FINC20018 Managerial Finance OZ Assignments

FINC20018 Managerial Finance OZ Assignments

FINC20018 Managerial Finance OZ Assignments

Introduction:

This assignment depicts issues of the financial economic and financial interest about financial figures in economy. There are few practical questions of finance which are related with simple and compound interest, future and current payments. There is also analysis about the financial ratios and ascertainment of profits and accounts receivable. The thorough financial analysis provided a deep insight about the financial and economic information.   

Question 1 [Theory]: Chapter 1 profits versus cash flows:

Critically explain how profits and cash flows differ. Then critically explain why a financial manager should differentiate between profits and cash flows when evaluating investment projects.

Solution: theory –

While preparing financial statements it is necessary for financial managers to consider various financial parameters. Cash flow and profits are those parameters which trace actual business operations and conditions of a company.

Cash flow: -

Cash flow concept is that procedure which helps the company to keep track their flows in or out of the business operations. It's the measurement of monetary terms and activity that is needed to meet current and recent obligations. Managers should focus on two major components such as:

1.If a business is in the profitable situation but not have sufficient cash or fund flow arrangement, then this profitable situation could also make company insolvent and bankrupt.

2.If company's sales and monetary activities are in the condition of keeping pouring in, but it cannot be taken as the profitable condition of business activity. If the company takes loan or borrowing to solve the matters of cash flow then increasing debt costs will raise the overall cost of breakeven points (Peavler, 2017).

Profits: -

1.Profit can be taken as net income and revenue status of the company. It could be identified after sales revenue is subtracted from firm's expenses. It is the excess level above total expenses. It is consistency principle of accounting that company cannot even survive until it is profitable situation occurred. The level of profitability could be enhanced when the company knows how to evaluate and reduce the overall costs & production expenses to restore more profitability. Enhancement in the profitability is the measurement of period to avoid a financial crisis (Peavler, 2017).

Critically evaluation of profit and cash flow in the business:

1.Cash flow and profitability concept both are essential aspects of business operation. Where cash flow analysis describes inflow and outflows of monetary activities from the business operations, profit is known as surplus calculated after expenses are subtracted from total revenue from operations. Cash flow and profit calculation are necessary to obtain care for meeting daily obligations, taxes, purchases of inventory and adjustment of operating costs and employees. It is a proper determination of one of the most important financial operation through financial circumstances (Thomason, 2017).

For proper illustration, businesses operate their profit every month but cash is tied up from hard assets and account receivable so a company could not have sufficient money or cash to pay to their employees. The company has to pay their obligations or debt to trace and keep a business running positive and see profitable cash flow again. To maintain the level of profitability, it makes a company liable to maintain their level of cash flow positive. If a substantial level of debt over there, the financial condition of the company would be in insolvency due to a high amount of debt and business operation could not be able to make more profit (Martin Wheatley, 2012).

In another situation, if high profit and low level of cash flow in the favorable situation of the company could make company unable to meet their requirements and short-term obligations. The difference should be made between profits and cash flows when evaluating investment projects:

2.Evaluation of profit regarding investment projects:

The major advantage of considering accounting profits over cash flows makes a company and financial manager able to manipulate accounting figures while producing investment projects. On the other hand, if company's cash flow statements appear weak then a company could make a better decision and show them stronger by increasing their accounting profits. Financial managers focus using cash flow over profits so that value of money could be considered for cash flow evaluation (Martin Wheatley, 2012).

3.As it is known that profit is taken as net income that shows company's total revenue and earnings. In the subject to prepare investment projects or report, financial managers have to adjust total revenue according to the administrative cost of business operations. Adjustment of depreciation, interests and taxes and non-cash items are must to be focused while preparing investment projects (Peavler, 2017).

2.Evaluation of cash flow operation regarding investment projects:

1.Financial cash flow also to be considered because calculating accounting profits becomes more complex and consuming. While preparing cash flows statement, a manager has to focus only one and easy method while producing profits statements manager has to consider many processes and methods full of complexity. Sometimes investment projects become fails due to its non-cash operating features. Depreciation and amortization cannot be taken into Account while making investment projects. Depending on financial profitability and finances, investment projects could result in the books appearing lower profitability compared to using accounting profit (Thomason, 2017).

2.While making a focus on investment projects, a company has to consider total cash receipts from cash payments related to a specific period of time. As cash flow represents different expenses and revenue stream, financial manager should manage the good flow of cash over profits. Proper arrangement of cash flow will ensure the company to implement accurate plan and strategy to execute liquid assets responsibility (Guda, 2013).

