Financial Management
Assignment-RAK – 2020
Solution 1:
Part A:
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Calculation of Tax Liability |
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|
Particulars |
Tax Rate |
Calculation |
Amount |
|
Taxable Income |
|
|
$ 701,500.00 |
|
|
|
|
|
|
Tax Slab |
|
|
|
|
$0-$50000 |
15% |
$50000*15% |
$ 7,500.00 |
|
$50001-$75000 |
25% |
$25000*25% |
$ 6,250.00 |
|
$75001-$10 million |
34% |
($701,500-$75000)*34% |
$ 213,010.00 |
|
|
|
|
$ 226,760.00 |
|
Add: Additional Surcharge |
|
|
|
|
As taxable income is $701500, there will be no additional surcharge |
|
||
|
|
|
|
|
|
Total Tax Liability |
|
|
$ 226,760.00 |
(Mott, 2012)
Part B:
The income tax is imposed on individuals or business entities that tend to vary with the income or profits associated with a business. The tax is mainly computed as the product of tax that and the taxable income. The rate of tax tends to increase with the taxable income of an individual or a business company. The tax levied on the corporate is known as corporate tax and it is necessary for paying tax on the income received by a business firm for providing funds to the government for performing the different operational activities of a country. It can be regarded as one of the biggest source of income received by the government (Mott, 2012)
.
Solution 2:
Part A:
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Calculation of Return of both Stocks |
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|
Stock A |
Stock B |
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|
Probability |
Return |
Weighted return |
Probability |
Return |
Weighted return |
|
0.30 |
12.00% |
3.60% |
0.20 |
15.00% |
3.00% |
|
0.40 |
16.00% |
6.40% |
0.30 |
6.00% |
1.80% |
|
0.30 |
18.00% |
5.40% |
0.30 |
13.00% |
3.90% |
|
|
|
|
0.20 |
21.00% |
4.20% |
|
|
|
15.40% |
|
|
12.90% |
|
Calculation of Standard Deviation of Stock A |
|||||
|
Returns |
Mean |
Excessive return |
|
Probability |
|
|
X |
X bar |
X-Xbar |
(X-bar)^2 |
p |
((X-Bar)^2)*p |
|
12.00% |
15.40% |
-3.40% |
0.116% |
0.30 |
0.03% |
|
16.00% |
15.40% |
0.60% |
0.004% |
0.40 |
0.00% |
|
18.00% |
15.40% |
2.60% |
0.068% |
0.30 |
0.02% |
|
|
|
|
Variance |
0.06% |
|
|
|
|
|
Standard Deviation |
2.37% |
|
(Tiffin, 2014)
|
Calculation of Standard Deviation of Stock B |
|||||
|
Returns |
Mean |
Excessive return |
|
Probability |
|
|
X |
X bar |
X-Xbar |
(X-bar)^2 |
p |
((X-Bar)^2)*p |
|
15.00% |
12.90% |
2.10% |
0.044% |
0.20 |
0.01% |
|
6.00% |
12.90% |
-6.90% |
0.476% |
0.30 |
0.14% |
|
13.00% |
12.90% |
0.10% |
0.000% |
0.30 |
0.00% |
|
21.00% |
12.90% |
8.10% |
0.656% |
0.20 |
0.13% |
|
|
|
|
Variance |
0.28% |
|
|
|
|
|
Standard Deviation |
5.32% |
|
(Tiffin, 2014)
Decision: As per the calculated return and risk (standard deviation) of both the stocks, it is advised that Stock A is better than Stock B. It is because it has higher return and lower risk as compared to Stock B.
Part B:
(i) Different types of Risk
The risk can be broadly categorized into two most important aspects that are as follows:
(ii) Diversification reduces risk
The diversifications strategy tends to reduce risk by promoting investment in various financial instruments, industries and other categories. The diversified portfolio created for investors may be often largely complicated and expenses and thus can result in reducing the rewards as risk is mitigated in advance (Clarke, Wilson, Wilson & Fowler, 2019).
