FIN203: Essentials of Financial Management
Question 1You are doing some financial analysis research for your work and managed to get (incomplete) data. You will use this data to deduce the required information. You can assume 365 days in a year.
(a) Alpha Co. reported a cost of goods sold of $64,380.00 and an accounts payable balance of $16,700.00 last year. Compute the average time taken to pay suppliers. Discuss the significance of a long days’ costs in payables for the firm.
(b) Bravo Ltd. equity multiplier is 1.93, its total asset turnover is 2.65, and its profit margin is 4.20 percent. Compute the Return on Equity (ROE). Explain the impact on ROE, should the total asset turnover decline next year.
(c) Charlie Inc. has a profit margin of 7.90 percent, a total asset turnover of 1.54, and a Return on Equity (ROE) of 13.47 percent. Solve for the debt-equity ratio.
(d) Delta GMBH’s ROE is 8.9 percent. Sales are $2,956,000.00. Total debt ratio is 0.3743. Total debt is $964,000.00. Determine the return on assets (ROA).
Question 2
After completing successfully your FIN203 course, you have been asked by many of your family and friends about financial matters. You are trying your best to advise them.
(a) Your grandmother has been asked to invest in a product that offers to double her money in 3 years. Indicate the annual rate of return she is being offered.
(b) Your parents have $5,000.00 to deposit. Alpha Bank offers 2 percent per year compounded monthly. Bravo Bank offers 2 percent compounded annually. Compute the amount of deposit after being kept 10 years at each bank. Explain the difference between the two (2) future values
(c) Your best friend is saving $1,800.00 and will earn 0.17 percent per month. Determine the number of months until the account grows to $2,000.00.
(d) Your cousin plans to expand his business and will require $100,000.00 in 6.5 years. The rate of return will be 0.70 percent per month for the first two years. It will go up to 1.00 percent for the rest of the period. Compute the $ amount to set aside today to reach her objective.
Question 3
Your employer has asked you to investigate the firm’s portfolio risk and return.The portfolio comprises three stocks. It is invested 50 percent in stock A, 30 percent in stock B and 20 percent in stock C.
You gathered the following information:
(a) Determine what is the portfolio’s expected return.
(b) Determine the portfolio’s variance and standard deviation.
(c) Assume that the expected risk-free rate is 2.75 percent. Determine the expected risk premium on the portfolio.
Question 4
Your cousin has created a business specialised in 3-D printing of metal spare parts for repair shops. For the purchase of one machine, she is considering two different models (project A and B). You are to assist her in making the best choice.
Assume an investment horizon of 6 years and a required rate of return of 10%. Assume no corporate or business tax on purchase, income or resale. No computation is required for the depreciation of the machine. After talking to technical professionals and the marketing manager, you have gathered the following information:
(*) Operating cash flow margin % is equal to operating cash flow divided by sales. Operating cash flows are equal to sales minus all the recurring cash cost associated to production and sales. Operating cash flow margin % is constant over the period.
(a) Explain briefly (less than 100 words) how holding cash and extending credit to your customers will influence your capital budgeting decisions.
(b) Determine the initial cash outlay for both project A and B.
(c) Compute operating cash flow and cash flow from assets for both projects over the six (6) years.
(d) Compute the Net Present Value of both project A and B.
(e) Compute the Internal Rate of Return of both projects. Explain your result.
(f) Assume both projects A and B are mutually exclusive, discuss and appraise which one has your preference.
Question 5
Your cousin’s business is up and running. She is meeting inventory management issues and wants to solve the repeated problem once and for all. Each period, her company starts with 350 metal bars in stock. This stock is depleted every two weeks and reordered. The calendar year is comprised of 52 weeks.
It costs $1.50 to hold every metal bar over the year. Every order comes at a fixed cost (unloading, storage and record of receipt) of $300.00.
(a) Calculate the total annual carrying costs and the restocking costs.
(b) Explain in few sentences why this business does not follow an economicallyadvisable strategy.
Your cousin places an order for 540 units of the metal bar at a unit price of $62.00. The supplier offers terms of 1/10, net 30.
(c) Indicate how much time can you wait to pay before the account is overdue. If you take the full period, determine how much you will have to remit.
(d) Identify the discount being offered and the period left for payment to get the discount. If you do take the discount, determine how much you will have to remit.