3.Liquidity responsibility: -

A company should make proper arrangement of effective adjustment of financial and monetary terms in the absence of profit. An absence of profitability level could decline the impact of cash flow. In order to manage investment projects, profit becomes more important while determining whether to manage cash flow or profit could be bought. Financial manager has to put his or her own businesses’ assets as capital into investment projects otherwise loan could be taken to keep business on track until it is started (Rothberg, 2013).

FINC20018 Managerial Finance OZ Assignments

Question 2:  

Use an Excel spreadsheet and tables to present your calculations. Show all workings, formulas, and timelines if applicable. Reference your formulas and any theory you apply.

a) Gross profits

FINC20018 Managerial Finance OZ Assignments

b) Operating profits
FINC20018 Managerial Finance OZ Assignments

c) Net profits before taxes

FINC20018 Managerial Finance OZ Assignments

d) Net profits after taxes (assume a tax rate of 30%)

FINC20018 Managerial Finance OZ Assignments

e) Cash flows from operations

FINC20018 Managerial Finance OZ Assignments

f) Earnings available to ordinary shareholders

FINC20018 Managerial Finance OZ Assignments

Question 3: Financial analysis

a) Given the following income statement, historical ratios and industry averages andbalance sheetcalculate financial ratios for CQU South Africa Pty Ltd for the most recent year.

Profitability ratios:

Profitability ratios

Particulars

Amount ($)

Gross profit

396900

Operating profit

107900

Net profit after taxes

53040

Revenue for the year

2100000

Gross profit ratio

0.189

Operating profit ratio

0.051380952

Net profit ratio

0.025257143

Profitability ratios

Particulars

Amount ($)

Net profit after taxes

53040

Total assets

1000000

Total equity

467000

Return on assets

0.05304

Return on equity

0.113576017

Liquidity ratios:

Liquidity ratios

Particulars

Amount ($)

Total current assets

575000

Total current liabilities

345000

Total quick assets

332000

Current ratio

1.666666667

Quick ratio

0.962318841

Debt ratios:

Particulars

Amount ($)

Total Long-term debt

188000

Total equity

467000

Debt Equity Ratio

0.402569593

Activity ratios:

Particulars

Amount ($)

Cost of goods sold

1703100

Average inventory

243000

Inventory turnover ratio

7.008641975

Particulars

Amount ($)

Average accounts receivable

237000

Sales revenue

2100000

Receivable turnover

8.860759494

Average collection period (365/Receivable turnover)

41.19285714

Particulars

Amount ($)

Total assets

1000000

Revenue

2100000

Total assets turnover ratio

0.476190476

b) Analyze its overall financial situation for the most recent year [break your analysis into evaluation of the firm's liquidity, activity, debt, and profitability]

The analysis of the company CQU South Africa Pty Ltd has been done on the basis of analyzing the financial position based on different aspects and the same is presented and explained in detail as below:

Profitability position –It can be observed form the firm profitability ratios that the gross profit margin is 19% which represents a good position for the company in the market (Grinblatt & Titman, 2016). The concerned gross profit ratio shows that the company has been efficiently and effectively producing various products and services and the cost incurred for these services and goods has been appropriate as enough gross profit has been generated. But the main reason of concern for the company is to control the operating expenses as the company has been not efficient in generating the operating profits which are due to increased number of depreciation and administrative and selling expenses of the company. The tax rate applied to the company has resulted in low profits and the same are not sufficient enough for the company shareholders to deploy them for their expected returns. The return on assets has not been enough but the returns for equity is sound enough for the company (Brigham & Ehrhardt, 2013).

Liquidity position –The current ratio of the company CQU South Africa Pty Ltd is 1.67 which is above the industry average. The same represents that the company has been maintaining enough current assets and a sound liquidity position in order to cover all its liabilities and other obligations. But the current ratio is in excess of what should be maintained by the company which is resulting in wastage of current assets so that should be controlled by the company. The quick ratio of the company is near to 1 which represents a good liquidity position and the investors will feel safe in this aspect of the company.

Debt position –The debt position of the company represents that most of the finances has been obtained from the equity portion and the debt has not been utilized efficiently by the company CQU South Africa Pty Ltd and therefore there is a requirement to employ more long-term debt in the financing structure of the company.

Activity position– The Company is looking sound in this aspect as the inventory turnover ratio is 7 days and that represents that the inventory is converted in minimum time and the total asset turnover position is also in a good position. However there is a concern regarding the collection period of the company and the same should be reduced by the company (DeFusco, et. al., 2015).

c) Analyze its overall financial situation from a cross-sectional and a time-series point of view [break your analysis into the evaluation of the firm's liquidity, activity, debt, and profitability.

