Financial Management
GRADE: 39%
This is the planning, organization and control of financial activities in business premises. This function in estimating capital requirements, determining capital composition, the source of funds, where the funds should be invested and management of the surplus finances. This is done with the aim resource efficiency, accountability, counter competition and plan on long-term financial sustainability.
1. Financial Statements and Ratios
(a) Accounts receivable for 2015 is given by;
Current assets – (cash and marketable securities + inventory)
= (1542) $ - (427+815) $ = $300
(b) Accounts payable for 2014 is given by;
= current liabilities – (notes payable + accrued wages and taxes)
= (997) $ - (421+257) $ = $319
(c) Gross plant and equipment for 2015 is given by;
= net plant and equipment – depreciation
= $2872 - $368 = $2504
(d) Long term debt for 2014 is given by;
= long term liabilities – current liabilities
= $2956 - $ 997 = $1959
(e) Common stock and paid-in surplus (250 million shares) for 2014 is given by;
= total equity – (preferred stock + retained earnings)
= (1472) $ – (30+1142) $ = $300
(f) Total FA for 2015 is given by;
= net plant and equipment – other long term assets
= $2872 + $521 = $3393
(g) Net sales for 2015 is given by;
Gross profits – cost of goods sold
= $1623 + $753 = $2376
(h) Less cost of goods sold in 2014 is given by;
Net sales – other operating expenses
= $2018 - $1189 = $829
(i) Less interest for 2015 is given by;
= earnings before interest and taxes (EBIT) – Earnings before taxes (EBT)
= $1086 - $949 = $137
(j) Less taxes for 2015 is given by;
= earnings before taxes (EBT) – net income
= $946 - $664 = $285
(k) Earnings per share (EPS) for 2015 is given by;
= Net income available to common stock holders divided by addition to retained income
= $566/$347 = $1.63
(l) Dividends per share (DPS) for 2014 is given by;
= common stock dividends divided by addition to retained income less preferred stock dividends
= $(199)/$(249 – 98) = $1.32
(m) Book value per share (BVPS) for 2015 is given by;
= net sales divided by shares outstanding
= $2376/$445 = $5.34
(n) Net income
Since; EBITDA = Gross profit – selling, general and administrative expenses,
EBIT = EBITDA – depreciation+ amortization expenses.
EBT = EBIT – interest expenses
Net income = EBT – tax expenses.
= $664
(o) Increase in accrued wages and taxes is given by;
= accrued wages recorded at the start – accrued wages recorded at the end
= $309 - $257 = $52
(p) Increase in inventory is given by;
Inventory at the opening of a balance sheet – inventory recorded at the close of a balance sheet.
= $815 - $797 = $18
(q) Net cash flow from operating activities
EBIT + depreciation = cash flow from operating activities
= $114 + $1086 = $1200
(r) Increase in other long term assets is given by;
= Long term assets at the start – long term assets at the close of a balance sheet
$521 - $487 = $34
(s) Net cash flow from investing activities is given by;
= total liabilities + total equity
= $4935
(t) Increase in notes payable is given by;
= notes payable at the start – notes payable at the end of the year
= $492 - $421 = $71
(u) Pay dividends is given as;
= common dividends recorded at the end of the year
= $219
(v) Net cash flow from financing activities
Cash from issuing stock/debt – cash paid as dividends and re-acquisition of stock
= $347 - $219 = $128
(w) Plus. Net income for 2015 is given by;
Retained earnings – common stock and paid in surplus
= $1142 - $317 = $825
(x) Preferred stock is given by;
Retained earnings + current liabilities
= $1142 + $825 = $1967
-1pt each, -12pts total
1B.
1. Earnings before taxes for 2015 $949; income statement
2. Gross plant and equipment for 2015 $1959; balance sheet
3. Increase in fixed assets, December 31, 2015 $343; statement of retained earnings
4. Net sales for 2015 $2376; income statement
5. Balance of retained earnings, December 31, 2015 $347; statement of retained earnings
6. Common stock and paid-in surplus for 2014 $300; statement of retained earnings
7. Net cash flow from investing activities, December 31, 2015 $4935; statement of cash flow
8. Increase in inventory, December 31, 2015 $18; statement of cash flow
9. Accrued wages and taxes for 2014 $257; income statement
10. Book value per share (BVPS) for 2015 $5.34; statement of cash flow
-1/4pts each answer, -2pts total
Worldwide Widget Manufacturing, Inc. Financial Ratios
(a) Current ratio
= CA/CL = $1542/$1182 = 1.3times
My company is lower than the industry.
(b) Quick ratio
= (CA-Inventory)/CL = $(1542-815)/$1182 = 0.6times
My company has lower than the industry.
(c) Cash ratio
= (cash + cash equivalents)/CL = $427/$1142 = 0.37times.
My company is higher than the industry.
(d) Inventory turnover
= cost of goods sold/inventory = $753/$815 = 0.9times
My company is slower compared to the industry.
