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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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