American International Theism University CEO Business School Financial Management Assignment’s Answers By Mohammed Ahmed Jasim ID Number: A11648025 Page 1 of 13 MBA Finance - Assignment Part 1: Multiple Choice Questions & Matching Questions 1) The Financial System main function is to a) Channeling funds from surplus units to deficit units b) Transfer money from those who haven’t productive use of fund to other who have c) Derive the economy to efficiency d) All the above 2) The financial market considers to be a) The indirect route to transfer funds from surplus to deficit units b) The direct route to transfer funds from surplus to deficit units c) Where the surplus units make deposit d) Where the deficit units take loan 3) The balance sheet describes a) The financial position of the company b) The operation of the company c) The sources of finance of the company d) All the above 4) In order to calculate the weighted average cost of capital, we obtain a) Cost of debt b) Cost of equity c) Cost of both (debt and equity) d) None of above 5) The income statement describes a) The financial position of the company b) The operation of the company c) The sources of finance of the company d) All the above Page 2 of 13 6) If the ROA of a company is 17.5%, profit margin is 12.5% and ROE is 30% and the interest on deposits is 18%. It would be better for the investors to invest in: a) the company b) the bank c) divided the money into both d) need more information 7) If the present value of cash flows greater than initial investment, so we shall a) Accept the project b) Reject the project c) Need more information d) None of the above 8) In the cash flow, it is better for the company to have from operating activity: a) Positive cash flow b) Negative Cash flow c) It doesn’t differ d) None of the above 9) The financial ratio that measures the management efficiency a) Return on equity b) The current ratio c) The debt to equity d) Return on Assets 10) The country risk premium will increase if a) The economic position of the country stable b) The economic position of the country unstable c) From one year to another d) If the political status become stable Page 3 of 13 11) The first step to obtain make budgeted financial statement a) Determine expected distributed dividends b) Determine expected purchase of raw material c) Determine expected sales revenue d) Determine expected organization structure 12) The breakeven point for a company reached when: a) Revenue equal variable cost b) Revenue equal fixed cost c) Revenue equal total cost d) Fixed cost equal variable cost Part 2: Short Case Study 1. The following company has the following data: Accordingly, calculate the Cash Gap and illustrate: 1) If the suppliers need to be paid after 40 days, is the company need a source of finance? If yes, the facilities needed to cover how many days? 2) How can the company cover the Gap? 3) What is the point of strength and weakness in the company operating cycle? Page 4 of 13 Solution of the Questions: 1) If the suppliers need to be paid after 40 days, is the company need a source of finance? If yes, the facilities needed to cover how many days? Account Receivable Turnover = Sales ÷ Account Receivable = 120,000/6,500 =18.5 Times DSO = 365 / Account Receivable Turnover = 365/18.5 = 19.77 ≈ 20 Days Inventory Turnover = COGS ÷ Avg. Inventory Inventory Turnover = 70,000 / [(25000 + 18000/2] = 3.26 Times DIO = 365 / Inventory Turnover = 365 / 3.26 = 112 Days Operation Cycle = DSO + DIO = 20 + 112 = 132 days DPO = 40 Days Cash Gap = Operation Cycle - DPO = 132 - 40 = 92 Days The Cash Gap (92) is Higher than Days Payable Outstanding (40) So, yes, the company needs a source of finance to cover 92 days (Cash Conversion Cycle ≥ 3 months) Page 5 of 13 2) How can the company cover the Gap? There are two ways to cover the gap: I. INTERNAL SOURCES OF FINANCE (SELF FINANCING): Internal sources of finance refer to money that comes from within a business. There are several internal methods a business can use, including owner’s capital, retained profit, and selling assets. 1. Owner’s capital refers to money invested by the owner of a business. This often comes from their personal savings. Personal savings is money that has been saved up by an entrepreneur. This source of finance does not cost the business, as there are no interest charges applied. 2. Selling assets involves selling products owned by the business. This may be used when either a business no longer has a use for the product, or they need to raise money quickly. Business assets that can be sold include for example, machinery, equipment, and excess stock. II. EXTERNAL SOURCES OF FINANCE External sources of finance refer to money that comes from outside a business. There are several external methods a business can use, including family and friends, bank loans and overdrafts, venture capitalists and business angels, new partners, share issue, trade credit, leasing, hire purchase, and government grants. 1. Family and friends: businesses can obtain a loan or be given money from family or friends that may not need to be paid back or are paid back with little or no interest charges. 