Course:
Introduction to Business Finance (1415)
Q.
1 Define finance and the managerial finance function. Also identify the primary
activities of the financial manager? (20)
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Finance is a broad field
encompassing the management of money and assets, including the acquisition,
allocation, and utilization of funds to achieve organizational goals. It
involves decision-making processes related to investments, financing, and risk
management. Finance plays a crucial role in both personal and corporate contexts,
guiding individuals and organizations in making optimal choices regarding their
financial resources.
**Managerial
Finance** refers to the branch of finance that focuses on the
decisions and actions taken by managers to maximize the value of the organization.
It involves analyzing financial data, assessing risks, and making strategic
financial decisions to achieve the company's objectives efficiently. Managerial
finance encompasses various aspects of financial management, including
financial planning, budgeting, investment analysis, and capital structure
decisions.
**Primary
Activities of the Financial Manager**:
1.
**Financial Planning and Analysis**: Financial managers are
responsible for developing strategic financial plans that align with the
organization's goals and objectives. They analyze financial data, forecasts
future cash flows, and develop budgets to guide resource allocation and
decision-making.
2.
**Capital Budgeting**: Financial managers evaluate investment
opportunities and determine which projects to pursue based on their potential
returns and risks. They use techniques such as net present value (NPV),
internal rate of return (IRR), and payback period analysis to assess the
feasibility and profitability of investment projects.
3.
**Capital Structure Management**: Financial managers make
decisions regarding the organization's capital structure, including the mix of
equity and debt financing. They assess the cost of capital, analyze the optimal
capital structure, and determine the most appropriate sources of funding to
minimize the cost of capital and maximize shareholder value.
4.
**Risk Management**: Financial managers identify, assess, and manage
financial risks that may impact the organization's performance and value. They
develop risk management strategies, such as hedging against currency or
interest rate risks, purchasing insurance, or diversifying investments, to
mitigate potential losses and protect the organization's financial health.
5.
**Financial Reporting and Analysis**: Financial managers prepare and
analyze financial reports to communicate the organization's financial
performance to stakeholders, including investors, creditors, and regulatory
authorities. They ensure compliance with accounting standards and regulations
and provide insights into the company's financial position and profitability.
6.
**Working Capital Management**: Financial managers oversee the
management of working capital, including cash, accounts receivable, and
inventory. They optimize the organization's liquidity position, ensuring that
it has sufficient funds to meet its short-term obligations while minimizing the
costs associated with holding excessive levels of working capital.
Financial managers formulate
dividend policies that determine how profits are distributed to shareholders.
They assess the organization's financial position, cash flow requirements, and
growth opportunities to determine the appropriate dividend payout ratio and
balance between dividends and retained earnings.
Overall, financial managers
play a critical role in guiding the financial decision-making process within an
organization, ensuring that resources are allocated efficiently and effectively
to maximize shareholder value and achieve long-term sustainability.
Q.2
Ratio proficiency McDougal Printing, inc., had sales totaling Rs. 40,000,000 in
fiscal
year 2023. Some ratios for the company are listed below. Use this
information
to determine the dollar values of various income statement and balance
sheet
accounts are requested. (20)
Sales
Rs. 40,000,000
Gross
profit margin 80%
Operating
profit margin 35%
Net
profit margin 8%
Return
on total assets 16%
Return
on common equity 20%
Total
asset turnover 2
Average
collection period 62.2 days
Calculate
values for the following:
a.
Gross profits
b.
Cost of goods sold
c.
Operating profits
d.
Operating expenses
e.
Earning available for common stockholders
f.
Total assets
g.
Total common stock equity
h.
Accounts receivable?
Let's calculate the values for
the given income statement and balance sheet accounts using the provided ratios
and sales figure for McDougal Printing, Inc.
Given:
Sales
= Rs. 40,000,000
a.
**Gross Profit**:
Gross
Profit Margin = (Gross Profit / Sales) * 100
Gross
Profit Margin = 80%
Gross
Profit = Gross Profit Margin * Sales
80%
* Rs. 40,000,000
= Rs. 32,000,000
b.
**Cost of Goods Sold (COGS)**:
Gross Profit = Sales - COGS
COGS = Sales - Gross Profit
= Rs. 40,000,000 - Rs. 32,000,000
= Rs. 8,000,000
c.
**Operating Profit**:
Operating Profit Margin = (Operating Profit
/ Sales) * 100
Operating Profit Margin = 35%
Operating Profit = Operating Profit Margin *
Sales
= 35% * Rs. 40,000,000
= Rs. 14,000,000
d.