Cross-sectionalpoint of view – The cross-sectional point of view takes into consideration the inter-firm comparison at the same point of time and the comparison gives management an opportunity to analyze the performance of the company in respect of the industry and another competitor firm. In the case of CQU South Africa Pty Ltd, it can be observed that the company is performing well in respect of the other firms operating in the same industry. However, there is a concern regarding the debt structure of the company which should be improved in order to achieve a competitive edge in the market (Grant, 2016).

Time series analysis – The analysis is concerned with intra-firm comparison and the company performance is compared at different points of time with different time horizons. In the case of CQU South Africa Pty Ltd, it can be observed that the firm has increased its level of sound liquidity position. However, the profitability position of the firm has decreased over the last few years and that is the major point of concern for the management of the company. Also, the debt ratio has been decreasing and the company needs to employ more long-term debt in order to secure a commanding position in the market (Palepu, et. al., 2013).

Question 4:

Use an Excel spreadsheet and tables to present your calculations. Show all workings, formulas, and timelines if applicable. Reference your formulas and any theory you apply.

a.

Value of Two bedroom unit

Year

Amount at year end (At 5% Inflation Rate)

1

367500.00

2

385875.00

3

405168.75

4

425427.19

5

446698.55

6

469033.47

7

492485.15

8

517109.41

9

542964.88

10

570113.12

11

598618.78

12

628549.71

13

659977.20

14

692976.06

15

727624.86

16

764006.11

17

802206.41

18

842316.73

19

884432.57

20

928654.20

Calculation of Annual Payments

Fv (Future Value)

0.00

Pv (Present Value)

928654.2

Pmt (Payment Period)

? -132,197.44

Rate (Interest Rate)

13%

Nper (Number of Periods)

20

 

 

Value of Payment each year

? -132,197.44

b.The daily annuity is calculated as follows:

Calculation of Daily Payments

Fv

0.00

Pv

928654.2

Pmt

? -255.04

Rate

0.0219%

Nper

7300

 

 

Value of Payment each Day

? -255.04

Total Number of Days

365

Value of Payment at year end

? -93,090.22

c.Effect of annuity on change of particulars of the annuity:

The daily payments allow the investor to leverage on the interest component, which is multiplied daily in terms of compounding daily. However, when annual payments are made, a higher sum would be accumulated in year 1, and later the benefit of compounding will be received. Even with 8% interest, the investor can receive benefits in savings on the payment made. A lower sum has to be invested in the interest is compounded daily. This is due to the multiplying nature of the annuity which provides a higher sum on daily compounding as compared to an annual payment made.

Question 5:  [Calculation-Based]

CQU Packing Company has an issue of $1,000 par value bonds with a 14% coupon interest rate outstanding. The issue pays interest semi-annually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12% rate of return. The current market price of the bond is $920.

a) What is the value of these CQU Packing Company bonds?

FINC20018 Managerial Finance OZ Assignments

Where

C = Compound Payment

I = Interest

M = Par value

N = Number of payments

FINC20018 Managerial Finance OZ Assignments

= 70 * (1-0.3118) + 1000

 0.06           3.207

= 70 * 11.47 + 311.82

 = $1114.72

b) What is the value of CQU Packing Company's bond if it pays no coupon interest?

    FINC20018 Managerial Finance OZ Assignments

FINC20018 Managerial Finance OZ Assignments

 = 1000/3.207

= $311.8

c) Calculate the value of the CQU Packing Company's bond if the yield falls to 10%?

FINC20018 Managerial Finance OZ Assignments

= 70 * [1-0.376] + 1000

 0.05         2.653

= 70 * 12.48 + 376.931

= $1250.531

d) Define yield to maturity, par value, above and below par values, value of bond, maturity of the bond and market price

The anticipationof the return that can be received on maturity of the bond refers to as Yield of maturity.

The par value refers to the face value that the bond issuer promises to pay at the time of the maturity of the bonds.

Above par value refers to if the share is trading at a higher amount than the face value and below par value when they are trading at below face values of the shares.

Value of bond refers to the fair value of the bond that the holder will receive by calculating the present value of the interest and face value of shares upon maturity.

The maturityof bonds can be defined as when the bond is being matured or they are being redeemed and paid by the bond issuer after the specific time.

Market price is the price that is being prevailed of the shares in the market for buying.

