Financial Management Assignment Analyzing Accounting & Finance Concerns Of Businesses

Question

Task:
In this financial management assignment, you are required to answer the following questions:

Answer

Answer all questions. 

Financial Management Assignment Question 1 – 

Lincoln labs Inc. is considering the purchase of a $700,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Lincoln labs is expected to be able to sell all that it can manufacture for the next five years. The government exempted taxes on profits from new investments to encourage capital investments. This legislation is not expected to be altered in the foreseeable future. The equipment is expected to have five years of useful life with no salvage value. The company employs straight-line depreciation. The net cash inflows are expected to be $180,000 each year for five years. Lincoln labs uses a rate of 9% in evaluating its capital investment projects. 

Required:

Calculate the estimated payback period for this proposed investment. (Assume that cash inflows occur evenly throughout the year.) (5 Marks) 

 Estimated payback period:

 The payback period refers to the time frame within which the company will recollect its investment.

Calculate the project's accounting rate of return. (5 Marks) 

Accounting rate of return:

The accounting rate of return is calculated for assessing the profitability of the project. The ARR will be presenting the profits for making the capital investment by comparing the return and the investment. 

In this case, the Accounting rate of return is calculated as follows: 

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky? (5 Marks) 

Capital Investment analysis:

 The capital investment analysis refers to assessing the profitability and other attributes that an investor is willing to know for its planned investment. With the help of capital investment analysis, one can estimate whether a project is selectable or not based on the resulting outcomes. For the investment analysis, the following tools are used.

• Net present value 
• Internal rate of return
• Payback period
• Discounted Payback period 
• Accounting rate of return and others

Difficulties: 

In the case of investment analysis, all the calculations are made based on the estimated values, which are highly volatile due to changes in the policy, economic situation, tax rate, inflation and others. As all of the capital investment tools are based on the projected cash flows, therefore any change in cash flows will give a different return which might compromise the investor's confidence. Thus, the capital investment analysis is considered to be difficult as it takes a lot of experience in making assumptions and projections, and it is risky because the cash flows will get influence because of changes in the external and internal business factors (Crouzet and Eberly, 2019).

Question 2 

Enciso Corporation is preparing its cash budget for November. The budgeted beginning cash balance is $31,000. Budgeted cash receipts total $135,000 and budgeted cash disbursements total $141,000. The desired ending cash balance is $50,000. The company can borrow up to $100,000 at any time from a local bank, with interest not due until the following month.

Required:

Prepare the company's cash budget for November in good form.

In the given case, the cash budget for the Enciso is prepared, and the results are showing the company has some shortfall in maintaining its desired minimum balance. Therefore, it has to borrow the balance amount for maintaining the minimum cash balance of $50000 at the end of November.

Question 3 

Calculate the unknowns for the following situations based on the data below. All situations are independent of each other. 

Total fixed costs $200,000 

Unit sale price $100 

Unit variable cost $40 

Answer the following: (5 x 5 marks each)

Calculate the break-even point in units

The breakeven point is the unit measure where the company is able to cover its all cost relating to production by making sales.

The BEP can be calculated by comparing the Fixed cost by the contribution margin.

The break-even sales units will be 3333.33 units 

Calculate the break-even point in dollar sales

The dollar sales of BEP will show the exact amount of sales that the company is required to make in order to cover its production-related cost. This can be calculated by multiplying the BEP units with the sales price.

The BEP sales = BEP sales unit * sales price 

= 3333.33 * $ 100

= $ 333333.3.

Assume the unit sale price increases by 10%. Other data is unchanged. Calculate the break-even point in units

If the sales price increase by 10%, then in such case, the BEP is 2857.14 units.Assume the unit variable cost increases by 10%. Other data is unchanged. Calculate the break-even point in units

If the variable cost increases by 10%, then the Breakeven units will be 3571.42.

Assume total fixed costs increase by $5,000. Other data is unchanged. Calculate the break- even point in units

If the Fixed cost increases, then in such case, the BEP sales unit will be 3416.67 units.

Question 4 

The Morgan Sports Equipment Company just reported the following financial figures. 

Morgan Sports Equipment Company 

Assets Liabilities and Equity 

Inventories €1 312 478 Notes payable 2 113 345 

Accounts receivable 1 845 113 Accounts payable €1 721 669 

Cash 677 423

Calculate the firm’s days’ sales outstanding. (4 marks) 

firm’s days’ sales outstanding

The sales days outstanding is 68 days.

