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Answer 1
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Income Statement |
|
Revenue |
|
Investment |
125,000 |
Expenses |
|
Loan |
100,000 |
Corporation tax |
|
Insurance, other costs |
95,000 |
Wages |
15,000 |
Manufacturing costs |
300,000 |
Net income |
385,000 |
Table 1: Income Statement for the first year of trading
(Source: MS-Excel)
Figure 1: Cash flow statement for the first year of trading
(Source: MS-Excel)
The main purpose of the balance sheet is to reflect the summary of all the assets present in the business and all the liabilities present. The balance sheet of the business generally helps in the provision of the funding of the debt that is being available by the organization (Vuong, 2020). The main purpose is to reveal the status of the finance of the business at a specific point of the time. The statement reflects what an entity owns and then what the company owes, and also the amount that is being invested in the regular course of the business (Salman and Jamil, 2017). The information is important as the balance sheets for the consecutive years are being grouped all together so that the analysis in the various items of the line can be viewed. Investors take the role of examining the amount of the cash prevailing on the balance sheet to analyze whether there is sufficient balance available to pay the dividend.
One limitation of the balance sheet:
Answer 2
(a) Net present value and internal rate of return
Figure 2: Net present value
(Source: MS-Excel)
Figure 3: Internal rate of return
(Source: MS-Excel)
(b) Report
(I) Companies like Tree house ltd. Can include the net present value and the internal rate of return, there are many benefits to the net present value. The net present value can help in the assumption of reinvestment in a significant manner. The net present value includes the acceptance of the conventional cash flow mattered. The benefits of net present value also include the proper measurement of the probability (Wekesa et al., 2017). The factors of the risk are measured by the net present value. Besides these, the consideration of several ‘Cash flows’ can be acknowledged with the present net value.
The limitation of the net present value includes- opportunity cost's estimation, avoiding the sunk cost, hard determining of the required return rate, 'optimistic projection, not boosting ROE and EPS, several project sizes.
The benefits of the Internal Rate of Return include money's time value, and this can be very impactful for the calculation in the business. The internal rate ratio also includes the nature of simplicity. The benefits also include the required or hurdle rate of return is not essential to be engaged. There can be a chance of a rough estimation of the needed return rate.
The disadvantages of the internal rate of return include the ignorance of the economic scale, implicit assumption, ignorance of the dependent project or contingent project, the ignorance of ‘mutually exclusive projects’ ((Pham et al. 2020)). Besides this, the IRR is not possible here if there is an insufficiency of cash inflows.
(ii) After analyzing the benefits and limitations of the net present value' and the factor of the internal rate of return', it can be decided that both calculation methods are impactful for business calculation. There is a significant offer of net present value that includes several benefits for the qualitative factors in the business. The imitations of the net present value have to be improved with substitution methods. Besides this, the limitations can be ignored in this manner.
The qualitative factors, internal rate of return, also the beneficial effect on the business calculation, and the factors of the internal rate of return are the most considerable area to be engaged effectively if there is ignorance of the limitations of the internal rate of return.
Answer 3
(a) Ratio calculation
Particulars |
Formula |
Ross Ltd |
Working |
Wye ltd |
Working |
Profitability Ratios: |
|||||
Return on Capital Employed |
EBIT/Net Assets |
0.2 |
30000/150000 |
0.125 |
2000/16000 |
Gross Profit Margin |
Gross profit/sales*100 |
70% |
91000/130000 |
64% |
57600/90000 |
Operating Profit |
Operating profit/sales*100 |
21% |
27000/130000 |
22% |
19600/90000 |
Working capital Ratio: |
|||||
Stock Turnover Days |
COGS/Average inventory*365 |
8 |
(39000/5000) |
3 |
32400/12000 |
Trade Receivable Days |
Trade Debtors/Sales*365 |
34 |
(12000/130000) |
0 |
90000/90000 |
Trade Creditor Days |
Trade Payables/ COGS*365 |
66 |
7000/39000*365 |
113 |
10000/57600*365 |
Liquidity Ratios: |
|||||
Current Ratio |
current assets/ current liabilities |
3.86 |
27000/7000 |
2.10 |
21000/10000 |
Quick Ratio |
(Current Assets – Inventories) / Current Liabilities |
3.14 |
(27000-5000)/7000 |
0.90 |
(21000-12000)/10000 |
Table 2: Calculation of the ratio
(Source: MS-Excel)
(b) Evaluation
