INTERNATIONAL FINANCIAL MANAGEMENT
Q1. FINANCIAL ANALYSIS
a. Fill in the 20X3 column in the table that follows.
BUENAFLOR CORP. INDUSTRY
RATIO 20X1 20X2 20X3 NORMS
1. Current ratio 250% 200% 225%
2. Acid-test ratio 100% 90% 110%
3. Receivable turnover 5.0× 4.5× 6.0×
4. Inventory turnover 4.0× 3.0× 4.0×
5. Long-term debt/total
Capitalization 35% 40% 33%
6. Gross profit margin 39% 41% 40%
7. Net profit margin 17% 15% 15%
8. Return on equity 15% 20% 20%
9. Return on investment 15% 12% 12%
10. Total asset turnover 0.9× 0.8× 1.0×
11. Interest coverage ratio 5.5× 4.5× 5.0×
b. Evaluate the company using information from the table. Cite specific ratio levels and trends as evidence.
a. If you are a supplier of BUENAFLOR Corporation, in what ratio/s will you be interested? Will you still grant credit to BUENAFLOR Corporation? Why?
b. If you want to invest in BUENAFLOR Corporation, in what ratio/s will you be interested? Will you invest in BUENAFLOR Corporation? Why?
c. If you are part of BUENAFLOR Corporation management, in what ratio/s will you be interested? Are the company's assets efficiently utilized?
Q2. CASH BUDGET. Prepare a cash budget for the Shoesyal Manufacturing Company, indicating receipts and disbursements for May, June, and July. The firm wishes to maintain at all times a minimum cash balance of P20,000. Determine whether or not borrowing will be necessary during the period, and if it is, when and for how much. As of April 30, the firm had a balance of P20,000 in cash.
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ACTUALSALES
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FORCE A STEDSALES SSSSSSTEDSA
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January
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P 50,000
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May
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P 70,000
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February
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50,000
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June
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80,000
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March
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60,000
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July
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100,000
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April
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60,000
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August
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100,000
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Accounts receivable: 50 percent of total sales are for cash. The remaining 50 percent will be collected equally during the following two months (the firm incurs a negligible bad-debt loss).
Cost of goods manufactured: 70 percent of sales: 90 percent of this cost is paid the following month and the remaining 10 percent one more month later.
Selling, general, and administrative expenses: $10,000 per month plus 10 percent of sales.
All of these expenses are paid during the month of incurrence.
- Interest payments: A semiannual interest payment on P150,000 of bonds outstanding percent annual interest) is paid during July. An annual P50,000 sinking-fund payment is also made at that time.
- Dividends: A P10,000 dividend payment will be declared and made in July.
- Capital expenditures: P40,000 will be invested in plant and equipment in June.
- Taxes: Income tax payments of P1,000 will be made in July.
Q3. Capital Budgeting Techniques: Mutually Exclusive Projects
Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm's cost of capital is 15%.
Press A Press B Press C
Initial investment (CF0) $85,000 $60,000 $130,000
Year (t) Cash inflows
1 $18,000 $12,000 $50,000
2 18,000 14,000 30,000
3 18,000 16,000 20,000
4 18,000 18,000 20,000
5 18,000 20,000 20,000
6 18,000 25,000 30,000
7 18,000 - 40,000
8 18,000 - 50,000
1. a. Calculate the payback period of each press.
b. Calculate the net present value (NPV) of each press.
c. Using NPV, evaluate the acceptability of each press.
d. Rank the presses from best to worst using NPV.
e. Calculate the profitability index (PI) for each press.
f. Rank the presses from best to worst using PI.
2. Using Payback period, which alternative is preferred? Why?
3. Using NPV, which alternative is preferred? Why?
4. Using PI, which alternative is preferred? Why?
5. Assume that the following IRR: for Press A- 12%, for Press B - 14%, and for Press C- 16%. Using the IRR, which alternative should be implemented? Why?
Q4. TIME VALUE OF MONEY
Tealicious Shop is considering two different savings plans. The first plan would have her deposit P30,000 every six months, and she would receive interest at a 7 percent annual rate, compounded semiannually. Under the second plan she would deposit P80,000 every year with a rate of interest of 7.5 percent, compounded annually. The initial deposit with Plan 1 would be made six months from now and, with Plan 2, one year hence.
a. What is the future (terminal) value of the first plan at the end of 10 years?
b. What is the future (terminal) value of the second plan at the end of 10 years?
c. Which plan should Tealicious use, assuming that her only concern is with the value of her savings at the end of 10 years?
d. Would your answer change if the rate of interest on the second plan were 7 percent?
Q5. ACCOUNTS RECEIVABLE MANAGEMENT
What are the probable effects on sales and profits of each of the following credit policies? Explain.
a. A high percentage of bad-debt loss but normal receivable turnover and credit rejection rate.
b. A high percentage of past-due accounts and a low credit rejection rate.
c. A low percentage of past-due accounts but high credit rejection and receivable turnover rates.
d. A low percentage of past-due accounts and a low credit rejection rate but a high receivable turnover rate.
Q6. CASH CONVERSION CYCLE-
Buena-Flor Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm's annual sales are P30 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables; and assume a 360-day year.
a. Calculate the firm's cash conversion cycle, its daily cash operating expenditure, and the amount of resources needed to support its cash conversion cycle.
b. Find the firm's cash conversion cycle and resource investment requirement if it makes the following changes simultaneously.
(1) Shortens the average age of inventory by 5 days.
(2) Speeds the collection of accounts receivable by an average of 10 days.
(3) Extends the average payment period by 10 days.
c. If the firm pays 13% for its resource investment, by how much, if anything, could it increase its annual profit as a result of the changes in part b?
d. If the annual cost of achieving the profit in part c is P350,000, what action would you recommend to the firm? Why?
Q7. RISK AND RETURN-
You have been asked for your advice in selecting a portfolio of assets and have been given the following data:
Expected return
Year Asset A Asset B Asset C
2013 12% 16% 12%
2014 14 14 14
2015 16 12 16
You have been told that you can create two portfolios-one consisting of assets A and B and the other consisting of assets A and C-by investing equal proportions(50%) in each of the two component assets.
a. What is the expected return for each asset over the 3-year period?
b. What is the standard deviation for each asset's return?
c. What is the expected return for each of the two portfolios?
d. How would you characterize the correlations of returns of the two assets makingup each of the two portfolios identified in part c?
e. What is the standard deviation for each portfolio?
f. Which portfolio do you recommend? Why?
Q8. COST OF CAPITAL
EENER Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40% tax bracket.
Debt
The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 20-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond.
Preferred stock
The firm can sell 8% preferred stock at its $95-per-share par value. The cost of issuing and selling the preferred stock is expected to be $5 per share. Preferred stock can be sold under these terms.
Common stock
The firm's common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The firm's dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by $7 per share, and flotation costs are expected to amount to $5 per share. The firm can sell new common stock under these terms.
Retained earnings
When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available$100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
a. Calculate the after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of common stock.
d. Calculate the firm's weighted average cost of capital using the capital structureweights shown in the following table. (Round answer to the nearest 0.1%.)
Source of capital Weight
Long-term debt 30%
Preferred stock 20
Common stock equity 50
Total 100%
Q9. WORKING CAPITAL
What are the costs of maintaining too large a level of working capital? Too small a level of working capital? Explain.
Q10. APPLICATION.
a. Choose a company. (workplace of a group member)
b. Briefly describe the company.
c. How is financial management practiced in the organization? (When, Who, How).
Attachment:- FINANCIAL MANAGEMENT ASSIGNMENT.rar