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Program: MBA (INNOVATIVE MANAGEMNET)
SESSION: Jan 2011
SUBJECT: FINANCIAL RESOURSE MANAGEMENT
SUBMITTED BY: RAHAT ALI
STUDENT ID: 41564
SUBMITTED TO: MR. RICHARD ASIBEY-BONSU
DATE: 16 MARCH 2011
British InstituteOf Technology & E-commerce
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Table of contents
1. Abstract
2. Introduction
3. ABC ining Corporation balance sheet
4. ABC ining Corporation income statement
5. J phones balance sheet
6. J phones income statement
7. Profitability Ratio
a Return on capital employed
b et profit argin
c Asset turn over
8. Liquidity Ratios a Current ratio
b Acid test ratio
c Debtor¶s turnover
9. anagement efficiency Ratio
a Stock turnover ratio
10. Corporate ratios
a Earnings per shares
b Dividend per shares
c Dividend cover
11. Financial ratios a Share holder profitability ratio
12. Conclusion and suggestion
13. References
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Abstract:
As Ahmet Hussain 75 years old pensioner, approached our firm for financial and
investment advice, who recently won £20,000 in lottery. y position in the company
is Assistant financial management advisor and my task will be producing a report
based on the information given about the two companies which has been proposed
by Ahmet Hussain. hese companies need to be analysed on the ground of
investment potential.
Int ducti n:
There are two companies given in the question, company 1 is ABC ining
Corporation which is long established, multinational, and over 2000 subsidiaries . The
operation extended to 70 different countries as it is a mining company so its main
interests is for minerals in Africa and refining, processing, and production of a wide
range of products. This corporation also interest in marketing and production of gas,
coal, and chemicals and various other products.
While the other company which is J phones Ltd only operating for just two years but
has a young dynamic management staff. They produce single principal product line,
A Smartphone incorporating recent technological advancements. Although the
company is new, but they have adapted effective way of advertisement via television
and press to introduce their product lines.
ow we have to analyse the financial data of both the companies which is
deliberately muddled by one of the partner of the firm. It is necessary to put this
information in the table so it can be easily understandable.
Tables are shown on the next page of balance she et and income statements for
both the companies for the year 2001 and 2002.
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AB
MINNING CORPORATION
BALANCE S ¡ EET2002 (£ Millions)
2001 (£ Millions)
Fixed Asse¢ s ( Non- c
£ ¤ ¤
ent assets)
Current Assets (stock)
Inventory
Debtors (receivables)
Cas ¥
Total current asset
Total Assets (Net asset)
Equity
Reserve Capital
Ordinary s ¦ ares Capital
Preference S ¦ ares Capital
Retained Earnings
Liabilities
Fixed Liabilities -----------------------------------------------------
Current Liabilities--------------------------------------------------
Other Current Liabilities
Taxation---------------------------------------------------------------
Dividends-------------------------------------------------------------
Total current liabilities--------------------------------------------
Total Equity & Liabilities
49,300
6000
9500
7000
22,500
71, 800
======
7, 000
40, 000
2, 500
5, 059
--------- 54, 559
2, 500
26, 000
2, 530
3, 450
31980
89, 039
======
38, 000
6000
6000
3000
15,000
53, 000
======
5, 500
32, 500
3, 000
2, 314
---------- 43, 314
......
14, 000
2, 311
2, 900
19211
62, 525
======
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ABC MINNING CORPORATION
INCOME STATEMENT2002 (£ Millions)
2001 (£ Millions)
Revenue (Sales)
Less Operating Cost
Operating Prof it (PBIT)
Less Interest
Prof it bef ore tax (PBT)
Less tax
Prof it af ter tax and interest (PAT)
Less dividend
Ordinary dividend £3, 200
Preference dividend £ 250
£ 35, 000
(£ 25, 900)
£ 9, 100
(£ 375)
£ 8, 725
(£ 2, 530)
£ 6, 195
£ 3,450
£ 2, 745
£ 29, 634
(£ 21, 292)
£ 7, 705
(£ 180)
£ 7, 525
(£ 2, 311)
£5, 214
£ 2, 900
£ 2, 314
Retained prof it f or the year
Retained Prof it (Earnings) £2, 314
-----------
Net Prof it £5, 509
======
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J PHONE LTD
BALANCE SHEET2002 (£ Millions)
2001 (£ Millions)
Fixed Assets ( Non- current assets)