By the evaluation of the annual results and all the ratios that have been calculated in the above part has helped us in the evaluation of the position of the company. The ratio that has been calculated is the ratio of liquidity, profitability, working capital management that helps in the analysis of the position of the company (Bonini and Capizzi, 2019). The company Ross ltd The gross profit margin has been calculated to be 70% as compared to the company Wye ltd, which has 64%. In the analysis of the net profit margin, the percentage for the company Wye ltd. was 22% and that when compared to the company Ross ltd. 21%. So the profitability ratio helps in the determination of the profit that the company is being generated. It helps in the overview of whether the company can be able to survive in the long run. As if the company doesn't earn enough profit, then the company will not be able to run in a long span of time, so hence the determination of the profitability capacity of the company is an integral part. In the analysis of the liquidity ratio, the quick and the current ratio has been undertaken to examine the position of the business in terms of liquidity (Bernthal, 2018). The current ratio for the company Ross ltd. was estimated to be 3.86; however, the current ratio for the company Wye ltd. was 2.10. And when the calculation of the quick ratio was determined, the rate of the company Ross ltd be 3.14 on the other hand, for the company Wye ltd was 0.90. The liquidity helps in the determination of the capacity of the business in terms of the liquid assets being present. It also determines how quickly the fixed assets can be converted into cash for the evaluation of liquidity. In the evaluation of the ratio for the management of the working capital, there were three ratios evaluated, namely, "Stock Turnover Days, Trade Receivable Days, and Trade Creditor Days" (Cumming, and Vismara, 2017). For the company Ross ltd., the ratio was determined being valued at 8, 34, and 66, respectively and on the next side for the company Wye ltd. It was evaluated to be 3, 0, and 113, respectively. The return on capital employed was also analyzed and undertaken for the analysis of the performance. So both the companies are performing well in the aspect for the ratio that we have analyzed. And the table has been attached below:
Particulars |
Ross Ltd |
Wye ltd |
Return on Capital Employed |
0.2 |
0.125 |
Gross Profit Margin |
70% |
64% |
Operating Profit |
21% |
22% |
Stock Turnover Days |
8 |
3 |
Trade Receivable Days |
34 |
0 |
Trade Creditor Days |
66 |
113 |
Current Ratio |
3.86 |
2.10 |
Quick Ratio |
3.14 |
0.90 |
Table 3: Ratio Analysis
(Source: MS-Excel)
Ratio analysis is referred to as the aspect of quantitative analysis of the information that is being enclosed by the financial statement of the enterprise (Deloof et al., 2019). It is being used for accessing various perspectives of the enterprise working and the performance of the financial statement like solvency, turnover, liquidity and profitability. It is the method of comparing and analyzing data by the computation of the statement percentages value except by the comparison of the line items from the financial statement. The advantages and disadvantages of the analysis of ratio are as follows:
Advantages:
Disadvantages:
References
Journals
Bellavitis, C., Filatotchev, I., Kamuriwo, D.S. and Vanacker, T., 2017. Entrepreneurial finance: new frontiers of research and practice: Editorial for the special issue Embracing entrepreneurial funding innovations.
Cumming, D. and Johan, S., 2017. The problems with and promise of entrepreneurial finance. Strategic Entrepreneurship Journal, 11(3), pp.357-370.
Cumming, D., Meoli, M. and Vismara, S., 2019. Does equity crowdfunding democratize entrepreneurial finance?. Small business economics, pp.1-20.
Vuong, Q.H., 2020. Entrepreneurial Finance at the Dawn of Industry 4.0.
Kenney, M. and Zysman, J., 2019. Unicorns, Cheshire cats, and the new dilemmas of entrepreneurial finance. Venture Capital, 21(1), pp.35-50.
Pham, T.H., Ho, M.T., Vuong, T.T., Nguyen, M.C. and Vuong, Q.H., 2020. Entrepreneurial finance: Insights from English language training market in Vietnam. Journal of Risk and Financial Management, 13(5), p.96.
Bonini, S. and Capizzi, V., 2019. The role of venture capital in the emerging entrepreneurial finance ecosystem: future threats and opportunities. Venture Capital, 21(2-3), pp.137-175.
Bernthal, J.B., 2018. The evolution of entrepreneurial finance: a new typology. BYU L. Rev., p.773.
Cumming, D.J. and Vismara, S., 2017. De-segmenting research in entrepreneurial finance. Venture Capital, 19(1-2), pp.17-27.
Cumming, D., Deloof, M., Manigart, S. and Wright, M., 2019. New directions in entrepreneurial finance. Journal of Banking & Finance, 100, pp.252-260.
Owen, R. and Mason, C., 2017. The role of government co-investment funds in the supply of entrepreneurial Finance Assignment: An assessment of the early operation of the UK Angel Co-investment Fund. Environment and Planning C: Politics and Space, 35(3), pp.434-456.
Salman, A. and Jamil, S., 2017. Entrepreneurial Finance and its Impact on e-Business. Problems and perspectives in management, (15, Iss. 3), pp.24-41.
Wekesa Bunyasi, G.N., Bwisa, H. and Namusonge, G., 2017. Effect of entrepreneurial finance on the growth of small and medium enterprises in Kenya.
Appendix 1: External sources of finance
(Source: https://i.ytimg.com/vi/Kjv31iUvYB4/maxresdefault.jpg)
Appendix 2: Limitation of the ratio
(Source: https://www.wallstreetmojo.com/ratio-analysis-li
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