Problem 2: Financial Analysis And Planning For Database Syst
Problem 2 Financial Analysis And Planningdatabase Systems Is Consideri
Problem 2 Financial Analysis And Planning database systems is considering expansion into a new product line. Assets to support expansion will cost $380,000. It is estimated that the database can generate $1,410,000 in annual sales, with an 8 percent profit margin. What would net income and return on assets (investments) be for the year?
Problem 8 Easter egg and Poultry Company has $2,000,000 in assets and $1,400,000 of debt. It reports net income of $200,000.
What is the firm’s return on assets?
What is its return on stockholders’ equity?
If the firm has an asset turnover ratio of 2.5 times, what is the profit margin (return on sales)?
Problem 22 The balance sheet for Stud Clothiers is shown below. Sales for the year were $2,400,000 with 90 percent of sales sold on credit.
Assets:
- Cash: $60,000
- Accounts receivable: $240,000
- Inventory: $350,000
- Plant and equipment: $410,000
Total assets: $1,060,000
Liabilities and equity:
- Accounts payable: $220,000
- Accrued taxes: $30,000
- Bonds payable (long term): $150,000
- Common stock: $80,000
- Paid-in capital: $200,000
- Retained earnings: $380,000
Total liabilities and equity: $1,060,000
Compute the following:
a. Current ratio
b. Quick ratio
c. Debt to total assets ratio
d. Asset turnover
e. Average collection period
Chapter 9 The Time Value of Money
Problem 2. What is the present value of:
a. $7,900 in 10 years at 11 percent
b. $16,600 in 5 years at 9 percent
c. $26,000 in 14 years at 6 percent
Problem 5. If you invest $9,000 today, how much will you have?
a. In 2 years at 9 percent
b. In 7 years at 12 percent
c. In 25 years at 14 percent
d. In 25 years at 14 percent (compounded semiannually)
Chapter 10
Problem 3. Exodus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the yield to maturity is:
a. 5 percent
b. 15 percent
Chapter 12
Problem 3. Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket:
a. Compute its cash flow
b. Assume it has $200,000 in depreciation. Recompute its cash flow
c. How large a cash flow benefit did the depreciation provide?
Problem 6. Assume a $250,000 investment and the following cash flows for two products:
Year 1:
- Product X: $90,000
- Product Y: $50,000
Year 2:
- Product X: $80,000
- Product Y: $60,000
Year 3:
- Product X: $70,000
- Product Y: [Data incomplete]
Problem 11. You buy a new piece of equipment for $16,230 and you receive a cash inflow of $2,500 per year for 12 years. What is the internal rate of return?
Problem 18. The Pan American Bottling Co. is considering the purchase of a new machine that would increase bottling speed and save money. The net cost of this machine is $60,000. The annual cash flows have the following projections:
Year 1: $23,000
a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine?
b. What is the internal rate of return? Should the project be accepted? Why?
Paper For Above instruction
Financial Analysis and Planning: Strategic Approaches and Practical Applications
Financial analysis and planning are critical components for the strategic growth and sustainability of businesses. This paper explores various aspects of financial analysis, including assessing the profitability of new investments, evaluating company performance through ratio analysis, understanding time value of money concepts, and decision-making tools like net present value and internal rate of return. By examining specific case problems, this discussion underscores the practical applications of financial principles in managerial decision-making.
Expansion and Investment Analysis
The decision to expand into a new product line necessitates a comprehensive financial analysis to determine potential profitability and return on investment (ROI). For example, considering a $380,000 investment in assets to support the expansion, which is projected to generate $1,410,000 in annual sales with an 8 percent profit margin, we can estimate net income and ROI. The net income is calculated as the product of sales and profit margin: $1,410,000 × 0.08 = $112,800. The return on assets, a key performance metric, is derived by dividing net income by total assets invested, which in this scenario is $380,000, resulting in approximately 29.68%. This high ROI indicates effective utilization of assets and potential profitability of the new product line (Brigham & Ehrhardt, 2016).