The relationships between:

1. Yield to maturity and value of a bond – Yield to maturity is the base for the value of the bond. Higher the yield to maturity higher the value of the bond.
2. Yield to maturity and par value –Par value and Yield to maturity are independent of each other.  The yield to maturity takes into account the par value to calculate coupon interest.
3.Bond value and the market price of the bond – The bond value is the factor for the market price of the bond. Higher the book value is higher the market value.
4. Par value and the market price of the bond – The market price must not go below the par value of the shares. It is an unfavorable situation for the company.
5.Yield and maturity of the bond – if the market value of the bond increases both yield and maturity bond are lower than the coupon rate and if its lower than vice versa.
6. Bond value and par value – Bond value must be higher than the par value. The bonds are good for investment if the par value is higher than bond value.

e) Discuss three risks to bondholders or bond issuers

a. Risk of Default – One of the risks that are faced by the bondholders or bond issuers is that there are chances of default in providing the interest and principal amount to the bondholders.

b. Risk of Inflation – Due to inflation it may lead to the loosing of money by the bondholder as it will block the purchasing power of them. They are exposed to the inflation risk in case of floating-rate bonds.

c. Call Risk –There are different types of bonds such as callable bonds which can force the bondholder to buy back the bonds and then surrender them if required which increases the risk.

Question 6:

After reading the article from The Australian Financial Review below titled Strong case built in swap rate inquiry (Shapiro, 2016) address the following questions in a single essay format only include title, introduction, body with sub-headings and conclusion:

Essay

BBSW & Libor Rate

Introduction

This reading will define investigation of Australian Securities and Investment Commission, 2012 related to BBSW rate and LIBOR rate. BBSW rates are also known as bank bill swap rate & London interbank offer rates are called Libor rates. This reading will describe the significance and uses of these rates in the Australian market. It will also dictate about international banks that had done seriously wrong regarding benchmark bond index.

1.Explain in your own words what a Bank Bill Swap Rate and London Interbank Offer Rate is and how it operates in the markets:

Solution:

LIBOR: LIBOR rate is known as the benchmark rate for which leading international banks have to charge these rates for short terms obligations. LIBOR is determined as international Exchange London Interbank offer rates that are served as the first process to compute interest rates. These rates are levied on international loans across the world. ICE Benchmark Administration (IBA) administrates LIBOR rates related to five currencies such as US dollars, EURO, Japanese YEN, Swiss Franc (CHF) and Pound Sterling (GBP). The major quoted rate of LIBOR is quarter three months U.S rates of a dollar.

BBSW:

The Bank Bill Swap Rate is considered as an overall interbank rate in Australia & also determined by various banks in the Australian financial Association (AFMA). It is known as borrowing rate among international countries and their top market makers. It is benchmark interest for another financial instrument. BBSW is also equivalent to the interest rate of Australia.

How BBSW and LIBOR operate in the markets:

IN THE Australian market, the BBSW rate is equivalent to LIBOR rate process. In the Trade market, BBSW is served as trade benchmark rate as per Australian market systems. According to AFMA Libor rate was defined as more subjective assessment and these rates are used to determine interbank borrowing rates.  Libor rate is used to value the pricing of Australian dollars securities. While BBSW rates are operated to determine short-term floating interest rates. BBSW rates are set by the panels of 10 banks and financial institutions to calculate interest rates (Developments in banking law, 2012).

b) Briefly, discuss in your own words what the major banks internationally seem to have done wrong with regards to these benchmark bond indexes that has led to the outrage expressed in the newspaper article.

Solution:

As it is observed by the Australian Financial Markets Association (AFMA) that critical differences have been found between BBSW and LIBOR rates that make the benchmarks bond index and the BBSW projects far less to manipulate than LIBOR rate for a set limited mechanism. Reserve banks of Australia had revealed that so-called four pillars of Australia such as Commonwealth Bank, NAB and Westpac & ANZ were the major reason for such financial crisis. Paper was issued by these primary banks on homogeneous and of high quality related to liquidity, credibility, and consistency of related yield of BBSW & LIBOR rates (Developments in banking law, 2012).

The governor of Reserve banks had said that BBSW can be rigged and doubtful while appearing to the politicians in the year 2012. That time BBSW was rated as the market value which was different from the LIBOR rate. While LIBOR rate was determined as estimated submitting of the total cost of funds but BBSW rates would not be set rigidly. LIBOR rates had been set by the panel in a distortive manner due to banks had submitted the LIBOR rates as distortive rates. BBSW panel had bought all bills at the certain price which had affected the price and rates in the wrong direction against benchmark bond index (McBride, 2016).

c) Discuss in your own words the implications of this scandal, including any legal and regulatory responses.