(e) Days’ sale in inventory
= days in a year/inventory ratio = 365days/0.9 = 405days
My company is slower than the industry.
(f) Average payment period
= average accounts payable/(total credit purchases/days) = $(381 + 319)/2 /(3116/365) = 41days.
My company is faster than the industry.
(g) Sales to working capital
= annual net sales/ (accounts receivable + inventory – accounts payable) = $2376/$(815 + 300 – 381) = 3.2times.
My company is higher compared to the industry.
(h) Total asset turnover
= net sales/ average total assets = $2376/ $(4935 + 4428)/2 = 0.5times
My company is lower than the industry.
(i) Debt –to –equity
= total liabilities/total equity = $3116/$1819 = 1.7times
My company is lower as compared to the industry
(j) Profit margin
= $(1623 – 1189)/282 = 15.4%
My company is lower than the industry.
(k) Gross Profit margin
Goss Profit/ gross revenue * 100% = $1623/$282 = 57.55%
My company is higher compared to the industry.
(l) ROA
= net income/average total assets = $664/$(4935 + 4428)/2 *100 = 14.18%
My company is higher than the industry
(m) ROE
Net income/shareholder’s equity = $664/$1819 = 36.50%
My company is higher than the industry.
(n) Dividend payout
Dividends/net income = $219/$664 = 33%
My company is higher than the industry.
-1pt each calculation, -1/2 pt each comparison. -9pts total
2. B.
Internal growth rate = reinvested earnings/total assets*net income/total assets = retention (1 – dividend payout ratio) rate*return on assets.
(1 – 0.33)*$664/$4681.5 = 9.5%-4pts both numerator and denominator should be in dollar values, no rates
Sustainable growth rate = (1- Dividend payout RATIO)*ROE
(1 – 0.33)*$664/$1819 = 24.5%-4pts
Part 2: The Value of Money, Bonds and Stocks
3. A machine is a capital economic resource and these resources are prone depreciation with time. I will advise my company to buy the machine now. This will not just be cost effective, but also increase the productivity of the company and this will lead to achieving the expansion objective. Besides, this machine will enhance efficiency and lower the cost of labor while increasing productive. This in return will create more profits thus expansion.
A = P (1 + r/100) ^t where A is amount in a year, P the starting amount, r is the interest rate and t the duration. Therefore, interest rate will be:
($1650000/$1464000)/1.01 = 1.12%
This is a present value problem. Must find the “%” based on other time value of money information. -8pts for calculation, -2pts for decision (must state what company should do)
4. Coupon rate = coupon payments annually/bond par value
= (x/ ($1.7 + $1.5) million)*2 = 7 therefore x = $71.68 million semiannual payments cost.
Cost to refinance the debt = $3.1*(1 + 3.5/100) ^50 = $17.31 million.
Present value = $71.68 million/ (1 + 3.5/100) ^50 = $12.83 million.
The savings on the new debt should show as $150,000. Then you must compare this to the cost to refinance. -5pts for calculation.
I will advise the company to take the new debt because its present value is lower which means that is future value is lower too.
5. PV = FV/ (1 + r) ^n where PV is present value and FV future value while n is number of years. $340million/ (1+0.065) ^20 = $9.6491million per bond meaning there are 3.52bonds.-4pts, number of bonds does not pertain to present value of money.
$340 million*6.5% = $22.1 million per yearThis is accurate for a yearly payment, but the payments are semi-annual. Half credit, -3pts
Interest is $340 million/ ($22.1 million/2*(1 + r/100) ^40) = 10.33%
Part 3: Stock Returns
6. Average return on investment for company A
(5.23 + 8.91 + 7.32 – 15.81 – 8.32 + 25.98) %/6 = 3.89%
Average return on investment for company B
(13.51 + 2.44 – 9.35 + 3.12 + 14.81 + 18.36) %/6 = 7.15%
Average return for the portfolio for Company A = positive years – negative years divided by number of years = ((5.23 + 8.91 + 7.32 + 25.98) – (-15.81 -8.32)) % /6 = 11.93%
Average return for the portfolio for Company B = ((13.51 + 2.44 + 3.12 + 14.81 + 18.36) – (-9.35)) %/6 = 10.27%
Portfolio standard deviation for Company A
= variance then square rooted. = (5.23 – 11.93) ^2 + (8.91 – 11.93) ^2 + (7.32 – 11.93) ^2 + (-15.81 – 11.93) ^2 + (-8.32 – 11.91) ^2 + (25.98 – 11.93) ^2 = 1021.9426/5 = 204.38852 square root of 204.38852 = 14.30%The 11.93 is incorrect. -3pts
Portfolio standard deviation for Company B
= variance (13.51 – 10.27) ^2 + (-9.35 – 10.27) ^2 + (2.44 – 10.27) ^2 + (3.12 – 10.27) ^2 + (14.81 – 10.27) ^2 + (18.36 – 10.27) ^2 = 593.9331/5 = 118.78662
Answer square rooted = 10.90%The 10.27 is incorrect. -3pts
Average return of portfolio in 60% A and 40% B =
= 60% (A+ 40% of B) – (60% of negative A + 40%B) = 60% (5.23+8.91+7.32+25.98) +40% (13.51+2.44+3.12+14.81+18.36) – 60%(-15.81-8.32) + 40% (-9.35) = 67.578/12 = 5.63%-6pts
7. Beta of the portfolio
= total = (150*61)/80650 (1.62) + (200*152)/80650 (1.8) + (300*36) /80650 (1.42) + (150*202)/80650 (2.51) = 1.9955.
