## Finance Assignment

Financial Analysis of Different case Scenarios

Name

Institution

Facilitator

Date

Question1 (a) (i)

The comfortable retirement rate will be:

Rate (1 + inflation rate) ^n

42,597 (1 + 0.06) ^35

= \$327,402.24 / 12

= \$27,283.35

Question 1 (a) (ii)

The lump sum amount that will be needed in nominal terms is:

Amount (1 + r) ^n

27,283.35 (1 + 0.12) ^35

= \$1,440,550.50

Question 1 (a) (iii)

N = 35

R = 0.06

L = \$1,440,550.50

A =??

Lump sum = Amount (1 + r) ^n

\$1,440,550.50 = A (1 + 0.06) ^35

A = \$1,440,550.50 / (1 + 0.06) ^35

A = \$187,243.14

Note: the lump sum calculations are made on assumption of a normal rate of return and zero changes in the inflation rate or other fringe charges.

Question 1 (a) (iv)

Alive retirement period is reduced reducing the cumulative income but maintaining the cumulative rate of return and the assumptive inflation rate

N = 15

R = 0.12

L = \$1,440,550.50

A=??

Lump sum= Amount (1 + r) ^n

\$1,440,550.50 = A (1 + 0.12) ^15

A = \$1,440,550.50 / (1 + 0.12) ^15

A = 26,318.40

Question 1 (a) (iv)

The amount is lowered due to cumulative and reactionary interest rates. Inflation is believed to lower with lapse of time. Theoretically, the inflation rate is assumed to be zero in the long run due to its diminishing nature.

The amount is also affected by the time to maturity of the amount yielded. The economic theory states that yield to maturity is inversely proportional to time to maturity. One therefore exacts the yield to maturity to increase as time trickles in order to have a higher yield closer to the maturity period than prior.

Question 1 (b) (i)

Predicted amount = Current amount (1 + CAGR) ^n

Predicted amount = 487.9 million (1 + 0.102) ^3

Predicted amount = 652.943 Million passengers

Question 1 (b) (ii)

Predicted amount = Current amount (1 + CAGR) ^n

28 Million = 20 million (1 + CAGR) ^n

28 Million / 20 Million = (1 + CAGR) ^2

(1.4 million)^1/2 = (1 + CAGR) ^2*1/2

1.1832 = 1 + CAGR

CAGR = 1.1832-1

CAGR = 18.32%

If the CAGR remains the same;

Predicted amount = Current amount (1 + CAGR) ^n

Predicted amount = 28 Million (1 + 0.1832) ^6

Predicted amount = 76.63 Million passengers

Question 1 (c) (i)

The effective annual interest rate is the interest rate required to recover the investment in the years of fluctuation and flexibility

EAIR = Return (1 + R) ^n

For the five years

Returned amount is 0.0549*350000*5

=\$85750

Remaining amount is 350000-85750

=\$264250

Remaining time = 30 years-5 years = 25 years

A=Installment (1 + Rate) ^n

264250=19215(1+R) ^25

13.75= (1+R) ^25

13.75^1/25= (1+R) ^*1/25

1.111=1+R

R=11.1%

Question 1 (c) (ii)

Amount to be repaid is 350000

Interest rate is 5.49%

The tax rate will be interest determined thus:

Tax gained will be 5.49*350000*30

=576,540

Question 1 (d) (i)

The factors affecting the interest rate in the market include the government regulations. The legal component of the interest rate varies with time and legal provisions of the government hence it affects the rate at a random level.

The high yield on the bonds may also be caused by the speculative components of the interest rates (De, Bandyopadhyay & Chakraborty, 2011, p. 28). The interest rates are based on the speculative motive if the buyers and sellers of the bonds hence this speculation affects the yields on bonds greatly.

The high yield on bonds may also be caused by the income category component of the interest rates. Different rates apply to different people especially based on repayment period and ability to pay. These factors also affect the yield on bonds as they make them more or less expensive depending on how they are brought into play.

Question 1 (d) (ii)

If the prediction is right, the interest rates would also rise due to the upward pressure from the yield on bonds and the need to limit the supply of money in the economy and lower inflation. High yield on bonds encourages people to buy the bonds which encourages borrowing and increased the money in supply hence causing undesired inflation in the economy (De, Bandyopadhyay & Chakraborty, 2011, p. 21). The government would raise the interest rates to lower the borrowing rate and allow the yield on bonds to stabilize.

Numerically;

A 10 year high yield bond

A 2.14% treasury bond

The yield on the Treasury bond will increase with pressure from market demand.

QUESTION 2 a

 Sunset Boards Statement of Operating Cash Flow for 2010 and 2011 2010 2011 Details DR (\$) CR (\$) DR (\$) CR (\$) Cash Inflows Accounts Receivable 16,753.00 21,732.00 Inventory 32,255.00 43,381.00 Cash 23,643.00 35,721.00 Total cash inflows 72,651.00 100,834.00 Cash Outflows Accounts payable 41,786.00 47,325.00 Net Cash flows 30,865.00 53,509.00 Sunset Boards Statement of Cash Flow for assets for 2011 2011 Details DR (\$) CR (\$) Accounts Receivable 21,732.00 Inventory 43,381.00 Cash 35,721.00 Total cash inflows 100,834.00 Sunset Boards Statement of Cash Flow for accounts Payable for 2011 2011 Accounts payable 47,325.00 47,325.00 Question 2 (b) Sunset Boards Statement of Cash Flow for Investors for 2011 2011 Details Initial capital inflow 111,038.00 New Equity 20,500.00 Dividends 21,704.80 Net profits retained 21,704.80 Total Capital inflow 174,947.60 Analysis of the cash flows Sunset’s Cash flow for 2011 Sunset has a consistent positive capital inflow in the year 2011 with the cash flow to the Shareholders and that for the Operating activities increasing. The company’s Expansion Plans The expansion plans are good steps for the business because it has a positive cash flow especially from the operating Activities. More so, the business has positive cash flow from the net assets with capital also increasing.

