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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