Posted: July 22nd, 2015

AP1 World Famous LTD Ratio Analysis

Assessment item 1

Task: Short Answers

Part A:
Presented below is a ratio analysis for a company World Famous limited. You are required to analysis the firms’ financial situation. Break your analysis into an evaluation of the following ratios:

(i) liquidity,

(ii) activity,

(iii) debt, and

(iv) profitability

[6 marks for each section]

World Famous Ltd

Ratio analysis

Industry Average Actual

2007 2007

Current ratio 2.35 1.84

Quick ratio 0.87 0.75

Inventory turnover 4.55 times 5.61 times

Average collection period 35.3 days 20.7 days

Total asset turnover 1.09 1.47

Debt ratio 0.30 0.55

Times interest earned 12.3 8.0

Gross profit margin 0.202 0.233

Operating profit margin 0.135 0.133

Net profit margin 0.091 0.072

Return on total assets (ROA) 0.099 0.105

Return on equity (ROE) 0.167 0.234

Earnings per share $3.10 $2.15

Subject Outline FIN501 Financial Management Practice

Part B:

(i). Explain why profit maximisation is not the same as wealth maximisation. Which is the more appropriate goal of management?. Why? [15 marks]

(ii). What are agency costs? Explain using an example. [11 marks]

Question 2: [50 marks]

Country Sports provides you statements and information to prepare financial plans for the coming year.

Income (profit and loss) statement of Country Sports for the year ending 31 December 2014

Sales revenue 5 000 000 Less Cost of goods sold 2 750 000 Gross profits 2 250 000 Less Operating expenses 850 000 Operating profits 1 400 000 Less Interest expense 200 000 Net profits before taxes 1 200 000 Less Taxes (rate = 40%) 480 000 Net profits after taxes 720 000 Less Cash dividends 288 000 To retained earnings 432 000

Balance sheet of Country Sports for the period ending 31 December 2014

Assets:

Cash 200 000 Marketable securities 275 000 Accounts receivable 625 000 Inventories 500 000 Total current assets 1 600 000 Net non-current assets 1 400 000 Total assets 3 000 000

Subject Outline FIN501 Financial Management Practice

Liabilities and Equities:

Accounts payable 700 000 Taxes payable Notes payable 95 000 Notes payable 200 000 Other current liabilities 5 000 Total current liabilities 1 000 000 Non-current debt 550 000 Ordinary shares Retained earnings 75 000 Retained earnings 1 375 000 Total liabilities and equity 3 000 000

Information relating to financial projections for the year 2015:

(1) Projected sales are $6 million, (2) Cost of goods sold includes $1 million in fixed costs, (3) Operating expense includes $250 000 in fixed costs, (4) Interest expense will remain unchanged, (5) The firm will pay cash dividends amounting to 40% of net profits after taxes, (6) Cash and inventories will double, (7) Marketable securities, notes payable, non-current debt and ordinary shares will remain unchanged, (8) Accounts receivable, accounts payable and other current liabilities will change in direct response to the change in sales, (9) A new computer system costing $356 000 will be purchased during the year. Total depreciation expense for the year will be $110 000,

You are required to:

(i). Prepare a pro forma income statement for the year ending 31 December 2015, using the information given and the per-cent-of-sales method. [20 marks]

(ii). Prepare a pro forma balance sheet as of 31 December 2015, using the information given and the judgmental approach. [20 marks]

(iii). Analyse these statements and discuss the resulting external financing required. [10 marks]

Subject Outline FIN501 Financial Management Practice

 

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