According to reserves bank of Australia and AFMA, the Australian market participants had demanded about actual rates of BBSW rates which had been observed in the market for prime banks (Big Four) companies and banks’ paper. As per personal consideration, BBSW rates was much far than LIBOR rates and far more subjective assessment as financial institution is basically affected and asked to mention their opinions related to interbank borrowing rates

Many banks were used LIBOR rates as their base rates for determining interest rates on consumer and financial loans. About hundreds trillions of dollars of amounts securities and loans were linked to LIBOR rates. LIBOR rates also included government and corporates debts, financial borrowings and home loans. When LIBOR rises, such rates and borrowings increased. The private-sector economists’ performance and interest rates were also impacted (UNSW Law, 2017).

The LIBOR administrator, IBA said the Libor rates had broken overseas. Global regulators found that major four pillars name Big Four companies and financial institutes had impacted and tampered with the changes in the benchmarks Bond Index it enraged the public also by increasing the Australian BBSW rate which could subject to tampering, promoting especially to ANZ banking group. 

ASIC chairman Greg Medcraft had tried to deploy around $80 million to charge against overall banks that had impacted and rigged the BBSW seriously. ANZ was the bank who had considered as a result of banking and fraud investigations. ANZ was definitely involved in this scandal but other banks could not be considered under intense scrutiny. The major three banks UBS, BNP Paribas and Royal Banks of Scotland had responsible & enforceable for such undertakings.

The BBSW rate was determined as a based rate but banks were charging such rates for Assessment of their own costs of funds. Banks were being engaged in charging such rates at a margin above rates on mortgages and business and personal activities. Majorly households, traders, banks, students, and brokers were on the wrong side of short-term interest rate and their derivatives. BBSW was the major interest rate to derive lending rates, manipulates potential changes were likely to have impacted materialistically on the Australian prices that had made for households and earned from another deposit (McBride, 2016).

Conclusion:

In the beginning of 2012, the investigation was made for an international interbank rate that is known as LIBOR. It was about the international scandal that had been revealed a widespread plotting and plans by multiple banks such as UBS, Rabobank, Royal Bank of Scotland and Barclays. Such case was related to manipulation in the overall interest rates of LIBOR rates and BBSW rates. This reading has explained about major investigation made by AFMA and reserve banks of Australia. This essay has also explained about the process of exposing such fraud against major institutions in the global banking systems. There are also analyses about the financial questions related with interest rates, ratios and financial analysis.

References:

1.Arnold, G., (2013). Corporate financial management. Pearson Higher Ed.

2.Brigham, E.F. and Ehrhardt, M.C., (2013). Financial management: Theory & practice. Cengage Learning.

3.Brooks, R., (2015). Financial management: core concepts. Pearson.

4.DeFusco, R.A., McLeavey, D.W., Anson, M.J., Pinto, J.E. and Runkle, D.E., (2015). Quantitative investment analysis. John Wiley & Sons.

5.Developments in banking law, (2012). The Libor scandal.  Review of banking & financial law. Vol. 32.

6.Grant, R.M., (2016). Contemporary Strategy Analysis Text Only. John Wiley & Sons.

7.Grinblatt, M. and Titman, S., (2016). Financial markets & corporate strategy.

8.Guda, O. D., (2013). The relationship between cash flow and profitability of small and medium enterprises in Nairobi County. University of Nairobi.

9.Martin Wheatley, (2012). The Wheatley review of Libor: final report, 11 [online] hereinafter Wheatley Reviews, available athttp://cdn.hmtreasury.gov.uk/wheatley_review_libor_finalreport_280912.pdf[accessed on: 22 December 2017].

10.McBride, J., (2016). Understanding the Libor Scandal. Council of foreign relation.

11.Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition. Cengage Learning.

12.Peavler, R., (2017). Are a Firm's Cash Flow and Profit Different? [Online] THE Balance, Available at:https://www.thebalance.com/are-a-firm-s-cash-flow-and-profit-different-393585[Accessed on: 22 December 2017].

13.Rothberg, f. A., (2013). What’s the difference between profits and cash flow? CFO edge.

14.Thomason, K., (2017). What Are the Differences Between Financiial Accounting & Cash Flow? [Online] Bizfluent, Available at:https://bizfluent.com/info-8543790-differences-accounting-profit-cash-flow.htmlAccessed on: 22 December 2017].

15.UNSW Law, (2017). The Bank Bill Swap Rate: Could the LIBOR Scandal Happen in Australia? [Online] Centre of law market and regulation. Available at:https://clmr.unsw.edu.au/article//the-bank-bill-swap-rate%3A-could-the-libor-scandal-happen-in-australia%3F[Accessed on: 22 December 2017].