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BUSINESS FINANCE ASSIGNMENT HELP UK

 BUSINESS FINANCE ASSIGNMENT HELP UK

 

Question 1

a. Liquidity position analysis

 

2016

Industry average

Liquidity ratios:

 

 

Current ratio

1.85714

1.5

Quick ratio

0.71429

1.25

 

Considering the above table, it can be stated that in the year 2016, the performance of Bradley Stores, Pty Ltd in terms of current ratio was good. It is because the current ratio of the company in 2016 was much higher than the industry average. The table is showing the industry average of 1.5 in terms of current ratio; whereas, the actual current ratio of the company in 2016 was 1.86, which means the current ratio of the company was at better position than the industry standard.

On the other hand, the performance of the company was not at satisfactory level in the context of quick ratio. The quick ratio was below the industry average. This has caused by the higher level of inventory of the business. It means the inventory management of the company was not good.

b. Activity ratios analysis

Activity Ratio:

2016

Industry average

Inventory turnover ratio

6.25

12

Assets turnover ratio

1.5

1.4

fixed assets turnover ratio

2.22222

1.8

Average collection period

24.3333

30days

Average payment period

0.07143

20days

 

The above table is showing five different activity ratios of the business in 2016. Considering the above table it can be stated that the performance of the company was at positive side in terms of assets turnover ratio, fixed assets turnover ratio, average collection period and average payment period. It is because in these four areas the performance of the company is showing better position than the industry standard. It means the company has performed more than average. This is also indicating the policies of the company in respect to the collection period and payment period were efficient enough (Maka & Suresh, 2018).

However, if the focus is made on the inventory turnover ratio, it can be identified that the inventory turnover ratio of the business was not up to the standard, which means the inventory management system of the company was not efficient.

c. Debt position analysis

Debt Ratio:

2016

Industry average

Debt to assets ratio

67.50%

50%

Assets to Equity ratio

3.07692

2.0

 

The above table is showing the debt ratios of Bradley Stores, Pty Ltd for the year 2016. As per the table, it can be stated that the debt to assets ratios of the business are showing negative position of the business. It is because the table is clearly showing that the company has used more debt capital for purchasing the assets of the business. In this context, the industry average is showing that the company should have used 50% debt capital for purchasing the assets of the business. However, practically the company has used more than 60% debt capital for purchasing the assets of the business. It means the risk level of the assets has increased due to the use of debt capital (Benedettini & Neely, 2017).

On the other hand, the assets to equity ratio of the company are showing better position than the industry average. The asset  to equity ratio is showing that the company has used equity capital more than the industry average and from this point of view the performance of the company good.

d. Profitability position analysis

Profitability Ratio:

2016

Industry average

Net profit ratio

2.00%

6.40%

Return on Assets

3.00%

9%

Return on Equity

9.23%

18%

 

The above table is showing the profitability ratios of Bradley Stores, Pty Ltd. Considering the profitability ratios in the above table, it can be stated that the profitability performance of the business was poor during 2016. The net profit ratio, return on assets and return on equity are showing much low performance of the company (Ozkan et al., 2017). It means the earnings capacity of the business has declined. However, the profitability performance of the company can be better understood if a DuPont analysis is performed in this context. The DuPont analysis is shown below:

ROE = Profit margin * Total assets turnover * Total assets to equity

            = 0.02 * 1.4 * 2.0

            = 0.056 or 5.60%

In the DuPont analysis again the ROE is showing the result less than the industry average. Therefore, from this analysis, it can be stated that the profitability position of the business needs to be improved as soon as possible.

e. Market ratio analysis

Market ratio

2016

Industry average

P/E ratio

15

23

Times interest earned ratio

1.25

8.5

 

The above table is showing that the performance of the company was not good in terms of market ratios in 2016. The P/E ratio of the business in 2016 was 15; whereas, the industry average is showing that the standard P/E ratio for the companies is 23. It means the performance of the shares of Bradley Stores, Pty Ltd was not up to the standard; rather it can be stated that the shares of Bradley Stores, Pty Ltd have performed poorly in 2016.