Current Assets (stock)
Inventory
Cash
Total current asset
Total Assets (Net asset)
Equity
Reserve CapitalOrdinary shares Capital
Preference Shares Capital
Retained Earnings
Current Liabilities
Dividends 2002 2001
Preference 30, 000 13,000
Ordinary 28, 500 18, 000
Total current liabilities--------------------------------------------
--------- ----------
Non Current Liabilities
Debenture 8 % 160, 000 150, 000
Debenture 12% 300, 000 ----
---------- -----------
Total Equity & Liabilities
165,000
730, 000
150,000
15, 000
895,000
1, 060, 000
======
20, 000 95, 000
300, 000
116, 794
---------
531, 794
350, 000
408,500
58,500
460, 000
1, 431, 293
=======
180, 000
384, 000
90,000
16, 000
490,000
670, 000
======
100, 000 90, 000
130, 000
79, 719
----------
399, 718
200, 000
231,000
31, 000
150,000
780, 718
=======
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J PHONE LTD 2002 (£ Millions)
2001 (£ Millions)
INCOME STATEMENT
Revenue (Sales) 412, 500 350, 625
Less Operating Cost (268, 125) (227, 906)
Operating Prof it (PBIT) 144, 375 122, 719
Less Interest (48, 800) (12, 000)
Prof it bef ore tax (PBT) 95, 575 110, 719
Less tax ----- ------
Prof it af ter tax and interest (PAIT) 95, 575 110, 719
Less Dividend Preference dividend 30, 000
Ordinary dividend 28, 500
--------- (58, 500) (31, 000)
----------- -----------
Retained prof it f or the year 37, 075 79, 719
Retained Prof it (Earnings) B/F 79, 719
-----------
Net Prof it 116, 794
P fit bility ti :
It measures the profitability of the company which is the ability of the business to
make profit for the share holders. Different tools can be used in order to analyse the
profitability ratio. I will be using few tools in order to analyse the profitability of ABC
ining Corporation and J phones Ltd .
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(a)Retu n n capital empl yed (ROCE):
It measures the efficiency with which capital employed by the business is utilized and
expressed in percentage.
R CE = PBIT/capital employed * 100
Where ³PBIT´ is profit before interest and tax and Capital employed is fixed asset +
current asset.
ABC mining corporation2002
ABC mining corporation2001
ROCE = 9100/49,300+22,500 *100
= 9100/71800 * 100
=12.6%
ROCE = 7705/38000+15000 * 100
= 7705/53000 * 100
= 14%
J phone Ltd
2002
J phone Ltd
2001
ROCE= 144,375/165,000+895,000 *100
= 144,375/ 1,060,000 *100
= 13%
ROCE= 122,719/180, 000+ 490,000 *100
= 122,719/670,000 * 100
= 18%
(b) Net profit Margin:
It measures relationship between profit and sales.
et profit margin = PBIT/Net sale * 100
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ABC mining corporation
2002
ABC mining corporation
2001
= 9100/35000 *100
= 26%= 7705/29,634 * 100
=26%
J phone Ltd
2002
J phone Ltd
2001
= 144,375/412500 * 100
= 35%
=122,719/350,625 * 100= 35%
(c)Asset Tur n Over :
This is also called asset utilization ratio which measures the relationship between
sales and net asset.
= Sales/Net Asset
Net asset = FA+CA-CL-FL .
Where the FA stands for fixed asset, CA for current asset, CL for current liabilities
and FL stands for fixed or long term liabilities.
Asset turnover ratio is calculated on the table given below:
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ABC mining corporation
2002
ABC mining corporation
2001
Asset turn over = 35000/37,320
= 0.93 times
Asset turn over = 29634/33789
= 0.87 times
J phone Ltd
2002
J phone Ltd
2001
Asset turn over =412500/191500
= 2.15 times
Asset turn over = 350625/289,000
= 1.21 times
Liquidity Ratios:
It measures the availability of liquid funds in order to meet the cash requirement of
the organization. Liquidity ratio generally use current ratio and acid test ratio, whichare as follows:
(a) Curr ent Ratio:
The current ratio also called as working capital ratio relates the current assets
and current liabilities. It measures the potential reservoir of cash of the
organization. Current asset is divided by the current liabilities and the differenc e
is denoted by X : 1 .
Current Ratio = current asset / current liabilities
= X : 1
Where the current asset is stock, debtor, bank, card and the current liability is
trade creditor, short term loan payable in year overdraft, and outstanding
payments.
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We will use this ratio in order to understand these companies¶ reservoirs of liquid
fund. Current ratio for both the companies is mention in the table on the next
page.