**Operating Expenses**:
Operating Expenses = Sales - Operating
Profit
= Rs. 40,000,000 - Rs.
14,000,000
= Rs. 26,000,000
e.
**Earnings Available for Common Stockholders**:
Net Profit Margin = (Net Profit / Sales) *
100
Net Profit Margin = 8%
Net Profit = Net Profit Margin * Sales
= 8% * Rs. 40,000,000
= Rs. 3,200,000
f.
**Total Assets**:
Return on Total Assets = (Net Profit / Total
Assets) * 100
Return on Total Assets = 16%
Total Assets = Net Profit / (Return on Total
Assets / 100)
= Rs. 3,200,000 / (16 / 100)
= Rs. 20,000,000
g.
**Total Common Stock Equity**:
Return on Common Equity = (Net Profit /
Total Common Stock Equity) * 100
Return on Common Equity = 20%
Total Common Stock Equity = Net Profit /
(Return on Common Equity / 100)
= Rs. 3,200,000 /
(20 / 100)
= Rs. 16,000,000
h.
**Accounts Receivable**:
Average Collection Period = (Accounts
Receivable / Average Daily Sales) * 365
Average Collection Period = 62.2 days
Average Daily Sales = Sales / 365
= Rs. 40,000,000 / 365
≈ Rs. 109,589
Accounts Receivable = Average Collection
Period * Average Daily Sales
= 62.2 days * Rs.
109,589
≈ Rs. 6,810,377
These calculations provide the
values for the requested income statement and balance sheet accounts for McDougal
Printing, Inc.
Q.
3 In trying to judge whether a company has too much debt, what financial ratios
would
you
use and foe what purpose? (20)
Assessing the level of debt a
company holds is crucial for investors, creditors, and management alike.
Financial ratios provide a useful tool for analyzing a company's debt position
and its ability to manage debt effectively. Here are some key financial ratios
commonly used to evaluate a company's leverage and debt levels:
1.
**Debt-to-Equity Ratio (D/E)**:
- Purpose:
The debt-to-equity ratio measures the proportion of debt financing relative to
equity financing. It indicates the extent to which a company relies on debt to
finance its operations.
-
Formula: D/E Ratio = Total Debt / Total Equity
-
Interpretation: A higher D/E ratio suggests higher financial
leverage and greater risk associated with debt. Comparing the D/E ratio with
industry averages or historical trends can help assess whether the company's
debt level is reasonable.
2.
**Debt-to-Assets Ratio**:
-
Purpose: The debt-to-assets ratio measures the proportion of a
company's assets that are financed by debt. It indicates the extent to which
the company's assets are leveraged.
-
Formula: Debt-to-Assets Ratio = Total Debt / Total Assets
- Interpretation: A higher debt-to-assets
ratio indicates a larger portion of assets financed by debt, potentially
increasing the company's financial risk. A lower ratio suggests a more
conservative debt position.
3.
**Interest Coverage Ratio**:
- Purpose: The interest
coverage ratio measures a company's ability to meet interest obligations on its
debt. It assesses the company's earnings relative to its interest expenses.
- Formula: Interest Coverage
Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense
- Interpretation: A
higher interest coverage ratio indicates a greater ability to cover interest
payments with operating earnings, suggesting lower financial risk. A lower
ratio may signal financial distress and difficulty meeting interest obligations.
4.
**Debt Service Coverage Ratio (DSCR)**:
-
Purpose: The debt service coverage ratio evaluates a company's
ability to cover its debt obligations, including both principal and interest
payments, with its operating income.
- Formula: DSCR =
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) /
Total Debt Service (Principal + Interest Payments)
- Interpretation: A DSCR
above 1 indicates that the company generates sufficient operating income to
cover its debt obligations. A ratio below 1 suggests insufficient cash flow to
meet debt obligations, increasing the risk of default.
5.
**Debt Ratio**:
- Purpose: The debt ratio measures
the proportion of a company's assets financed by debt. It provides a broader
perspective on leverage compared to the debt-to-equity ratio.
- Formula: Debt Ratio = Total Debt / Total
Assets
- Interpretation: A
higher debt ratio indicates a larger portion of assets financed by debt,
suggesting higher financial leverage and risk. A lower ratio indicates a more
conservative debt position.
6.
**Long-Term Debt-to-Capitalization Ratio**:
- Purpose: The long-term
debt-to-capitalization ratio assesses the proportion of long-term debt relative
to the company's total capitalization, including both debt and equity.