On the other hand, if the focus is made on the times interest earned ratio, it can be identified that the capacity of the company to pay the interest on its debt is much lower than the industry average (Hussain et al., 2018). It is showing that the efficiency level of the company in terms of market situation is low. Hence, it can be stated that the performance of the company in terms of market ratio is very poor.

f. Overall performance analysis and recommendation

From the above ratio analysis, it can be stated that the main strong points of Bradley Stores, Pty Ltd are the current ratio, assets turnover ratio, average collection period, average payment period and fixed assets turnover ratio. On the other hand, the major weak points of the company are – the profitability, market ratios and the debt ratios of the business.

Considering the performance standard of the company, it can be recommended that the loan should not be approved (Maka & Suresh, 2018). It is because the interest paying capacity of the business is low and at the same time, it can also be identified that the profitability standard or the earnings capacity of the business is also low. Therefore, from this point of view, it must be stated that the loan should be denied.

Question 2

1. Expected rate of return using probabilistic approach

Expected rate of return for Tech.com

= (0.30*-0.20) + (0.20*0.15) + (0.35*0.30) + (0.15*0.50)

= -0.06 + 0.03 + 0.105 + 0.075

= 0.15 or 15%

Expected rate of return for Sam’s Grocery

= (0.30*0.05) + (0.20*0.06) + (0.35*0.08) + (0.15*0.10)

=0.015 + 0.012 + 0.028 + 0.015

= 0.07 or 7%

Expected rate of return for ASX 200

= (0.30*-0.04) + (0.20*0.11) + (0.35*0.17) + (0.15*0.27)

= -0.012 + 0.022 + 0.0595 + 0.0405

= 0.11 or 11%

2. Calculating the standard deviation of expected rate of return

Standard deviation of expected rate of return for Tech.com = 0.15 = 0.39 or 39%

Standard deviation of expected rate of return for Sam’s Grocery = 0.07 = 0.26 or 26%

Standard deviation of expected rate of return for ASX 200 = 0.11 = 0.33 or 33%           

4. Which is a better measure of risk for the ordinary share of Tech.com and Sam’s Grocery – the standard deviation or the beta?                                        

Beta is the better measure of risk for the ordinary shares of of Tech.com and Sam’s Grocery

5. Based on the beta provided, what is the expected rate of return for Tech.com and Sam’s Grocery for the next year?

Expected rate of return for Tech.com (Recession) = 0.05 + (1.68 * -0.09)

                                                                                    = -0.10 or -10%

Expected rate of return for Tech.com (Average) = 0.05 + (1.68 *0.06)

                                                                                    = 0.15 or 15%

Expected rate of return for Tech.com (Expansion) = 0.05 + (1.68 * 0.12)

                                                                                    = 0.26 or 25%

Expected rate of return for Tech.com (Boom) = 0.05 + (1.68 * 0.22)

                                                                                    = 0.42 or 42%

Expected rate of return for Sam’s Grocery (Recession) = 0.05 + (0.52 * -0.09)

                                                                                    = -0.01 or -1%

Expected rate of return for Sam’s Grocery (Average) = 0.05 + (0.52 *0.06)

                                                                                    = 0.08 or 8%

Expected rate of return for Sam’s Grocery (Expansion) = 0.05 + (0.52 * 0.12)

                                                                                    = 0.11 or 11%

Expected rate of return for Sam’s Grocery (Boom) = 0.05 + (0.52 * 0.22)

                                                                                    = 0.16 or 16%

5. Calculating portfolio beta and expected rate of return

Portfolio beta = (1.68 * 30%) + (0.52 * 70%)

                        = 0.50 + 0.37

                        = 0.87

Expected rate of return = (0.15 * 30%) + (0.07 * 70%)

                                      = 0.04 + 0.05

                                      = 0.09 or 9%

6. Calculating portfolio beta and expected rate of return

Portfolio beta = (1.68 * 70%) + (0.52 * 30%)

                        = 1.17 + 0.15

                        = 1.32

Expected rate of return = (0.15 * 70%) + (0.07 * 30%)

                                      = 0.11 + 0.02

                                      = 0.13 or 13%

7. Which of these two-share portfolios can be selected? Why?

The first portfolio must be selected because in that portfolio the beta is below 0.87, which indicates less risk and the expected return is also positive.

Question 3

1. Calculating the payback period

 

Renovate

Replace

 

 

 

Initial investment

-9000000

-2400000

Cash inflow in year 1

3000000

2000000

Cash inflow in year 2

3000000

800000

Cash inflow in year 3

3000000

200000

Cash inflow in year 4

3000000

200000

Cash inflow in year 5

3000000

200000

 

 

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