# Assignment RAK 2020

## Assignment RAK 2020

Financial Management

Assignment-RAK – 2020

Solution 1:

Part A:

 Calculation of Tax Liability 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:

 Calculation of Return of both Stocks Stock A Stock B 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:

• Systematic Risk: The risks associated with the entire market segment changes and thus have a direct impact on the price level of all the stocks within a portfolio and cannot be diversified. For example, interest risk. Foreign exchange movement risk, liquidity risk and others
• Unsystematic risk: the risk associated with a specific industry and mainly occurs due to internal factors related with a company.

(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

• Probability distribution: This method of measurement tends to assess the probability associated with a particular event of its occurrence.
• Standard deviation: The method stands that higher is the probability smaller is the risks of a given project and vice-versa
• Coefficient of variation: The method tends to assess the relative variability of firms and higher is its value and larger is the risk associated with the business activities.

Solution 3:

Part A:

 Calculation of JSN's Financing Requirements (Total Assets) for year 2002 Particulars Asset value in year 2001 Sales in year 2001 Proportion of Sales Current Year Sales Asset value in year 2002 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 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 Equity Balance Common Stock \$    2,000,000.00 Paid in capital \$    1,900,000.00 Retained Earnings \$    1,100,000.00 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:

• Short-term financial plan: This type of financial plan is developed for the maximum time-period of 1 year and provides as assessment of mainly meeting its work capital requirement.
• Medium-term financial plan: This type of financial plan is developed for a period of 1 to 5 years and take decisions relating to the replacement and assets maintenance, research and development activities
• Long-term financial plan: This type of financial plan is developed for a time-period of more than 1 years for meeting the long-term financial objectives of a company (Atrill, McLaney & Harvey, 2015)

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 Years Project X Project Y 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 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 Less: Initial Investment \$200,000.00 \$200,000.00 Net present Value \$93,815.00 \$79,410.00

 Calculation of Account rate of return Particulars Project X Project Y 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 Total profit \$         425,000.00 \$                          400,000.00 Average Profit \$            85,000.00 \$                            80,000.00 Average Investment \$         100,000.00 \$                          100,000.00 Account Rate of return 85.00% 80.00%

(Kosowski & Neftci, 2015)

 Calculation of Profitability index 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 Particulars Amount Amount Revenue Sales \$    65,600.00 Less: Cost of Sales \$    34,000.00 Gross Profit \$    31,600.00 Less: Operating expenses Advertising expenses \$    10,000.00 Fuel expenses \$      4,000.00 Total operating expenses \$    14,000.00 Profit before tax and interest \$    17,600.00 Less: Interest expenses \$    10,000.00 Profit before tax \$      7,600.00 Income tax \$      2,400.00 Net profit \$      5,200.00

(Petty, Et.al. 2012)

 Balance Sheet XYZ Limited Particulars Amount Amount Assets Current Assets Cash \$    31,000.00 Accounts Receivable \$      9,000.00 Inventory \$  200,000.00 Total Current Assets \$  240,000.00 Non-Current Assets Equipment \$    90,000.00 Accumulated Depreciation \$  (10,000.00) \$    80,000.00 Total Assets \$  320,000.00 Liabilities and Equity Current Liability Accounts Payable \$      8,000.00 Short Term Liability \$    70,000.00 Total Current liability \$    78,000.00 Non Current liability Bank Loan(Long term liability) \$  112,000.00 \$  112,000.00 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:

• Assists in  undertaking financial planning
• Forecast the inflows and outflows of cash
• Raising and allocating the funds
• Promotes effective utilization of funds
• Achieve financial control over the business activities

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 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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