(iii) Common Measures of Risk
Solution 3:
Part A:
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Calculation of JSN's Financing Requirements (Total Assets) for year 2002 |
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Particulars |
Asset value in year 2001 |
Sales in year 2001 |
Proportion of Sales |
Current Year Sales |
Asset value in year 2002 |
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Total Assets components |
|
|
|
|
|
|
Current Assets |
$4,000,000.00 |
$14,000,000.00 |
28.57% |
$15,000,000.00 |
$4,285,714.29 |
|
Net fixed assets |
$6,000,000.00 |
$14,000,000.00 |
42.86% |
$15,000,000.00 |
$6,428,571.43 |
|
Total Financing Requirements |
|
|
|
|
$10,714,285.71 |
(Frino, Chen & Hill, 2013)
|
Calculation of net funding requirements |
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|
Particulars |
Amount |
|
Total Financing requirements |
$ 10,714,285.71 |
|
|
|
|
Less: |
|
|
Account Payable (28.57% of 15 Million) |
$ 4,285,714.29 |
|
Long term Debt (No Change) |
$ 1,000,000.00 |
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Equity Balance |
|
|
Common Stock |
$ 2,000,000.00 |
|
Paid in capital |
$ 1,900,000.00 |
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Retained Earnings |
$ 1,100,000.00 |
|
|
|
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Less: Increase in retained earnings in year 2002 |
|
|
Net income allocated 100% to Retained earnings |
$ 2,000,000.00 |
|
Projected Sources of funding |
$ 12,285,714.29 |
|
Net Funding Requirements |
$ (1,571,428.57) |
(Frino, Chen & Hill, 2013)
Part B: Overview of Financial Planning and its Types
The concept of financial planning refers to a systematic approach that is undertaken by businesses for creating a comprehensive and strategic plan for managing their expenses and thus achieving thus financial goals and objectives. The plan provides assistance to the people for organizing their expenses and savings and thus developing a better strategic plan for the future. This document provides an estimate of the capital required by a business firm by assessing its competitive position and thereby developing its financial policies for achieving the strategic financial plan and objectives. The plan enables a business firm to achieve a control over its overall income and expenses and thus realizing its financial goals and objectives.
There are mainly three types of financial planning used within the business organizations that are stated as follows:
Solution 4:
Part A:
|
Years |
Project X |
Project Y |
|
Year 0 |
$ (200,000.00) |
$ (200,000.00) |
|
Year 1 |
$ 110,000.00 |
$ 75,000.00 |
|
Year 2 |
$ 65,000.00 |
$ 150,000.00 |
|
Year 3 |
$ 100,000.00 |
$ 60,000.00 |
|
Year 4 |
$ 115,000.00 |
$ 55,000.00 |
|
Year 5 |
$ 35,000.00 |
$ 60,000.00 |
|
Calculation of Payback period |
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|
Years |
Project X |
Project Y |
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|
Cumulative CF |
Cumulative CF |
|
Year 1 |
$ 110,000.00 |
$ 75,000.00 |
|
Year 2 |
$ 175,000.00 |
$ 150,000.00 |
|
Year 3 |
$ 275,000.00 |
$ 60,000.00 |
|
Year 4 |
$ 390,000.00 |
$ 55,000.00 |
|
Year 5 |
$ 425,000.00 |
$ 60,000.00 |
|
|
|
|
|
Initial Investment |
$ 200,000.00 |
$ 200,000.00 |
|
|
|
|
|
Payback Period |
2.25 |
2.83 |
(Kosowski & Neftci, 2015)
|
Calculation of Net present Value |
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|
Years |
PVF @ 15% |
PV of CF of Project X |
PV of CF of Project Y |
|
Year 1 |
0.870 |
$95,700.00 |
$65,250.00 |
|
Year 2 |
0.756 |
$49,140.00 |
$113,400.00 |
|
Year 3 |
0.658 |
$65,800.00 |
$39,480.00 |
|
Year 4 |
0.572 |
$65,780.00 |
$31,460.00 |
|
Year 5 |
0.497 |
$17,395.00 |
$29,820.00 |
|
PV of Cash Inflows |
|
$293,815.00 |
$279,410.00 |
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Less: Initial Investment |
|
$200,000.00 |
$200,000.00 |
|
Net present Value |
|
$93,815.00 |
$79,410.00 |
|
Calculation of Account rate of return |
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|
Particulars |
Project X |
Project Y |
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Profit of each year |
|
|
|
Year 1 |
$ 110,000.00 |
$ 75,000.00 |
|
Year 2 |
$ 65,000.00 |
$ 150,000.00 |
|
Year 3 |
$ 100,000.00 |
$ 60,000.00 |
|
Year 4 |
$ 115,000.00 |
$ 55,000.00 |
|
Year 5 |
$ 35,000.00 |
$ 60,000.00 |
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Total profit |
$ 425,000.00 |
$ 400,000.00 |
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Average Profit |
$ 85,000.00 |
$ 80,000.00 |
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Average Investment |
$ 100,000.00 |
$ 100,000.00 |
|
Account Rate of return |
85.00% |
80.00% |
(Kosowski & Neftci, 2015)
|
Calculation of Profitability index |
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|
Particulars |
Project X |
Project Y |
|
NPV |
$ 93,815.00 |
$ 79,410.00 |
|
Initial investment |
$ 200,000.00 |
$ 200,000.00 |
|
Profitability index |
1.47 |
1.40 |
(Kosowski & Neftci, 2015)
Solution 5:
Part A:
|
XYZ Limited |
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Particulars |
Amount |
Amount |
|
Revenue |
|
|
|
Sales |
