Managerial Finance T1 2019 Assessment 1 - Written

Finc20018 Managerial Finance T1 2019 Assessment 1 - Written Assignment

Discuss what this information indicates about the differences in each business’s approach. If one of them prides itself on personal service and the other on competitive prices, which do you think is which, and why? Based on the given information, which business tends to require more external financing and what types of external financing you would recommend.

1) Prepare a ratio analysis from the available information to cover profitability, liquidity, efficiency, and capital structure. 2) Based on the above ratio analysis, prepare a report indicating potential strengths and weaknesses in the management of this business. 3) Identify additional information you would require to improve your analysis of this company over the period specified.

1) Describe Discount Bonanza's sources of financing in the financial markets over the last four years. 2) Prepare a brief narrative that describes the major activities of Discount Bonanza's management team over the last four years. 3) Explain the three perspectives from which financial statements can be viewed.

A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years. They believe that they can earn 8% interest on retirement savings. Required: 1) If they make annual payments into a savings plan, how much will they need to save each year? Assume the first payment comes in 1 year. 2) Would the answer to part 1) change if the couple also realizes that in 20 years, they will need to spend $60,000 on their child’s college education? 3) Explain what the time value of money is and why it is so important in the field of finance.

Babu is planning to save for his son’s university education. His son is currently 11 years old and will begin university in 7 years. Babu has an index fund investment of $17,500 earning 9.5% annually. Total expenses currently at the University of Sydney where his son plans to go, currently cost $25,000 per year but are expected to grow at roughly 4% every year. Babu plans to invest a certain amount in an investment fund that will earn 11% annually to make up the difference. In total, Babu will make seven equal investments with the first starting today and with the last being made a year before his son begins university. Assume the discount rate is 6%. Required: 1) What will be the present value of the 4 years of education expenses at the time that Babu’s son starts university? 2) What will be the value of the index fund when his son just starts university? 3) What is the amount that Babu will have to have saved when his son turns 18 if Babu plans to cover all of his son’s university expenses? 4) How much will Babu have to invest every year in order for him to have enough funds to cover all his son’s expenses?

Assume you have invested in two shares Woolworth (WOW) and Village Roadshow (VRL). Consider the following information associated with the two shares: Probability of return, Rate of return WOW, VRL, 0.30, 0.02, -0.20, 0.40, 0.32, 0.12, 0.30, 0.18, 0.40. The market risk premium is 12%, and the risk-free rate is 4%. Required: 1) Calculate and explain which share has the most systematic risk? 2) Calculate and explain which share has the most total risk? 3) Discuss which share is actually the 'riskier' share based on the concept of diversification. 4) Discuss the importance of CAPM and SML in determining the trade-off between risk and return.

Paper For Above instruction

The provided data offers comprehensive insight into different facets of financial analysis, facilitating meaningful assessment of business strategies, financial health, and investment considerations. This essay delves into the implications derived from the ratios comparing Business A and Business B, evaluates Rocky Ltd’s financial reports, examines Discount Bonanza Ltd’s cash flow dynamics, explores the time value of money through retirement planning scenarios, analyzes a personal investment plan for education funding, and finally reviews the risk profile of two shares in relation to the Capital Asset Pricing Model (CAPM).

Analysis of Business Ratios: Approaches and Financial Strategies

The comparative ratio analysis between Business A and Business B reveals distinct approaches to retailing, underpinned by operational priorities such as profitability, liquidity, and efficiency. Business A demonstrates a higher return on capital employed (20%) and owners’ equity (30%) relative to Business B, indicating a focus on leveraging assets to generate higher profits. Conversely, Business B’s lower ratios suggest a cautious approach with possibly leaner operations or more conservative asset utilization. The notably longer average settlement period for accounts receivable (63 days vs. 21 days) for Business A signals a strategy to foster personalized customer service, allowing customers extended credit, which might enhance customer loyalty but raises liquidity concerns. Business B’s shorter collection period suggests a focus on rapid cash collection, aligning with a competitive pricing strategy that may prioritize turnover and cash flow.

Gross profit margin (40%) for Business A outstrips Business B’s 15%, illustrating a premium pricing strategy or superior cost management. The profit percentage (both 10%) implies that despite profitability differences, the overall efficiency in converting sales to net profit remains similar. Inventory turnover days (52 for Business A versus 25 for Business B) further underscore distinct inventory management approaches—Business B’s quicker turnover reflects tighter inventory control, possibly due to competitive pricing pressures, while Business A maintains higher inventory levels, possibly aiming to offer extensive product variety or personalized service.

If one business emphasizes personal service, it aligns with Business A’s longer receivables and higher gross profit margins. Contrasted with Business B’s quicker receivables and lower margins, it suggests Business B’s approach centers on competitive pricing and rapid turnover. Regarding external financing needs, Business A’s higher asset utilization and longer receivable periods imply a greater reliance on external credit to support its operations, necessitating short-term debt or trade credit. Business B, with leaner working capital cycles, may require less external funding but might be exposed to liquidity risks if cash flows are disrupted.

