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## Fin4001 Introduction to Finance Assignment

INTRODUCTION

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The report closely monitors the financial statements which are used in analysing the ratios which are being categorised as the debt equity ratios, Gross profit margin ratios etc. Apart from this the efficiency has also been taken into account so that there is proper validation of accounts to take a proper and efficient Decision. The key highlights in the report which will be discussed in the later part are the margin of safety which shows us the amount to keep for the contingencies and the point where the firm is not earning profit and should try to sell more goods after it. The two options for net present value has also been analysed to take care the best suitable option considering the rate and the amount or internal rate of return. After this the opening statements have also been analysed with the proper validation and the procedures. This whole report will give a thorough understanding of the same.

 1. Gross Profit Margin in £m (2019) Sales 3,495 Cost of goods sold (COGS) 2,182 Gross Profit 1,313 Ratio 37.56795422%

Question 1

Gross profit margin is company’s profitability. The Formula used for calculating Gross profit margin is {Gross profit / Sales}.Gross profit margin indicates the amount of Revenue remaining in a given accounting period after a company pays for labour and material. Here company’s sale is 3495£m and its COGS is 2182£m, i.e. Gross profit will be 1313£m.

The ideal Gross profit margin is 65%. As the company has Gross profit margin of 37.57% (around); it is to be said that company is in average condition. The company should focus to increase gross profit and maintain healthy Gross Profit Margin.

 2. Assets Usage 2019 (in £m) 2018 (in £m) Property, plant and equipment (PPE) 1700 1,615 Intangible assets 425 375 Investments 0 95 Inventory 150 102 Trade receivables 1010 315 Short-term investments 75 0 Cash at Bank 452 1 Total Assets 3812 2503 Assets usage 5063.5

Assets usage refers to the utilization of Assets to increase the revenue of the company. An optimal assets usage means company is being efficient with each £m of assets held.

As company is in good condition in case of Assets Usage. The company should try to increase it rapidly which ultimately help the company to maximize its profit. Here the value of Assets being used comes to 5063 approximately which should be tried to increase in the future nearby. So, the assets which are used in day to day course should be more taken into consideration to earn profitability in the short run and whereas if we talk about the long run, the non currents assets play a vital role.

 3. Current Ratio (2019) (in £m) (in £m) Current Assets Current liability Inventory 150 Trade payables 289 Trade receivables 1010 Bank overdraft 143 Short-term investments 75 Taxation 312 Cash at Bank 452 Total Current Assets 1687 Total Current Liability 744 Current Ratio 2.267473118

Current Ratio is calculated for assess the company’s short term liquidity with respect to its available assets and pending liability. The ideal current ratio of an organisation is 2:1.As Company maintains the current ratio more than ideal ratio. The company should try to maintain it continuously. Here the ratio comes to more than 2 which is good and the business should try to maintain it. (Asare et al,2012,p194(2))

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 4 Acid Test Ratio (2019) (in £m) (in £m) Current Assets Current liability Trade receivables 1010 Trade payables 289 Short-term investments 75 Bank overdraft 143 Cash at Bank 452 Taxation 312 Total liquid Assets 1537 Total Current Liability 744 Current Ratio 2.065860215

Acid test ratio is calculated to know whether the company has enough funding in hand to cover its current debt. Acid test ratio is more reliable as it only includes cash and cash equivalent. The ideal Acid test ratio is 1:1, and company maintain more then 2:1So, it is too said that company has good cash flow & should maintain it in future as now. So, by looking into this factor it is clearly observed that the firm should try to increase the liquidity to facilitate the performing of the daily activities of the firm. Although the ratio is more than 2 but still due to the ever-changing dynamics it should look into the matter.

