Overview - What is a Group?
- For campus students, the group means 1 or 2 students.
- For distant learning (FLEX) students, while a group of 1 is likely to be more practical groups of 2 are optional.
- Important Note 1: Students working as a group, only one member of the group will submit the assignment online by uploading it in Moodle.
The Task - There are 4 calculation-based questions and 2 theory questions assessing work covered in Weeks 1 to 5. All questions are from the prescribed textbook, Managerial Finance - Principles and Applications by Titman et al. (2016)
References - TITMAN, S., MARTIN, T., KEOWN, A. J. & MARTIN, J. D. 2016. Financial management: Principles and Applications, Melbourne, Pearson Australia
Question 1: Understanding Financial Statements
Develop your responses by reviewing peer-reviewed articles, professional publications and/or credible texts.
Part 1 - Describe the content and the importance of the balance sheet and the income statement.
Part 2 - From the firm's perspective, how are dividends different from interest payments?
Part 3 - What is a firm's net working capital, and what does it tell you about the liquidity of a firm?
Question 2: The Income Statement
Construct an Income Statement. Use an Excel spreadsheet and/or tables to present your work. Show all workings.
Part 1 - At the end of its third year of operations, the Sandifer Manufacturing Company had:
- $4,500,000 in revenue;
- $3,375,000 in cost of goods sold;
- $450,000 in operating expenses, which included a depreciation expense of $150,000;
- a tax liability equal to 30% of the firm's taxable income.
- Construct an Income Statement with the above data.
- What is the net profit of the firm for the year?
- Explain how net profit differs from gross profit and operating profit?
- Analyse the data and outcome. What information can we derive from Sandifer's Income Statement?
Part 2 - Continued from Part 1: Sandifer Manufacturing Company (from the previous problem) plans to reinvest $50,000 of its earnings back in the firm.
How much profit is left for the payment of a cash dividend to Sandifer's shareholders?
Question 3: Financial Analysis
Use an Excel spreadsheet and/or tables to present your calculations. Show all workings.
Part 1 - Liquidity Analysis Calculation: The King Carpet Company has $3, 000, 000 in cash and a total of $12,000,000 in current assets. The firm's current liabilities equal $6,000,000 such that the firm's current ratio equals 2. The company's managers want to reduce the firm's cash holdings to $1,000,000 by paying $500,000 in cash to expand the firm's truck fleet, and using $1,500,000 in cash to retire a short-term note. Central to the decisions is the issue of liquidity.
- What does the term liquidity mean in the context of the firm's financial condition?
- What financial ratios can you use to analyse and assess liquidity?
- If they carry this plan through, demonstrate the effect on the firm's current ratio?
- How we can we determine whether The King Carpet Company is more or less liquid than other firms?
Part 2 - Profitability Analysis Calculation: The Allen Corporation had sales in 2015 of $65 million, total assets of $42 million and total liabilities of $20 million. The annual interest rate on the company's debt is 6%, and its tax rate is 30%. The operating profit margin is 12%.
- Compute the firm's 2015 operating profit and net profit.
- How would you determine if the frim was achieving reasonable profit margins?
- Calculate the firm's return on assets and return on equity (hint: you can assume that interest must be paid on all of the firm's liabilities) and describe what aspect of the firm's performance you are measuring.
Question 4: Time Value of Money
Use an Excel spreadsheet and/or tables to present your calculations. Show all workings.
Part 1 - Future Value Calculation: 'Saving for your first house' - You are hoping to buy a house in the future and recently received an inheritance of $50,000. You intend to use your inheritance as a deposit on your house.
- If you put your inheritance in an account that earns 7% interest compounded annually, how many years will it be before your inheritance grows to $75 000?
- If you let your money grow for 10.25 years at 7% compounded annually, how much will you have?
- How long will it take your money to grow to $75 000 if you move it into an account that pays 3% compounded annually?
- How long will it take your money to grow to $75 000 if you move it into an account that pays 11% compounded annually?
- What does all this tell you about the relationship among interest rates, time and future sums?
Part 2 - Present Value: Sarah Wiggum would like to make a single investment and have $2 million at the time of her retirement in 35 years. She has found a managed fund that will earn 4% annually.
- How much will Sarah have to invest today?
- What if Sarah has a finance degree and learned how to earn a 14% annual return? How soon could she then retire?
Question 5: Risk and Return
Use an Excel spreadsheet and/or tables to present your calculations. Show all workings.
Part 1 - Calculating rates of return: On 12 December 2007, the ordinary shares of Qantas Airways Ltd (QAN) were trading for $5.75.
One year later, the shares sold for $2.24. During that period, Qantas paid dividends totalling $0.35.
- What rate of return would you have earned on your investment had you purchased the shares on 12 December 2007 and sold them on 12 December 2008?
- Describe, in your own words, the concept of a realised of return.
- How do cash dividends affect the realised rate of return from investing in ordinary shares?
- Why is volatility in an investment's rate of return a reasonable indication of the risk of an investment?
Part 2 - Calculating rates of return: The S&P/ASX 200 share price index represents a portfolio which comprises the 200 largest companies listed on the Australian Securities Exchange. On 12 December 2007, the index had a value of 6615.2 and on 12 December 2008 the index had a value of 3510.4.3. If the average dividend paid on the shares in the index is approximately 4% of the value of the index at the beginning of the year, what is the rate of return earned on the S&P/ASX 200 index?
What is your assessment of the relative riskiness of the Qantas Airways investment (analysed in the previous problem) compared to investing in the S&P/ASX 200 index (recall from Chapter 2 that you can purchase managed funds that mimic the returns on the index)?
Question 6: Risk and Return
Unpack the question and develop your responses by reviewing journal articles, professional publications and/or credible texts.
Part 1 - Describe the relationship between the expected rate of return for an individual investment and the expected rate of return for a portfolio of several investments.
Part 2 - Portfolio diversification is affected by the volatility of the returns of the individual investments in the portfolio as well as the correlation among the returns. Explain this statement.
Attachment:- Assignment File.rar