2. A bank loan: is money borrowed from a bank by an individual or business. A bank loan is paid off with interest over an agreed period, often over several years. Page 6 of 13 3. Overdrafts are where a business or person uses more money than they have in a bank account. This means the balance is in minus figures, so the bank is owed money. Overdrafts should be used carefully and only in emergencies as they can become expensive due to the high interest rates charged by banks. In this company gap, the overdraft should cover 92 days, and its value will be: = Sales Revenue / 365 * Cash Gap = 120000 / 365 * 92 ≈ 30250 $ 4. Share issue a business may sell more of their ordinary shares to raise money. Buying shares gives the buyer part ownership of the business and therefore certain rights, such as the right to vote on changes to the business. 5. Trade credit must be agreed with a supplier and forms a credit agreement with them. This source of finance allows a business to obtain raw materials and stock but pay for them later. The payment is usually made once the business has had an opportunity to convert the raw materials and stock into products, sell them to its own customers, and receive payment. 3) What is the point of strength and weakness in the company operating cycle? The operating cycle is the average period required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. This is useful for estimating the amount of working capital that a company will need to maintain or grow its business. A company with an extremely short operating cycle requires less cash to maintain its operations, and so can still grow while selling at relatively small margins. Conversely, a business may have fat margins and yet still require additional Page 7 of 13 financing to grow at even a modest pace if its operating cycle is unusually long. If a company is a reseller, then the operating cycle does not include any time for production - it is simply the date from the initial cash outlay to the date of cash receipt from the customer. I. The Operating Cycle Weakness: 1- The payment terms extended to the company by its suppliers: Longer payment terms (40 days) which will shorten the operating cycle (132 days), since the company can delay paying out cash. 2- The order fulfillment policy: since a higher assumed initial fulfillment rate increases the amount of inventory on hand (18,000 $), which increases the operating cycle. 3- The credit policy and related payment terms: since looser credit equates (6,500 $) to a longer interval before customers pay (20 days), which extends the operating cycle. II. The Operating Cycle Strength The operating cycle (132 days) is important because it can tell a business owner how quickly the company is able to sell inventory. Simply put, it determines the company's efficiency (120,000). For example, if its operating cycle is short (< 132 days), this means the company will able to make a turnaround relatively quickly. It could also mean it will has shorter payment terms and stricter credit policy. A shorter operating cycle is more favorable as it means the company has enough cash to maintain operations, recover investments and meet various obligations. In contrast, if a business has a longer operating cycle, it means the company requires more cash to maintain operations. Just as there are many influencers on a company's operating cycle, there are also many ways that an operating cycle can help determine a company's financial standing. The better a business owner understands the company's operating cycle, the better that owner will be able to make decisions for the benefit of the business. Page 8 of 13 Part 3: Indicate which of the following statements is True or False: 1) False The accounting is identical to the finance 2) True It is better for the company to own assets greater than the liabilities and owner-equity 3) False The start of any company done by the operation, then the financing then the investing. 4) False The cash flow statement contains the finance and investing activities only 5) False The cash ratio used to measure the profitability of the company 6) True It is a positive indicator to have a company have positive cash flow from investing activities 7) False In order to obtain budgeted cash flow statement we have to make projected income statement and balance sheet 8) True The net present value of any project must be positive to accept Page 9 of 13 Part 4: Case Study Page 10 of 13 Page 11 of 13 GIVINGS Cash AR Inventory Current Assets AP Current Liability Long Term Liability Total Assets Total Liability & OE Total Equity Sales COGS EBIT Net Income RE 2008 $ $ $ $ $ $ $ $ $ $ 21,860 11,316 23,084 56,260 19,320 38,963 75,000 290,328 290,328 176,365 Page 12 of 13 2009 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 22,050 13,850 24,650 60,550 22,850 43,235 85,000 321,075 321,075 192,840 305,830 210,935 68,045 36,475 16,475 Requirements Law or Equation used 2008 2009 56260/38963= 144% (21860+11316)/38963 =85% 21860/38963= 56% 60550/43235= 140% (22050+13850)/43235 =83% 22050/43235= 51% Short term solvency ratios: a Current Ratio Current Asset / Current Liability b Quick Ratio (Cash + Account Receivable) ÷ Current Liability c Cash Ratio Cash / Current Liability Asset utilization ratios: d Total Asset Turnover Sales / Total Assets e Inventory Turnover COGS / Inventory f Receivable turnover Sales / Account Receivable 305830/321075= 0.95 210935/24650= 8.56 305830/13850= 22.08 Long-term solvency ratios: g Total Debt Ratio Debt / Assets h Debt-equity ratio Debt / Equity (38963+75000)/290328 = 39% (38963+75000)/176365 = 65% (43235+85000)/321075 = 40% (43235+85000)/192840 = 66% Profitability Ratios: i Profit Margin Net Income / Sales Revenue m Return On Equity Net Income / Equity n Return On Asset Net Income / Assets Page 13 of 13 36475/305830= 11.9% 36475/192840= 18.9% 36475/321075= 11.4%