 5. Inventory Holding period in £m Inventory 150 Cost of goods sold (COGS) 2,182 Days 365 Holding period 25.09165903

Inventory holding period tell about the sale performance of a product. It is calculated by dividing Inventory from COGS*Days. INVENTORY/(COGS*365). A good inventory holding period is considered as 5-10 which means 1-2 month to restock. Basically company maintain it 25days, which shows good sales of the company’s produce. Here the company has the holding capacity very strong when compared to the other factors in the market of the competitors. It also helps to facilitate the money flow in the organisation to earn more profits for the growth and sustainability. (Khan,2012 ,p254(1)).

 6. Debt to Equity Ratio (in £m) (in £m) DEBT EQUITY Short Term Debt 744 Share Capital 1,950 Long Term Debt 170 Share Premium A/c 260 Revaluation Surplus 70 Retained Earning 618 Total Debt 914 Total Equity 2,898 Debt To Equity Ratio 0.315389924

Debt to Equity Ratio compares the total liability of the company to its shareholder’s equity and check the leverage of the company. It indicates the stability of a company and its ability to raise additional capital to grow. A good debt to equity ratio is lower than 1 as we can see in data that company maintain it lower than 1. So it can be said that company has more reliable to its equity more than debt. The ratio here is far less than what the firm has expected which means that with running a big business also it has managed its debt also.

1. B) As Liverton Co’s ratios are calculated above, which help the audience to understand the financial position of the company and help them to calculate the risk factor of their investment and also help them to ascertain whether they should invest in the company or not.

As per the above financial data it is easy to understand that company has a good financial position and cover its debt easily in unforeseen position. Liver ton prefers to raise fund is equity fund or it can say that its own shareholder fund as compare to debt. Company has good capture in the market as its sale of product is very frequent. The company restock its product in just 25-26 days. This shows its capability.

The company is maintaining goods ratios and other financial instrument, and try to maximize its profit by efficient use of assets. According to the data company want to increase the share of shareholder by maintaining excess profit as retained earnings and so on.

Question2.A)

 Statement of financial Position Particular Amount Assets Current assets Cash at bank 50000 Non- current assets Tangible assets 150000 Total asset 200000 Liabilities Owner's equity 200000 Total liabilities 200000 (Martikka,2013,p(1))

B)

 Particular Months July (In\$) August (In\$) Sept. (In\$) October (In\$) november (In\$) December (In\$) Opening cash balance 50000 Sales revenue 150000 120000 150000 210000 260000 285000 Less: Material payment 120000 100000 60000 60000 60000 60000 Labour cost 80000 80000 80000 80000 80000 80000 Other expenses 57500 57500 57500 57500 57500 57500 Add: Depreciation 2500 2500 2500 2500 2500 2500 Closing balance -55000 -115000 -45000 15000 65000 90000 Overdraft required -55000 -115000 -45000

C)

Here, if the firm has to manage all the expenses it should definitely take financial assistance as without it there cannot be a proper working in the organisation. Although hiring a financial advisor will bear the cost but that will ultimately be settled off by earning more profit. It should clear the overdue of the overdrafts by the bank to reduce some of the extra expenses which the firm is bearing(Pae et al,2012.p123(3)).

Question3.A)

 Break Even Point 2019 2020 Selling price per unit 300 309 Variable cost per unit 185 181 Fixed cost 5430 6,880 Break Even Unit 47.21 53.75

Break Even point of the company is that point on which the company can earn nominal profit.Here two year’s data is given, as per demand of the question the company only sell same amount of units of fans as in previous year (2019).

The company sells 45000 units of fans. As it can easily understand that fixed cost increase in the 2020, but variable cost decrease. According to data 2019 BEP is 47-48 units and 2020 53-54 units. Sales price of the fan is increase 3%. So sale price will be (300+3%of 300). The BEP of every company is different so there is no ideal BEP is to be said. BEP is an indicator of no loss no profit.