Financial Position and External Financing

Based on the ratios, Business A’s higher leverage and longer receivable cycle indicate a tendency to require more external financing, especially short-term credit to finance working capital. Business B, with efficiencies in receivable collection and inventory management, might depend less on external capital but must remain vigilant about liquidity constraints. Recommendations for external financing include trade credit for Business A, shorter-term bank loans, or working capital lines of credit, which could streamline cash flow management.

Rocky Ltd Financial Ratios: Strengths and Weaknesses

The financial extracts of Rocky Ltd allow for multiple ratio computations. Profitability ratios such as net profit margin (net profit divided by sales) indicate the company’s ability to convert revenue into profit; liquidity ratios like current ratio and quick ratio assess short-term financial health; efficiency ratios, including inventory turnover and receivables collections, reveal operational effectiveness; and capital structure ratios, such as debt-to-equity ratio, illustrate leverage levels.

Rocky Ltd’s total current assets and liabilities suggest liquidity strengths or weaknesses depending on their ratios. A higher current ratio indicates sufficient liquidity, while leverage ratios highlight the extent of debt used to finance assets. Identified strengths could include a favorable profit margin and adequate liquidity, while weaknesses might encompass high debt levels or inefficient asset utilization. Additional data, such as cash flow statements and detailed expense breakdowns, would refine this analysis, revealing trends over periods and operational efficiencies.

Cash Flow Insights and Strategic Management

The cash flow statements of Discount Bonanza Ltd demonstrate fluctuations in operational, investing, and financing activities. The consistent positive cash flows from operations showcase operational stability. The significant outflows in investing activities, notably in capital expenditure ($16.3 million), indicate ongoing investment in assets, essential for growth and maintenance. The financing activities reveal strategies around debt issuance and equity management, with net cash outflows of approximately $10.5 million, suggesting a focus on funding expansion or refinancing debt.

Historically, the company’s sources of financing include debt issuance (evidenced by increased liabilities) and equity issuance, complemented by retained earnings. The management’s activities, such as managing working capital, investing in infrastructure, and balancing debt and equity, reflect a strategic intent to sustain growth while maintaining fiscal discipline.

Financial statements can be viewed from three perspectives: the profitability view, which emphasizes income generation; the liquidity or solvency view, focusing on cash and short-term obligations; and the efficiency perspective, analyzing how effectively resources are used to generate revenues and profits. These viewpoints collectively provide a holistic understanding of financial health, operational effectiveness, and strategic positioning.

Time Value of Money and Retirement Planning

The time value of money (TVM) is a core principle in finance that asserts the present value of a sum of money is worth more than the same sum in the future due to its earning capacity. It underscores the importance of compounding interest and assists decision-making in investments, savings, and loan repayment.

For the retirees aiming to generate annual withdrawals of $30,000 over 25 years with an 8% return, the required annual savings can be calculated using the future value of an ordinary annuity formula, factoring in the accumulation over 50 years until retirement. If considering the $60,000 college expense in 20 years, additional calculations would be necessary to estimate the increased savings requirement, accounting for the increased future expense and the discounted present value.

TVM is vital as it promotes efficient capital allocation, enabling individuals and entities to evaluate the worth of cash flows received or paid at different points in time. It forms the backbone of investment valuation, loan amortization, and retirement planning, ensuring assets are optimally used to maximize wealth accumulation.

Saving for Education: Present Value and Investment Strategies

Babu’s scenario involves calculating the present value of future education expenses, considering inflation and discount rates. The projected annual expenses, starting at $25,000 with 4% annual growth over 4 years, are discounted at 6% to find their present value at the start of university. The future value of Babu’s current savings in an index fund (earning 9.5%) is computed for the same timeline, providing a benchmark for additional savings required.

Babu’s goal to cover the total university expenses by age 18 involves estimating the future value of his current investments, and the annual contributions needed to fill the gap between current savings and projected expenses, considering his targeted returns of 11%. Using annuity formulas, the precise investment amounts per year will be determined to ensure sufficient funds are accumulated to meet his child’s educational costs.

Risk and Return in Investment Portfolios

The comparison of Woolworth (WOW) and Village Roadshow (VRL) shares through their returns and probabilities reveals insights into their systematic and total risk profiles. Systematic risk, measured through beta, reflects the stock’s sensitivity to market movements. The share with higher covariance with market returns and higher beta presents more systematic risk. Total risk encompasses both systematic risk and unsystematic, diversifiable risk, which measures overall volatility.

The analysis indicates Woolworth's shares exhibit higher systematic risk due to their nature as a retail leader, heavily influenced by macroeconomic factors. Conversely, VRL’s volatile returns due to industry-specific factors might indicate higher unsystematic risk component. Diversification reduces unsystematic risk, so the actual riskiness depends on the portfolio composition, emphasizing the importance of CAPM and the Security Market Line (SML) in assessing the trade-off between risk and expected return. These models assist investors in making informed decisions aligned with their risk appetite and market conditions.

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