business analysis ratios

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Faculty of Business Economics and Law Bachelor of Business

(Incorporating Graduate Diploma in Business & Graduate Certificate in Business)

ACCT 606

Financial Management for Accountants

Semester One 2020

Assignment # 1

Case scenario and investigation

Due: Week 6 - Thursday 7th May 2020, 5.00 pm

Weighting: 25% of the final grade

Type: Individual Assignment

Length: Approximately 2500 - 3000 words, including appendices and workings.

Submission: A soft copy of the assignment should be submitted to Turnitin by Thursday 7th May 2020, 5.00 pm

The assignment should have a bar-coded cover sheet. Assignments without a bar-coded cover sheet will not be marked.

Penalty for late submission: A reduction of 5% of the marks obtained or one grade per day (including weekends) up to a maximum of five days.

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QUESTION 1: FINANCIAL ANALYSIS (40 MARKS)

Tourism Holdings Limited (THL)

Using the annual report of Tourism Holdings Limited for 2018 and 2019, answer the following

questions.

To download THL’s annual report go to:

https://companyresearch-nzx-com.ezproxy.aut.ac.nz/deep_ar/newpage.php?pageid=overview&default=THL

Required:

1. Comment on the recent financial performance of the company compared to 2018. (you may refer to page 9 of the report) (4 marks)

2. Compare the performance of New Zealand and Australian Rentals divisions and comment on the financial outlook for the year 2020. (6 marks)

3. Discuss how the group recognised the ‘sales of services’ under NZ IFRS15 ‘Revenue from contracts with customer’ (you may refer to note 2 under the ‘Notes to the consolidated financial statements’).

(6 marks)

4. Using the consolidated financial statements of Tourism Holdings Limited for the years 2018 and 2019, prepare common-size balance sheets and income statements. (6 marks)

5. Using the following financial ratios for 2018 and 2019, and other associated information available in the public domain, assess the financial health of THL.

A. Liquidity ratios (Ratio calculations and discussion)

B. Capital structure ratios (Ratio calculations and discussion)

C. Asset management efficiency ratios (Ratio calculations and discussion)

D. Profitability ratios (Ratio calculations and discussion)

E. Market ratios (Ratio calculations and discussion)

(12 marks)

6. The tourism industry is subject to fluctuations with demands for tourism and transportations.

Considering the recent coronavirus travel restrictions, discuss the potential impact on THL’s

operating and financial performance (Refer to recent announcements and media news).

(6 marks)

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Question 2: Wealth maximisation and Time Value of Money (40 Marks)

2.1

Answer the following:

a) Explain the main reason that an agency relationship exists in the company form of business? What

kind of problems can arise? (6 marks)

b) Rewarding managers based on accounting profits can induce managers to manipulate the

accounting numbers – Discuss your arguments using examples.

(6 marks)

2.2

After completing your Bachelor of Business (Accounting) degree, suppose you secure a permanent

position as an accountant. You drafted a financial plan to retire in 30 years from now. So, you are

thinking about creating a fund that will allow you to receive $40,000 at the end of each year for 25 years

after your retirement. The interest rates are expected to be 5.75% per annum during the 30year pre-

retirement period, and 5.25% during the retirement period.

Required:

a) To provide the 25- year, $40,000 a year annuity, calculate how much should be in the fund account

when you retire in 30 years. (3 marks)

b) How much will you need today as a single amount to provide the fund calculated in part (a) if you

earn 5.75% per year during the 30 years preceding your retirement?

(3 marks)

c) What effect would a change (increase/decrease) in the interest rates, both during and prior to

retirement, have on the values calculated in parts (a) and (b)? Explain why.

(3 marks)

d) (Using different interest rates) Assume that the interest in the pre-retirement period is 5.95% and

5.35% in the post-retirement period. To fund the 25- year stream of $40,000 annual annuity

payments, how much do you need to deposit annually? (deposits are made at the end-of-year for

30 years).

(4 marks)

2.3

Suppose you are planning for a 20-year mortgage to buy a residential property in Auckland. The

property value is $950,000. You have got a pre-approval for 80% of the property value. The interest

rate on the mortgage is 3.55% per annum, and payments are required to be made annually at the end

of each year.

a. Calculate the annual mortgage payment on the loan (2 marks)

b. Construct a mortgage amortisation table showing loan balance at the beginning of each period, annual repayment amount, interest payment, the amortisation of the loan and the loan balance for each year. (13 marks)

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Question 3: Capital Budgeting and Investment appraisal (20 marks)

Petersen Limited is planning to purchase a new material handling machine for its manufacturing unit. The company is considering the following four mutually exclusive investments. The required payback period is six years. The financial data for the four machines is given below (ignore taxes).

Machine/asset Machine A Machine B Machine C Machine D

$ $ $ $

Revenue 950,000 1,596,000 1,040,000 1,100,000

Operational costs 480,000 738,000 580,000 520,000

Depreciation 160,000 800,000 600,000 480,000

Interest 240,000 320,000 180,000 160,000

Initial investment 1,800,000 2,800,000 2,080,000 2,320,000

Machine life (years) 8 10 14 12

The manufacturing department has requested the chief financial officer (CFO) to evaluate the above investment opportunities using both payback period and internal rate of return methods. The CFO of Petersen Ltd is seeking your help to calculate each machine's payback period, internal rate of return and determine appropriate hurdle rates. Required:

(a) Calculate each machine’s payback period and state which alternative should be accepted based on this criterion.

(6 marks)

(b) Calculate each machine's internal rate of return (IRR), and using a hurdle rate of 22% state which of the alternatives is acceptable by this criterion.

(8 marks)

(c) Discuss why the above two investment appraisal methods do not give consistent answers for the accept/reject decision. Which method should the CFO employ? Why?

(6 marks)

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