- Formula: Long-Term
Debt-to-Capitalization Ratio = Long-Term Debt / (Long-Term Debt + Total Equity)
- Interpretation: A
higher ratio suggests a greater reliance on long-term debt for financing,
potentially increasing financial risk. A lower ratio indicates a more
conservative capital structure.
These financial ratios provide
valuable insights into a company's debt position, financial risk, and ability
to manage debt effectively. By analyzing these ratios, investors, creditors,
and management can make informed decisions regarding investment, lending, and
capital allocation. Additionally, comparing these ratios with industry
benchmarks and historical trends can provide context for evaluating the
company's debt levels relative to its peers and over time.
Q.4
Present value and discount rates. You just won a lottery that promises to pay
you
Rs.
1,000,000 exactly 10 years from today. Because the Rs. 1,000,000 payment is
guaranteed
by the state in which you live, opportunities exist to sell the claim today
for
an immediate single cash payment. (20)
a.
What is the least you will sell your claim for if you can earn the following
rates of return on similar risk investments during the 10 year period? (1) 6%
(2) 9% (3)
12%.
b.
Rework part a under the assumption that the Rs. 1,000,000 payment will be
received
in 15 rather than 10 years.
c.
On the basis of your findings in parts and b, discuss the effect of both the
size of the rate of return and the time until receipt of payment on the present
value of a future sum.
To
calculate the present value of the Rs. 1,000,000 payment, we'll use the present
value formula:
\[
PV = \dfrac{FV}{(1 + r)^n} \]
Where:
-
\( PV \) = Present Value
-
\( FV \) = Future Value (Rs. 1,000,000)
-
\( r \) = Discount Rate (annual interest rate)
-
\( n \) = Number of years
a.
**Present Value for Different Discount Rates (10 years)**:
1. Discount Rate of 6%:
\( PV = \dfrac{1,000,000}{(1 +
0.06)^{10}} = \dfrac{1,000,000}{1.790847} ≈ \text{Rs. 558,394.62} \)
2. Discount Rate of 9%:
\( PV = \dfrac{1,000,000}{(1 + 0.09)^{10}} =
\dfrac{1,000,000}{2.367752} ≈ \text{Rs. 422,401.23} \)
3.
Discount Rate of 12%:
\(
PV = \dfrac{1,000,000}{(1 + 0.12)^{10}} = \dfrac{1,000,000}{3.106378} ≈
\text{Rs. 321,973.43} \)
b.
**Present Value for Different Discount Rates (15 years)**:
Using the same formula with \( n = 15 \)
years:
1. Discount Rate of 6%:
\( PV = \dfrac{1,000,000}{(1 +
0.06)^{15}} ≈ \text{Rs. 497,182.25} \)
2. Discount Rate of 9%:
\( PV = \dfrac{1,000,000}{(1 +
0.09)^{15}} ≈ \text{Rs. 309,581.11} \)
3. Discount Rate of 12%:
\( PV = \dfrac{1,000,000}{(1 +
0.12)^{15}} ≈ \text{Rs. 193,243.26} \)
c.
**Effect of Discount Rate and Time on Present Value**:
- **Discount Rate**: A
higher discount rate leads to a lower present value, indicating that the future
Q.5 Find value of an annuity for each case in
the accompanying table, answer the
Question
that follow. Case Amount of-annuityInterest rateDepositperiodA Rs. 2500 8% 10
B
500 12 6
C
30,000 20 5
D
11,500 9 8
E
6,000 14 30
a.
Calculate the future value of the annuity assuming that it is
1.
An ordinary annuity.
2.
An annuity due.
b.
Compare your finding in parts a (1) and a (2). Al else being identical, which
type
of annuity ordinary or annuity due is preferable? Explain why.
To calculate the future value of each annuity,
we'll use the future value of an annuity formula for both ordinary annuity and
annuity due:
1.
**Future Value of Ordinary Annuity**:
\[
FV_{\text{ordinary}} = Pmt \times \left( \dfrac{(1 + r)^n - 1}{r} \right) \]
2.
**Future Value of Annuity Due**:
\[
FV_{\text{annuity due}} = Pmt \times \left( \dfrac{(1 + r)^n - 1}{r} \right)
\times (1 + r) \]
Where:
-
\( Pmt \) = Payment amount per period
-
\( r \) = Interest rate per period
-
\( n \) = Number of periods
Given:
-
Case A: \( Pmt = Rs. 2500 \), \( r = 8\% \), \( n = 10 \)
-
Case B: \( Pmt = Rs. 500 \), \( r = 12\% \), \( n = 6 \)
-
Case C: \( Pmt = Rs. 30,000 \), \( r = 20\% \), \( n = 5 \)
-
Case D: \( Pmt = Rs. 11,500 \), \( r = 9\% \), \( n = 8 \)
-
Case E: \( Pmt = Rs. 6,000 \), \( r = 14\% \), \( n = 30 \)
Let's
calculate the future value for each case:
a.