What is the firm’s days’ sales in inventories? (4 marks) 

The inventories days outstanding is 81 days.

What is the firm’s days’ payable outstanding? (4 marks) 

The payable days outstanding is 107 days.

What is the firm’s operating cycle? How does it compare to the industry average of 72 days? (4 marks) 

The operating cycle is calculated by adding the receivable days and the inventory days, which suggest the block and realization of case form acquisition the investors to its collection. In this case, the operating cycle for the firm is 42 .82 days, whereas the industry average is 72 days. Thus the company has better cash operating cycle (Julianto, Marjono and Labangge, 2021).

What is the firm’s cash conversion cycle? How does it compare to the industry average of 42 days? (4 marks) 

The cash conversion cycle suggests the time required by an entity for investment cash for the acquisition of material, manufacturing its, making sales of the production and realizing the same for collection. The cash conversion cycle for the company was 148 days, where the average industry cash conversion cycle for the industry is 43 days. This the cash conversion cycle for the firm should be considered poor compared to the industry standard (Go?a?, 2020).

Question 5 

The following information for Kinnis, Inc., a retail furniture and design firm, is presented at December 31, 2020 and 2019: 

December 31

Total liabilities and stockholders’ equity $7,207,000$6,621,000

There were 100,000 shares of common stock outstanding at the end of both years. The income tax rate is 35%. Interest expense totaled $139,000 for 2020 and $158,000 for 2019. The market price per share was $110 at the end of 2019 and $134 at 2020. Net income was $615,000 for 2020 and $739,000 in 2019. Net sales totaled $4,568,000 and $3,253,000 for 2020 and 2019, respectively. 

Calculate the following for 2020 and 2019: (4 x 5 marks each = 20 marks) 

Earnings per share

Price-earnings ratio 

Return on total assets

Return on common stockholders’ equity 

Comment on any trends apparent in the ratios (5 marks). 

Based on the calculation made above, the trend analysis for all ratios is discussed as follows.

Earnings per Share:

The EPS is a measure of earnings made by the company for every share it has issued. The EPS can be calculated by comparing the net income with the number of shares outstanding. In this case, the EPS for 2019 was $7.39, which is decreased to $6.15 per share. In this case, there is no new issue, and a direct decrease in EPS suggests that the company; profitability impacted by almost 16.78% in 2020 compared to the results of 2019.

Price to Earnings ratio:

 The price to earnings ratio is calculated by comparing the price per share with the earnings. In this case, the P/E ratio for the company was 14.88 times in 2019, which is increased top 21.79 times in 2020, which indicates that the shareholder is willing to pay more for the earnings (Cheng, Li and Zhang. 2020). Therefore, the trends suggest an increase in P/E of 46.38% in 2020.

Return on Total Assets:

The return on total assets is calculated by comparing the net income with the total asset. The return on assets for 2019 was 11.2%, which decreased to 15.9% due to an increase in total assets and a decrease in net income. Thus, there is a negative trend of 23.55% in the case of return on assets for the company.

Return on stockholders’ equity:

 The return on equity is a profitability measure that calculates the company's income based on the equity investment (Alpi, 2018). The return on stockholders’ equity was 22.7% in 2019, which is decreased to 15.9%. The decrease in return of equity by 30.02% is identified in 2020 compared to the previous year.

Reference List

Alpi, M.F., 2018. Pengaruh Debt To Equity Ratio, Inventory Turn Over, Dan Current Ratio Terhadap Return On Equity Pada Perusahaan Sektor Farmasi Yang Terdaftar Di Bursa Efek Indonesia. The National Conference on Management and Business (NCMAB) 2018.

Cheng, C.A., Li, S. and Zhang, E.X., 2020. Operating cash flow opacity and stock price crash risk. Journal of Accounting and Public Policy, 39(3), p.106717.

Crouzet, N. and Eberly, J.C., 2019. Understanding weak capital investment: The role of market concentration and intangibles (No. w25869). Financial management assignment National Bureau of Economic Research.

Go?a?, Z., 2020. Impact of working capital management on business profitability: Evidence from the Polish dairy industry. Agricultural Economics, 66(6), pp.278-285.

Julianto, D., Marjono, M. and Labangge, A., 2021. ANALISIS BENEISH M-SCORE UNTUK MENDETEKSI FINANCIAL STATEMENT FRAUD PADA PT. GARUDA INDONESIA Tbk PERIODE 2017-2019. Jurnal Ekonomi STIEP (JES), 6(1), pp.44-51.