|
$ 65,600.00 |
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Less: Cost of Sales |
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$ 34,000.00 |
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Gross Profit |
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$ 31,600.00 |
|
|
|
|
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Less: Operating expenses |
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Advertising expenses |
$ 10,000.00 |
|
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Fuel expenses |
$ 4,000.00 |
|
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Total operating expenses |
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$ 14,000.00 |
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Profit before tax and interest |
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$ 17,600.00 |
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Less: Interest expenses |
|
$ 10,000.00 |
|
Profit before tax |
|
$ 7,600.00 |
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Income tax |
|
$ 2,400.00 |
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Net profit |
|
$ 5,200.00 |
(Petty, Et.al. 2012)
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Balance Sheet |
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|
XYZ Limited |
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Particulars |
Amount |
Amount |
|
Assets |
|
|
|
Current Assets |
|
|
|
Cash |
$ 31,000.00 |
|
|
Accounts Receivable |
$ 9,000.00 |
|
|
Inventory |
$ 200,000.00 |
|
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Total Current Assets |
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$ 240,000.00 |
|
|
|
|
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Non-Current Assets |
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|
Equipment |
$ 90,000.00 |
|
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Accumulated Depreciation |
$ (10,000.00) |
$ 80,000.00 |
|
|
|
|
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Total Assets |
|
$ 320,000.00 |
|
|
|
|
|
Liabilities and Equity |
|
|
|
Current Liability |
|
|
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Accounts Payable |
$ 8,000.00 |
|
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Short Term Liability |
$ 70,000.00 |
|
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Total Current liability |
|
$ 78,000.00 |
|
|
|
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Non Current liability |
|
|
|
Bank Loan(Long term liability) |
$ 112,000.00 |
$ 112,000.00 |
|
|
|
|
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Equity |
|
|
|
Share Capital |
$ 130,000.00 |
$ 130,000.00 |
|
|
|
|
|
Total of Equity and Liabilities |
|
$ 320,000.00 |
(Petty, Et.al. 2012)
Part B:
Wide Scope of Finance
The finance department within an organization carries out the following functions for addressing its objectives that are stated as below:
Thus, it can be said that the scope of financing function is very wide as it has an impact on each and every activities of a business firm. It provides a basis for assessing whether a company should make investment in fixed assets. In addition to this, it also determines the decision concerning the capital expenditure of a firm and also taking decisions by the business managers regarding the need of acquiring new and external sources of finance. It also monitors the various business activities by ensuring that they are not consuming higher cost that can negatively impact the financial growth and development of a firm (Petty, Et.al. 2012).
Solution 6:
A: Calculation of Financial Ratios
|
Calculation of financial ratios of McDonald's Corporation for year 2018 |
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|
Financial Data |
Year 2018 |
|
|
Current Assets |
$1,143.00 |
|
|
Current Liabilities |
$2,985.00 |
|
|
Account Receivables |
$484.00 |
|
|
Credit Sales |
$11,508.00 |
|
|
Daily credit sales |
$31.53 |
365 days in a year |
|
Operating income |
$2,794.00 |
|
|
Total Assets |
$18,242.00 |
|
|
Sales |
$11,508.00 |
|
|
Cost of goods sold |
$6,537.00 |
|
|
Inventory |
$71.00 |
|
|
Net Fixed Assets |
$14,961.00 |
|
|
Total Debt/Liabilities |
$9,310.00 |
|
|
Common Equity |
$8,932.00 |
|
|
Net income |
$1,617.00 |
|
|
Ratios |
McDonald's Corporation |
Industry Average |
|
Firm Liquidity |
|
|
|
Current Ratio |
0.38 |
0.70 |
|
Average Collection period |
15.35 |
NA |
|
|
|
|
|
Profitability Ratios |
|
|
|
Operating income return on investment |
15.32% |
11.60% |
|
Operating profit margin |
24.28% |
6.10% |
|
Total assets turnover |
0.63 |
1.9 Times |
|
Inventory Turnover |
92.07 |
35 Times |
|
Fixed Asset Turnover |
0.77 |
3.2 Times |
|
|
|
|
|
Financing Decision |
|
|
|
Debt Ratio |
51.04% |
69.00% |
|
|
|
|
|
Return on common equity |
|
|
|
Return on equity |
18.10% |
12.78% |
(Khalaf & Mari, 2011)
Interpretation of Ratios
Liquidity Ratios (It will interpret how liquid is the firm)
As analyzed from the above table, it can be stated that McDonald’s corporation has maintained low liquidity as its current ratio is less than 1 that is 0.
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