**Future Value of Annuity**:
1.
**For Ordinary Annuity**:
\[
FV_{\text{ordinary}} = Pmt \times \left( \dfrac{(1 + r)^n - 1}{r} \right) \]
\[
\text{FV}_{A_{\text{ordinary}}} = 2500 \times \left( \dfrac{(1 + 0.08)^{10} -
1}{0.08} \right) \]
\[
\text{FV}_{B_{\text{ordinary}}} = 500 \times \left( \dfrac{(1 + 0.12)^6 -
1}{0.12} \right) \]
\[
\text{FV}_{C_{\text{ordinary}}} = 30000 \times \left( \dfrac{(1 + 0.20)^5 -
1}{0.20} \right) \]
\[
\text{FV}_{D_{\text{ordinary}}} = 11500 \times \left( \dfrac{(1 + 0.09)^8 -
1}{0.09} \right) \]
\[
\text{FV}_{E_{\text{ordinary}}} = 6000 \times \left( \dfrac{(1 + 0.14)^{30} -
1}{0.14} \right) \]
2.
**For Annuity Due**:
\[
FV_{\text{annuity due}} = Pmt \times \left( \dfrac{(1 + r)^n - 1}{r} \right)
\times (1 + r) \]
\[
\text{FV}_{A_{\text{annuity due}}} = 2500 \times \left( \dfrac{(1 + 0.08)^{10}
- 1}{0.08} \right) \times (1 + 0.08) \]
\[
\text{FV}_{B_{\text{annuity due}}} = 500 \times \left( \dfrac{(1 + 0.12)^6 -
1}{0.12} \right) \times (1 + 0.12) \]
\[
\text{FV}_{C_{\text{annuity due}}} = 30000 \times \left( \dfrac{(1 + 0.20)^5 -
1}{0.20} \right) \times (1 + 0.20) \]
\[
\text{FV}_{D_{\text{annuity due}}} = 11500 \times \left( \dfrac{(1 + 0.09)^8 -
1}{0.09} \right) \times (1 + 0.09) \]
\[
\text{FV}_{E_{\text{annuity due}}} = 6000 \times \left( \dfrac{(1 + 0.14)^{30}
- 1}{0.14} \right) \times (1 + 0.14) \]
Now,
let's compute these values.
To
calculate the future value of each annuity, let's plug in the given values into
the formulas:
1.
**For Ordinary Annuity**:
\[
\text{FV}_{A_{\text{ordinary}}} = 2500 \times \left( \dfrac{(1 + 0.08)^{10} -
1}{0.08} \right) \]
\[
\text{FV}_{B_{\text{ordinary}}} = 500 \times \left( \dfrac{(1 + 0.12)^6 -
1}{0.12} \right) \]
\[
\text{FV}_{C_{\text{ordinary}}} = 30000 \times \left( \dfrac{(1 + 0.20)^5 -
1}{0.20} \right) \]
\[
\text{FV}_{D_{\text{ordinary}}} = 11500 \times \left( \dfrac{(1 + 0.09)^8 -
1}{0.09} \right) \]
\[
\text{FV}_{E_{\text{ordinary}}} = 6000 \times \left( \dfrac{(1 + 0.14)^{30} -
1}{0.14} \right) \]
2.
**For Annuity Due**:
\[
\text{FV}_{A_{\text{annuity due}}} = 2500 \times \left( \dfrac{(1 + 0.08)^{10}
- 1}{0.08} \right) \times (1 + 0.08) \]
\[
\text{FV}_{B_{\text{annuity due}}} = 500 \times \left( \dfrac{(1 + 0.12)^6 -
1}{0.12} \right) \times (1 + 0.12) \]
\[
\text{FV}_{C_{\text{annuity due}}} = 30000 \times \left( \dfrac{(1 + 0.20)^5 -
1}{0.20} \right) \times (1 + 0.20) \]
\[
\text{FV}_{D_{\text{annuity due}}} = 11500 \times \left( \dfrac{(1 + 0.09)^8 -
1}{0.09} \right) \times (1 + 0.09) \]
\[
\text{FV}_{E_{\text{annuity due}}} = 6000 \times \left( \dfrac{(1 + 0.14)^{30}
- 1}{0.14} \right) \times (1 + 0.14) \]
Let's calculate these values.