Question 2 (c)

 1) CURRENT RATIO Current ratio=Current Assets/ Current Liabilities 0.71 2) QUICK RATIO Quick Ratio=Current Assets-Inventory/ Current liabilities 0.37 3) CASH RATIO Cash Ratio=Cash/Current Assets 0.20 4)TOTAL ASSETS TURNOVER TATO=Total Assets/ Total Sales 0.48 5) INVENTORY TURNOVER Inventory Turnover=Total Inventory/Total Sales 0.03 6) RECEIVABLES TURNOVER Receivables turnover=Receivables/ Total Sales 0.02 7) TOTAL DEBT RATIO TDR=Total Debt/ Total Liabilities 0.29 8) DEBT-EQUITY RATIO D-E ratio=Total Debt/ Common Equity 0.53 9)EQUITY MULTIPLIER EM=Total Common Stock/ Total Equity 0.03 10) TIMES INTEREST EARNED TIE=Interests/365 1570.41 11) Cash Coverage ratio CCR=Cash/ Current Liabilities 0.14 12) Profit Margin PM=Profit/Sales 5% 13)Return On Assets ROA=Total Assets/ Sales 0.05 14) RETURN ON EQUITY ROE=Equity/Sales 0.26 Analysis 1 The company is an aspirant company because it has the following features: -Profit margin is greater than 1 -The return on Capital is positive -The Acid test ratio is greater than 0 but less than 1 Analysis 2 It is inappropriate to use the companies because the financial ratios of the company supports it in its development and changes Some of the justifications include: -Profit margin is greater than 1 -The return on Capital is positive -The Acid test ratio is greater than 0 but less than 1 QUESTION 3 RATIO COMMENT 1) CURRENT RATIO It is a positive indication as it Current ratio=Current Assets/ Current Liabilities is greater than 0 but less than 1 0.71 2) QUICK RATIO It is a good indicator as it is less Quick Ratio=Current Assets-Inventory/ Current liabilities then the current ratio 0.37 3) CASH RATIO It is an average indicator as it Cash Ratio=Cash/Current Assets means the company lacks liquidity 0.20 4)TOTAL ASSETS TURNOVER It is a good indicator as it shows that TATO=Total Assets/ Total Sales stock of the company is selling 0.48 5) INVENTORY TURNOVER It is a good indicator as it shows that Inventory Turnover=Total Inventory/Total Sales stock of the company is selling 0.03 6) RECEIVABLES TURNOVER It is a bad indicator as it shows that Receivables turnover=Receivables/ Total Sales receivables of the company are not 0.02 paid on time or not paid at all 7) TOTAL DEBT RATIO It is a bad indicator as it shows that TDR=Total Debt/ Total Liabilities the company has a very huge debt 0.29 8) DEBT-EQUITY RATIO It is a bad indicator as it shows that D-E ratio=Total Debt/ Common Equity the company has a very huge debt 0.53 9)EQUITY MULTIPLIER It is a bad indicator as it shows that EM=Total Common Stock/ Total Equity the company has a very huge debt 0.03 10) TIMES INTEREST EARNED It is a good indicator as it shows that TIE=Interests/365 the company has ability to settle its debts 1570.41 11) Cash Coverage ratio It is a good indicator as it shows that CCR=Cash/ Current Liabilities the company has ability to settle its debts 0.14 12) Profit Margin It is a good indicator showing the PM=Profit/Sales company is profitable in the market 5% 13)Return On Assets It is a good indicator showing the ROA=Total Assets/ Sales company is profitable in the market 0.05 14) RETURN ON EQUITY It is a good indicator showing the ROE=Equity/Sales company is profitable in the market 0.26

Question 2 (d)

 Problem 2 Formula FV=PV(1+R)^n a) 10 years 9 Months b) 8 years 7 months c) 17 years 9 months d) 21 years 8 months Problem 3 Formula FV=PV(1+R)^n 200,000=61000(1+R)^16 =7.71% Problem 4 Formula FV=PV(1+R)^-n =580*1.073^-15 =201.57 Problem 5 a) Rate of return = 7.18% a) Annual Interest=7.21% c) Annual interest=8.14%
 CAPITAL Initial capital 81,929.00 111,038.00 New Equity – 20,500.00 Dividends 19,999.20 21,704.80 Net profits retained 19,999.20 21,704.80 TOTAL LIABILITIES AND CAPITAL 266,719.40 338,606.60

Reference List

De, A., Bandyopadhyay, G. & Chakraborty, B.N. 2011, “Application of the Factor Analysis on the Financial Ratios and Validation of the Results by the Cluster Analysis: An Empirical Study on the Indian Cement Industry”, Journal of Business Studies Quarterly, vol. 2, no. 3, pp. 13-31.