ABC mining corporation2002
ABC mining corporation2001
Current ratio = 22500 / 31980
= 0.70 : 1 Current ratio = 15000 / 19211
= 0.78 : 1
J phone Ltd
2002
J phone Ltd
2001
Current ratio = 895000/408500
= 2.2 : 1
Current ratio = 490000/ 231000= 2.2 : 1
(b) Acid test ratio:
It is also known as quick ratio, it is similar to current ratio but it exclude the current asset
from the stock which is hard to convert in to cash. The formula will be like
Acid test ratio = current asset ± stock / current liabilities
= X : 1
enerally 1 : 1 or 1.5 : 1 is consider good to analyse the liquidity of the company.Here we will check for the companies given in the question. The table for both
companies is mentioned as follows:
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ABC mining corporation
2002
ABC mining corporation
2001
Acid test ratio = 22500 6000 / 31,980 = 0.51 : 1
Acid test ratio = 15000 6000 / 19211 = 0.46 : 1
J phone Ltd
2002
J phone Ltd
2001
Acid test ratio = 895000 730,000 / 408500
= 0.4 : 1
Acid test ratio = 490000 ± 384000/ 231000= 0.45 : 1
(c)Debtor s Tur nover :
It measures the debtor¶s Turnover in days. It is formulated by as follows
Trade¶s debtor¶s / credit sales * 365 days
And the answer will be in days. The table is as follows:
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ABC mining corporation
2002
ABC mining corporation
2001
Debtors turnover = 9500/35000 * 365
= 99.07 days
Debtors turnover = 6000/29,634 * 365
= 73.9
J phone Ltd
2002
J phone Ltd
2001
Debtors turnover = 150,000/412500 * 365
= 132.7 days
Debtors turnover = 90,000/ 350,625 * 365
= 93.68 days
Management Efficiency Ratios:
(a)Stock Tur nover Ratio
Stock Turnover (in days) = stock/cost of sale * 365
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ABC mining corporation
2002
ABC mining corporation
2001
Stock turnover = 6000/29500 * 365
= 84.55 days
stock turnover = 6000/21929 * 365
= 99.86
J phone Ltd
2002
J phone Ltd
2001
stock turnover = 730,000/268125 * 365
= 993.75 days
stock turnover = 384,000/ 227,906 * 365
= 614.99 days
Corporate Ratios:
(a) § arnings Per Share (EPS)
Earnings per Share = Net prof it af ter interest, tax and preference dividend
Number of shares in issue
ABC mining corporation
2002
ABC mining corporation
2001
EPS = 5945/40000
= 0.14 P
EPS = 4914/32500
= 0.15 P
J phone Ltd
2002
J phone Ltd
2001
EPS = 65575/190,000
= 0.345 P
EPS = 97719/ 180,000
= 0.542 P
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(b) ̈ ividend Per Share
Dividend per Share = Paid and proposed ordinary dividend
Number of Shares in issue
ABC mining corporation
2002
ABC mining corporation
2001
DPS = 3200/40000
= 0.08 P
DPS = 2600/32500
= 0.08 P
J phone Ltd
2002
J phone Ltd
2001
DPS = 28500/190,000
= 0.15 P
DPS = 18000/ 180,000
= 0.10 P
(c) © ividend Cover
Dividend Cover = Prof it attributed to ordinary shareholders Paid and proposed ordinary dividend
ABC mining corporation
2002
ABC mining corporation
2001
Dividend cover = 5945/3200
= 1.85
Dividend cover = 4914/2600
= 1.89
J phone Ltd
2002
J phone Ltd
2001
Dividend cover = 265575/28500
= 2.30
Dividend cover = 97719/ 18000
= 5.42
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E) Financial Ratios
(1) Shareholder Profitability Ratio
Shareholder Prof itability = Prof it attributed to ordinary shareholders x 100%
Total Assets
ABC mining corporation
2002
ABC mining corporation
2001
Share holder prof itability = 5945/71800*100%
= 8.27 %
Share holder prof itability = 4914/53000 * 100%
= 9.27%
J phone Ltd
2002
J phone Ltd
2001
Share holder prof itability = 65575/1060000 * 100%
= 6.18%
Share holder prof itability = 97719/ 670,000* 100%
= 14.5n8%
Conclusion & suggestion:
According to my analysis above I came on to the conclusion that J phones Ltd is
doing very well in terms of return on capital employed, Net profit margin, asset turn
over, current ratio and corporate ratios. As far as ABC ining Corporation is
concern, in comparison to j phones Ltd, profitability ratios are slow but steady along
with the corporate ratios. ABC ining Corporation is better in liquidity ratios and
share holder profitability ratio which is a great concern for the customer we are
dealing with.
some of the trends suggest that both the companies are having problem just like in
acid test ratio where ABC mining corporation have only 0.51 : 1 in 2002 while J
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phones have 0.40 : 1 in 2002. Which suggest both companies are struggling wi th its
liquidity funds to meet their requirements.
y suggestion to the customer who is 75 years old and he may not want a risky
company where he invests so in my opinion ABC ining Corporation would be a
better choice because of its long term commitments and better share holder
profitability ratio. This company is less risky in my opinion because of its better
liquidity ratios. And its steady figures in the above tables suggest it may not have
sudden downwards trends.
Refer ences:
anaging finance by David Crowther published in 2004
Financial ratio analysis available [online] at
http://www.bized.co.uk/compf act/ratios/sdc5.htm
[accessed on 28 march 2011]
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