Business Finance Assignment

This is a solution of Business Finance Assignment in which we discuss Developing business IT strategy can help your company cope with aging systems and limited resources that can lead to fragmented IT solutions.

Assessment TitleIndividual Assignment
Unit Learning Outcomes Addressed:·        Demonstrate knowledge of time value of money (TVM) concepts and techniques, capital market theories, and methods of financing businesses, and critically apply the concepts to evaluate economic and investment decisions, including the valuation of bonds and shares and the assessment of capital budgeting decisions.

·        Demonstrate strong conceptual corporate finance knowledge to analyse and interpret advances in theory for professional practice.

·        Communicate relevant high level finance knowledge with other professionals.

Weight20%
Total Marks40
Word limit2000
Release DateWeek Seven (7)
Due DateWeek Ten (10)
Submission Guidelines·     All work must be submitted on Moodle by the due date along with a completed Assignment Cover Page.

·      The assignment must be in MS Word format, 1.5 spacing, 11-pt Calibri (Body) font and 2 cm margins on all four sides of your page with appropriate section headings.

·     Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using APA 6th editionfor the School of Business.

ExtensionIf an extension of time to submit work is required, an Application for Special Consideration and supporting documentation must be submitted directly to the School’s Administration Officer via your MIT AMS login

[https://online.mit.edu.au/ams/default.aspx?ReturnUrl=%2fams%2f]. You must submit this application no later than three working days after the due date of the specific piece of assessment or the examination for which you are seeking Special Consideration.  Further information is available at:

http://www.mit.edu.au/aboutmit/institutepublications/policiesproceduresandguidelines/specialconsiderationdeferment

Academic Misconduct 

 

Academic Misconduct is a serious offence. Depending on the seriousness of the case, penalties can vary from a written warning or zero marks to exclusion from the course or rescinding the degree. Students should make themselves familiar with the full policy and procedure available at:http://www.mit.edu.au/about-mit/institute-publications/policies-procedures-and-guidelines/Plagiarism-Academic-Misconduct-Policy-Procedure. For further information, please refer to the Academic Integrity Section in your Unit Description.

Business Finance AssignmentAssignment: solver all four problems below

  1. You have been hired by Bank of Sydney as a financial analyst. One of your first job assignments is to analyse the present financial condition of Bradley Stores, Pty Ltd. You are provided with the following 2016 balance sheet and income statement information for Bradley Stores. In addition, you are told that Bradley Stores has 10,000,000 ordinary shares outstanding, currently trading at $9 per share, and has made annual purchases of $210,000,000.

Your assignment calls for you to calculate certain financial ratios and to compare these calculated ratios with the industry average ratios that are provided. You are also told to base your analysis on five categories of ratios: (a) liquidity ratios, (b) activity ratios, (c) debt ratios, (d) profitability ratios, and (e) market ratios.

Balance Sheet (in 000s)

Cash                                       $    5,000           Accounts payable                         $  15,000

Accounts receivable               20,000           Notes payable                                   20,000

Inventory                                  40,000           Total current liabilities                $  35,000

Total current assets           $  65,000           Long-term debt                             100,000

Net fixed assets                    135,000           Shareholders’ equity                        65,000

Total assets                         $200,000           Total liabilities and equity          $200,000

Income Statement (in 000s)

Net sales (all credit)                                                                                         $300,000

Less cost of goods sold                                                                                     250,000

Earnings before interest and taxes                                                               $  50,000
Less interest                                                                                                           40,000

Earnings before taxes                                                                                      $  10,000

Less taxes (40%)                                                                                                      4,000

Net income                                                                                                        $    6,000

Industry Averages for Key Ratios:

Net profit margin                                                            6.4%

Average collection period (365 days)                          30 days

Debt ratio                                                                          50%

P/E ratio                                                                            23

Inventory turnover ratio                                                12.0

        ROE                                                                                    18%

Average payment period (365 days)                            20 days

Times interest earned ratio                                           8.5

Total asset turnover                                                       1.4

Current ratio                                                                     1.5

Assets-to-equity ratio                                                     2.0

        ROA                                                                                    9%

Quick ratio                                                                        1.25

Fixed asset turnover ratio                                              1.8

Use the following guidelines to complete this job assignment. First, identify which ratios you need to use to evaluate Bradley Stores in terms of its (a) liquidity position, (b) business activity, (c) debt position, (d) profitability, and (e) market comparability. Next, calculate these ratios. Finally, compare these ratios to the industry average ratios provided in the problem and answer the following questions.