Here
are the calculations for the future value of each annuity, both for ordinary
annuity and annuity due:
1.
**For Ordinary Annuity**:
\[
\text{FV}_{A_{\text{ordinary}}} = 2500 \times \left( \dfrac{(1 + 0.08)^{10} -
1}{0.08} \right) \]
\[
\text{FV}_{A_{\text{ordinary}}} \approx 2500 \times \left( \dfrac{(1.08)^{10} -
1}{0.08} \right) \]
\[
\text{FV}_{A_{\text{ordinary}}} \approx 2500 \times \left( \dfrac{2.158924 -
1}{0.08} \right) \]
\[
\text{FV}_{A_{\text{ordinary}}} \approx 2500 \times 19.48655 \]
\[
\text{FV}_{A_{\text{ordinary}}} \approx \text{Rs. } 48,716.37 \]
Similarly,
calculating for the rest of the cases:
\[
\text{FV}_{B_{\text{ordinary}}} \approx \text{Rs. } 3,339.13 \]
\[
\text{FV}_{C_{\text{ordinary}}} \approx \text{Rs. } 270,247.02 \]
\[
\text{FV}_{D_{\text{ordinary}}} \approx \text{Rs. } 147,197.89 \]
\[
\text{FV}_{E_{\text{ordinary}}} \approx \text{Rs. } 1,448,999.54 \]
2.
**For Annuity Due**:
\[
\text{FV}_{A_{\text{annuity due}}} = 2500 \times \left( \dfrac{(1 + 0.08)^{10}
- 1}{0.08} \right) \times (1 + 0.08) \]
\[
\text{FV}_{A_{\text{annuity due}}} \approx 2500 \times \left(
\dfrac{(1.08)^{10} - 1}{0.08} \right) \times 1.08 \]
\[
\text{FV}_{A_{\text{annuity due}}} \approx 2500 \times \left( \dfrac{2.158924 -
1}{0.08} \right) \times 1.08 \]
\[
\text{FV}_{A_{\text{annuity due}}} \approx 2500 \times 19.48655 \times 1.08 \]
\[
\text{FV}_{A_{\text{annuity due}}} \approx \text{Rs. } 52,637.89 \]
Similarly,
calculating for the rest of the cases:
\[
\text{FV}_{B_{\text{annuity due}}} \approx \text{Rs. } 3,826.08 \]
\[
\text{FV}_{C_{\text{annuity due}}} \approx \text{Rs. } 312,299.12 \]
\[
\text{FV}_{D_{\text{annuity due}}} \approx \text{Rs. } 169,624.08 \]
\[
\text{FV}_{E_{\text{annuity due}}} \approx \text{Rs. } 1,665,599.45 \]
Now,
let's compare the findings in parts a(1) and a(2).
Comparing
the future values of ordinary annuity and annuity due for each case, we observe
the following:
- For all cases, the future
value of the annuity due is higher than that of the ordinary annuity.
- The difference between the
future values of the annuity due and the ordinary annuity increases as the
interest rate and the deposit period increase.
The reason for the difference
in future values lies in the timing of cash flows. In an annuity due, each
payment is received at the beginning of the period, allowing more time for
compounding to occur. As a result, the future value of an annuity due is higher
than that of an ordinary annuity.
Now, let's discuss which type
of annuity, ordinary or annuity due, is preferable, assuming all else is
identical:
Annuity due is generally
preferable over an ordinary annuity due to the time value of money principle.
By receiving payments at the beginning of each period, an annuity due allows
for earlier access to funds, which can be reinvested or used for other
purposes. Additionally, the higher future value of an annuity due compared to
an ordinary annuity further supports its preference, especially in scenarios
where maximizing wealth accumulation is a priority.
In conclusion, all else being
identical, an annuity due is preferable over an ordinary annuity due to its
higher future value and the benefits associated with receiving payments at the
beginning of each period.
Dear Student,
Ye sample assignment h. Ye bilkul
copy paste h jo dusre student k pass b available h. Agr ap ne university
assignment send krni h to UNIQUE assignment
hasil krne k lye ham c contact kren:
0313-6483019
0334-6483019
0343-6244948
University c related har news c
update rehne k lye hamra channel subscribe kren:
JUST
5 BULLET POINTS WITHOUT ANY HEADINGS AND SUB BULLET POINTS