 Sales Revenue 2019 2020 Sales price per unit 300 309 Unit Sold 45000 45000 Revenue 13500000 1,39,05,000

Sales revenue of the 2019 is 13500000 is calculated as the total sale unit is 45000 & price of the product is 300 so 300*45000 to get sales revenue of 2019 and 309*45000 for 2020.Therefore the company earns a good amount when compared with the financial year and is improving day by day to meet the expectations of the consumers and the investors for the growth. So by having a slight increase in the sales price which is because of inflation the revenue stood up. So, it is always better to keep the record of the revenues and the factors that are directly impacting them.

B)

 Margin of Safety 2019 2020 Actual Sale 13500000 13905000 BEP 47.21 53.75 Margin of Safety 13499952.79 1,39,04,946

Margin of safety is calculation helps to determine the number of sale that surpass the business i.e. Breakeven point is the amount sales can fall before the breakeven point is reached and business make no profit. Margin of safety tell how much sell is made over its BEP (Batkovskiy et al,2017,p(2)).

 Sales Revenue 2019 2020 Sales price per unit 300 309 Unit Sold 45000 45000 Revenue 13500000 1,39,05,000

Sales revenue of the 2019 is 13500000 is calculated as the total sale unit is 45000 & price of the product is 300 so 300*45000 to get sales revenue of 2019 and 309*45000 for 2020 (Nunoo et al,2020,p (2)).

C)

In above the case the it is considered that the company made invest in fixed cost which help in decreasing the variable cost of the product. Since the fixed cost investment is made help to increase the sale price of the product.

There in increment of 3% of the sale price of the product and it make to increase the profit of the firm . But if the investment goes down as it if is not practically applicable the company is in a situation of debt or may be suffer a great loss.

But in case the company is successfully applied its investment it create a lot of gains to the company which help to recover its fixed cost as soon as possible and also become more efficient and effective towards its goal. This will also lead to the growth and the sustainability of the organisation and expansion of its tentacles can prove to be advantageous for the organisation if these activities continue in the future.

So, by closely monitoring the variable expenses it should consider the major fixed cost which are impacting the profit of the firm and are directly linked with the reduction too(De,2012,p(3)).

Question4

A)

 Present value of Cash Inflow Year Profit before Depreciation & Tax Depreciation Profit after Depreciation Before Tax 1 75000 34000 41000 2 65000 34000 31000 3 60000 34000 26000 4 55000 34000 21000 5 50000 34000 16,000 1,35,000

Depreciation: (Initial Investment + Salvage value)/ Expected life

i.e. 27000

Payback period: Initial investment/ cash inflow

>

So, here the depreciation value is 27000 and the payback period comes down to the 6.48

B)

 Present value of Cash Inflow (Project B) Year Profit before Depreciation & Tax Depreciation Profit after Depreciation Before Tax 1 95000 40600 54400 2 65000 40600 24400 3 45000 40600 4400 4 45000 40600 4400 5 45000 40600 4,400 92,000

Depreciation: (Initial Investment + Salvage value)/ Expected life

I.e.>

Payback period: Initial investment/ cash inflow

(Wiesemann et al,2010,p 257(2))

Here, the amount of depreciation comes to 18400 which is less than the previous amount calculated above and the payback period comes to approximately 11. The payback period is way higher than the previous one here in this particular questioned.

C)

 Present value of Cash Inflow (Project C) Year Profit before Depreciation & Tax Depreciation Profit after Depreciation Before Tax 1 500000 4600 45400 2 60000 4600 55400 3 65000 4600 60400 4 66000 4600 61400 5 57000 4600 52,400 2,75,000