Performance Ratios and Financial Health
Analyzing the financial health of companies involves ratio analysis. For instance, Easter Egg and Poultry Company, with $2 million in assets and $1.4 million of debt, reports a net income of $200,000. The return on assets (ROA) measures how efficiently the company utilizes its total assets to generate profit and is calculated as net income divided by total assets: $200,000 / $2,000,000 = 0.10 or 10%. The return on stockholders’ equity (ROE) considers shareholders' investments and is calculated as net income divided by stockholders' equity. Equity is assets minus liabilities: $2,000,000 - $1,400,000 = $600,000, leading to an ROE of approximately 33.33%. Furthermore, if the firm’s asset turnover ratio is 2.5 times, the profit margin or return on sales can be inferred from the ROA and assets turnover ratio. ROA = profit margin × asset turnover, thus profit margin = ROA / asset turnover = 10% / 2.5 = 4% (Higgins, 2012).
Liquidity and Efficiency Measures
Liquidity ratios such as current and quick ratios assess a company's short-term financial stability. From the balance sheet of Stud Clothiers, with total assets of $1,060,000 and current liabilities comprising accounts payable ($220,000) and accrued taxes ($30,000), current assets include cash ($60,000), accounts receivable ($240,000), and inventory ($350,000). The current ratio is calculated as current assets divided by current liabilities: ($60,000 + $240,000 + $350,000) / ($220,000 + $30,000) = 650,000 / 250,000 = 2.6. The quick ratio refines this by excluding inventory, resulting in (cash + accounts receivable) / current liabilities = ($60,000 + $240,000) / 250,000 = 1.2. Debt to total assets ratio assesses leverage by dividing total liabilities by total assets: (accounts payable + bonds payable + accrued taxes) / total assets. Asset turnover indicates efficiency in using assets to generate sales, computed as sales divided by total assets. The average collection period measures credit policy effectiveness, calculated as accounts receivable divided by average daily sales.
Time Value of Money and Investment Appraisal
The time value of money (TVM) is fundamental in making investment decisions. Present value calculations, such as discounting future sums like $7,900 in 10 years at 11%, help determine today's worth of future cash flows. These calculations, based on PV = FV / (1 + r)^n, facilitate comparing different investment options. For instance, investing $9,000 today, compounded at various rates, illustrates how compound interest grows assets over time, emphasizing the importance of the rate of return in wealth accumulation (Pycke & Pryor, 2017).
The valuation of bonds according to yield to maturity (YTM) also exemplifies TVM application. Calculating the current price of bonds with a $1,000 face value at different market interest rates demonstrates how interest rate fluctuations influence bond pricing. A lower yield than coupon rate increases bond price, while a higher yield decreases it, aligning with market expectations and risk assessments (Fabozzi, 2013).
Project evaluation tools such as net present value (NPV) and internal rate of return (IRR) further aid decision-making. NPV compares the present value of cash inflows to initial costs; a positive NPV indicates a profitable project. IRR calculates the discount rate that makes the NPV zero. For example, estimating the IRR of equipment investments or projects like the bottling plant demonstrates how firms determine whether projects meet their required rate of return and justify capital expenditure (Ross, Westerfield, & Jordan, 2018).
Conclusion
In conclusion, financial analysis and planning encompass a wide array of techniques—ratio analysis, valuation methods, and project appraisal tools—that enable firms to make informed decisions regarding investments, operations, and strategic growth. Mastery of these principles ensures companies can optimize asset utilization, manage risks, and sustain profitability in competitive markets. Constant evaluation using these tools fosters proactive financial management and long-term success.
References
- Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
- Fabozzi, F. J. (2013). Bond Markets, Analysis, and Strategies. Pearson Education.
- Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
- Pycke, J. R., & Pryor, L. (2017). The Mathematics of Money Management: Making the Most of Your Wealth. Wiley.
- Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2018). Fundamentals of Corporate Finance. McGraw-Hill Education.