Discuss legal, ethical and legal requirements with the client
- Talk about different financial plans and discuss about plans to achieve those.
- Communicate client about how the plans are progressing
- Ask questions about your services(feedback)
- Use table, calculations to discuss which options are better for client and why?
- Advise the client about risk and contingencies and different risk management options.
- Advise and discuss different short term and long-term finance options.
Your trainer will use following checklist to assess your work.
Did the learner Yes/No Comments and other options
Used simple and clear English
Did learner use good questioning and listening skills?
Verified the business goals with client
Discussed legal and ethical requirements.
Talked about different finance options
Collected feedback about customer services
Made use of tables, other calculations etc. to present data while advising
Explained about risk and how to manage them
Discussed short term and long term loan options