Depreciation: (Initial Investment + Salvage value)/ Expected life

I.e.>

Payback period: Initial investment/ cash inflow

>

In above question project c is beneficiary project for the company its pay-back period is too short rather than project a and b behind it amount of investment is also lesser than other 2 project so it also reduce the burden of payment to the creditors as also we say that reduce the liabilities of the company if company can receive its invested amount as soon as possible so company get profit from that particular project which directly includes profit earning capacity or a growth .so company also try to find out the other project of the company .if we search and find out that project a needs higher amount of investment as compared to other project like as project c . Same thing is also applicable on project B .both the project increase the burden of creditors on the company and payback period is also higher so these project not allowed to the company to investing any other projects .on the other hand it also not beneficiary for the company profit and vise versa situation talk by company investor . as we can compared these through the table .for make comparison just go through the payback period of the project .which one is best for the company investor because a investor have an ideal idea about the investment to make in which project is going part for them .as every person invest in the something to get benefits. So company should adopt that project which is benefit for the company . to confirm for the project which one is best just go through the average rate of return which project have average rate of return is higher along with which project payback period is lesser is the best project for the company. And that selection is give higher benefit to each and every candidate or a personal of the company. Whether that personal is belong to the top management of the company, middle level or a bottom level of the company. After that manager also analysis which project charge higher deprecation or which project is charge lesser deprecation .A good manager should adopt that project which charge lesser deprecation because it increase the expenses of the company (Arshad,2012,p(3)).

Conclusion

The report clearly determines the various ratios that the company has used in the first and the foremost question and these ratios has given us the fair idea as to which are the areas to improve and whether the investors should invest in the company or not. Whereas, it has also been seen that the importance of the fundamental statements have been discussed there only. With this a proper knowledge of maintain the opening statements. The Net present value with the amount of payback period has also been considered in one of the question above. Apart from all this thorough and dept knowledge of the depreciation method has been taken into account at the later of the report. With this report the breakeven point and the Margin of safety has also been calculated which has tell us that point at which the company earns no profit no loss which is at 48 units approximately. So, this report has covered all the important point which are of due importance when running a business.

References

Arshad, A, 2012, Net present value is better than internal rate of return, Interdisciplinary journal of contemporary research in business4(8), pp.211-219,

Asare, S.K and Wright, A.M, 2012, Investors', auditors', and lenders' understanding of the message conveyed by the standard audit report on the financial statements, Accounting Horizons26(2), pp.193-217,

Batkovskiy, A.M, Semenova, E.G, Trofimets, V.Y, Trofimets, E.N. and Fomina, A.V., 2017, Statistical simulation of the break-even point in the margin analysis of the company, Journal of Applied Economic Sciences, Romania: European Research Centre of Managerial Studies in Business Administration12(2), p.558, https://www.ceeol.com/search/article-detail?id=532542

de Gregorio Merino, A, 2012, Legal developments in the Economic and Monetary Union during the debt crisis: The mechanisms of financial assistance,Common Market Law Review49(5), https://kluwerlawonline.com/journalarticle/Common+Market+Law+Review/49.5/COLA2012093

https://meridian.allenpress.com/accounting-horizons/article-abstract/26/2/193/99206/Investors-Auditors-and-Lenders-Understanding-of

https://www.semanticscholar.org/paper/The-relationship-of-capital-structure-decisions-A-Khan/852233ca046fecaa4f73560a1a866d885a653206?p2df

Khan, A.G, 2012, The relationship of capital structure decisions with firm performance: A study of the engineering sector of Pakistan, International Journal of Accounting and Financial Reporting2(1), pp.245-262,

Martikka, E, 2013, Opening Statement [International Safeguards Symposium on Preparing for Future Verification Challenges, Vienna (Austria), 1-5 November 2010], https://www.osti.gov/etdeweb/biblio/22112148

Pae, J, and Yoon, S.S., 2012, Determinants of analysts’ cash flow forecast accuracy, Journal of Accounting, Auditing & Finance Assignment27(1), pp.123-144, https://journals.sagepub.com/doi/abs/10.1177/0148558x11409148

Wiesemann, W, Kuhn, D and Rustem, B, 2010, Maximizing the net present value of a project under uncertainty. European Journal of Operational Research202(2), pp.356-367, https://www.sciencedirect.com/science/article/abs/pii/S0377221709003932

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