This is a lower risk portfolio.A beta of 2 is high risk, 2x as volatile as the market. -1pt
The required portfolio return = $0.9*1.62 + $0.3*1.8 + $0.1*1.42 + $0.3*2.51 = 2.9
A. Merck & Co. Inc.
1. Position = 150*61 =9150
2. Weight = value/total portfolio value*100 = 9150/8065*100 =11.34%
3. W*Beta = 11.34*1.62 =18.37
B. Domino’s Pizza
1. Position = 200*152 = 30400
2. Weight = 30400/80650*100 = 37.69%
3. W*Beta = 37.69*1.8 = 67.84
C. Macy’s Inc.
1. Position = 300*36 = 10800
2. Weight = 10800/80650*100 = 13.39%
3. W*Beta = 13.39*1.42 = 19.01
D. Tesla
1. Position = 150*202 = 30300
2. Weight = 30300/80650*100 = 37.57%
3. W*Beta = 37.57*2.51 = 94.30
Total position = 80650
Total W*Beta = 199.52
Expected return = 2.9-3pts
The risk of the portfolio = 1.9955
Part 4: Capital Budgeting
8. WACC = cost of equity + cost of debts
= annual savings interest payments + shares + preferred stock + common outstanding stock + dividends = $(185 + 180) million*0.09 + $(24.63*200000) + $((24.63*200000)*30%))/12% + ((15 million*$24.63))*40% + 15million*$1.50 = $220.37 millionThe WACC should be expressed as a percentage. To calculate it accurately, you must calculate the cost of equity, cost of debt, and cost of preferred stock (all required calculations in this problem, -5pts each). These numbers can be used to compute a WACC (-5pts). -20pts total
9. Payback of A = 5 + ($1000)/$(150 + 300 + 500 + 300 + 250) = 5.67years.-2pts
Payback of B = 5 + ($1400)/$(300 + 470 + 200 + 600 + 350) = 5.73years.-2pts
IRR of A = $150/ (1 + r) ^1 + $300(1 + r) ^2 + $500/ (1 + r) ^3 + $300/ (1 + r) ^4 + $250/(1+r) ^5 = for IRR, we assume rate and replace in r so as to get the r that will give us NPV = zero. If we take 10% it show that as the rate increases, NPV decrease thus NPV ratio is greater than 10%Need to show IRR of Project A and B. -4pts each, -8pts total
IRR of B = $300/ (1+r) ^1 + $470/ (1 + r) ^2 + $200/ (1 + r) ^3 + $600/ (1 + r) ^4 + $350/ (1 + r) ^5 = it also apply as A above. It will be 10% and above.
NPV for A = C*((1 – (1 + R) ^-T/R) – initial capital = $1500*((1 – (1 + 0.06) ^-5/0.06) = $6318.55-4pts
NPV for B = $1920*((1 – (1 + 0.06) ^-5/0.06) = $8087.74-4pts
Project B is the best it will take slightly a shorter time to payback. As a check, Project A will be the project that gets accepted. Numbers should reflect this.
Part 5: Forecasting and Capital Structure
10. Using naïve approach, next year’s approach will be $1.95 million-2pts while using the average sales approach, $(1.75 + 2.00 + 1.35 + 2.25 + 1.80 + 1.95) million/6 = $1.85 million-2pts
MAPE = summation of actual – forecast over actual *100%
Using naïve approach; MAPE = $1.95 million - $1.95 million /$1.95 million*100% = 0-1.5pts, as the formula seems accurate but numbers are incorrect
Using average appro.ach; MAPE = $1.95 million - $1.85 million / $1.95 million*100% = 5.13%-1.5pts, see above
11. AFN = current level of assets*change in sales/current sales – current level of liabilities*change in sales/sales – new level of sales*profit margin*retention rate
= $6million*($-2million/$20million) - $6million*($-2million/$20million - $18million*20%*25% = $-0.9million I believe the increase in liabilities is in error here and there is a decimal place error in the increase in assets. Showing calculations for these would help. Partial credit for 3 increase calculations, -1pt each. -2pts for AFN. -5pts total.
This shows that the company has excess capital to invest somewhere else .More specifically, it says that there is no need for external funding for this project
Ethan76
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