  1. Based on the provided industry average information, discuss Bradley Stores’ liquidity position. Discuss specific areas in which Bradley compares positively and negatively with the overall industry.
  2. Based on the provided industry average information, what do Bradley Stores’ activity ratios tell you? Discuss specific areas in which Bradley compares positively and negatively with the overall industry.
  3. Based on the provided industry average information, discuss Bradley Stores’ debt position. Discuss specific areas in which Bradley compares positively and negatively with the overall industry.
  4. Based on the provided industry average information, discuss Bradley Stores’ profitability position. As part of this investigation of company profitability, include a DuPont analysis. Discuss specific areas in which Bradley compares positively and negatively with the overall industry.
  5. Based on the provided industry average information, how is Bradley Stores viewed in the marketplace? Discuss specific areas in which Bradley compares positively and negatively with the overall industry.
  6. Overall, what are Bradley’s strong and weak points? Knowing that your boss will approve new loans only to companies in a better-than-average financial position, what is your final recommendation (approval or denial of loan)? 

(10 Marks)

  1. On your first day as an intern at Tri-Star Management Pty Ltd the CEO asks you to analyse the following information pertaining to two ordinary share investments, Tech.com and Sam’s Grocery. You are told that a one-year Treasury note will have a rate of return of 5% over the next year. Also, information from an investment advisory service lists the current beta for Tech.com as 1.68 and for Sam’s Grocery as 0.52. You are provided a series of questions to guide your analysis.

 Estimated Rate of Return

Economy                  Probability               Tech.com        Sam’s Grocery          ASX 200

Recession                         30%                         –20%                           5%                       – 4%

Average                            20%                            15%                           6%                        11%

Expansion                         35%                            30%                           8%                        17%

Boom                                15%                            50%                        10%                        27%

  1. Using the probabilistic approach, calculate the expected rate of return for Tech.com, Sam’s Grocery, and the ASX 200 Index.
  2. Calculate the standard deviations of the estimated rates of return for Tech.com, Sam’s Grocery, and the ASX 200 Index.
  3. Which is a better measure of risk for the ordinary share of Tech.com and Sam’s Grocery – the standard deviation you calculated in Question 2 or the beta?
  4. Based on the beta provided, what is the expected rate of return for Tech.com and Sam’s Grocery for the next year?
  5. If you form a two-share portfolio by investing $30,000 in Tech.com and $70,000 in Sam’s Grocery, what is the portfolio beta and expected rate of return?
  6. If you form a two-share portfolio by investing $70,000 in Tech.com and $30,000 in Sam’s Grocery, what is the portfolio beta and expected rate of return?
  7. Which of these two-share portfolios do you prefer? Why?

(10 Marks)

  1. Contact Manufacturing Ltd is considering two alternative investment proposals. The first proposal calls for a major renovation of the company’s manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 15%.

Year             Renovate                  Replace

0             –$9,000,000             –$2,400,000

1                 3,000,000                  2,000,000

2                 3,000,000                     800,000

3                 3,000,000                     200,000

4                 3,000,000                     200,000

5                 3,000,000                     200,000

  1. Calculate the payback period of each project and based on this criterion, indicate which project you would recommend for acceptance.
  2. Calculate the net present value (NPV) of each project and based on this criterion, indicate which project you would recommend for acceptance.
  3. Calculate the internal rate of return (IRR) of each project and based on this criterion, indicate which project you would recommend for acceptance.
  4. Calculate the profitability index (PI) of each project and based on this criterion, indicate which project you would recommend for acceptance.
  5. Overall, you should find conflicting recommendations based on the various criteria. Why is this occurring?
  6. Chart the NPVprofiles of these projects. Label the intersection points on the x- and y-axes and the crossover point.
  7. Based on this NPVprofile analysis and assuming the WACC is 15%, which project would you recommended for acceptance? Why?
  8. Based on this NPVprofile analysis and assuming the WACC is 25%, which project is recommended? Why?
  9. Discuss the important elements to consider when deciding between these two projects.

(10 Marks)

  1. Higher and Higher Constructions Pty Ltd in Melbourne is considering some new equipment. This new equipment will generate sales revenues but it will not replace any existing equipment. The equipment has a 3-year life for depreciation purposes under Australian company tax regulations would be fully depreciated by the prime cost method over those years. It is planned to close down the project at the end of Year 3.  The company will need to increase its net operating working capital at the beginning of the project but no further increases are foreseen. Revenues and other operating costs are expected to be constant over the project’s life.
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