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.