HW 5 - a b invesment previous year market value generated...

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Unformatted text preview: a) b) invesment previous year market value generated cash flow X $20,000 $1,500 Y $55,000 $6,800 Expected rate of return for X: $1,500 + $21,000 - $20,000 $20,000 Expected rate of return for Y: $6,800 + $55,000 - $55,000 $55,000 If both investments are equally risky, Douglas should choose investment X, since this one yields mo nerated cash flow current market year value $21,000 $55,000 = 0,125 (or) 12,5% = 0,1236 (or) 12,36% ent X, since this one yields more return than investmant Y. a) Particulars Expansion A Expansion B Initial investment Annual rate of return: Pessimistic Most likely Optimistic $12,000 $12,000 Possible ranges: 24% - 16% = 8% 16% 20% 24% 10% 20% 30% 30% - 10% = 20% b) The greater the range, the more variability and risk an investment includes. Project A showing a sm c) Investors should consider project A over project B. The risk is way smaller (8% compared to 20%), w d) Even when the likely return for B increases, risk averse investors should stick with investment A. udes. Project A showing a smaller range than project B means that this project is less risky. aller (8% compared to 20%), while maximum return is at 24% for A, and only at 30% for B. Therefore, A almost has as much p d stick with investment A. efore, A almost has as much potential as B, but at much smaller risk. a) Alternative Standard deviation of return A 20.00% 7.0% B 22% 9.5% C 19% 6.0% D 16% 5.5% Coefficient of variation: b) Expected return A 7% / 20% = 0.35 B 9.5% / 22% = 0.43 C 6% / 19% = 0.32 D 5.5% / 16% = 0.34 The coefficient of variation is used to measure the volatility of the expected return of an investm tion of return ected return of an investment. If coefficient variation is low, returns will be better than the risk. This means, the lower the n This means, the lower the number, the lower the risk level in comparison to possible return for an investment. r an investment. a) Expected return Year Asset F Asset G 2016 16% 17% 2017 17% 16% 2018 18% 15% 2019 19% 14% Alternative Investment 1 100% of asset F 2 50% of asset F and 50% of asset G 3 50% of asset F and 50% of asset H Asset H 14% 15% 16% 17% a) Portfolio weights Asset Asset beta Portfolio A 1 1.3 10% 2 0.7 30% 3 1.25 10% 4 1.10 10% 5 0.9 40% Totals 100% Assets Assets Beta Portfolio weights Porfolio A 1 1.3 10% 2 0.7 30% 3 1.25 10% 4 1.1 10% 5 0.9 40% Total 100% Portfolio B 30% 10% 20% 20% 20% 100% Portfolio B 30% 10% 20% 20% 20% 100% a) Debt ratio Total L/Total A Pelican Times-interest earned ratio EBIT/interest Pelican 0.1 62.5 a) The debt ratio of Pelican paper Inc. is less than the timberland forest which shows that Pe debt as compared to timberland and Times interest ratio indicates that company has good c to Timberland. b) Operating Profit margin Operating Profits/Sales Pelican 25.0% Net profit margin Earnings available for common Stockholders/Sales 14.8% Return on total assets Earnings available for common Stockholders/Total Assets 36.9% Return on common equity Earnings available for common stockholders/Total common Equity 41.0% c) This shows that the Timberland forest is only making debts when needed, while profiting possible. The fact, that more debt is used shows that the risk is higher, but the dividend in c positive result will also be higher. There is a correlation between risk and return, since the h (Timberland) is also expected to pay higher returns in case of profits. Timberland 0.5 Timberland 12.5 erland forest which shows that Pelican paper is less dependent on ndicates that company has good capacity to pay interest as compare Timberland 25.0% 13.8% 34.5% 69.0% bts when needed, while profiting when sk is higher, but the dividend in case of a ween risk and return, since the higher risk of profits. 1) Current ratio= current Assets/current Liabilities Quick ratio=current A-Inventory/current Liabilties Inventory Turnover=COGS/(Inventory/365) Average collection period=Accounts Receivable/Average sales p. day Debt ratio=Total L/Total A Times interest earned ratio=EBIT/interest Gross profit margin=Gross profit/sales Net profit margin=Earnings available to common stockholders/Sales Return on Total A=Earnings available to common stockholders/Total A Return on common Equity=Earnings Available to common stockholders/Common Stoc Market/book ratio=Market price/book value b) Liquidity is already low and still declining. The activity of the firm is analyzed using the inventory turnover, average collection period a inventory turnover of the firm is lower than industry average, which could indicate usually h The increase of an average collection period indicates ineffective management of receivable The debt of the firm is lower than the industry avarage, however, the lower times interest e the firm's declining ability to pay its interest and debt. The gross profit margin of the firm is less than the industry average, which indicates a high c increase in return on assets and return on equity indicates a positive trend (in sales). The increase in the market/book ratio indicates a positive increase in the market price in com value per share. Overall, company Z. I. has excellent profitability with a deteriorating liquidity. Further investi inventory and accounts receivable is necessary. sales p. day olders/Sales olders/Total A n stockholders/Common Stock Equity 1.04 0.38 2.33 57.03 61.3% 2.79 33.8% 4.1% 4.4% 11.3% 1.29 over, average collection period and asset turnover. The e, which could indicate usually high inventory rates. ective management of receivables. wever, the lower times interest earned ratio indicates average, which indicates a high cost of good sold. The a positive trend (in sales). ncrease in the market price in comparison to the book riorating liquidity. Further investigation of the 2013 2014 2015 1) ROA=Net profit margin x total asset turnover Johnson: 12.45% 12.64% 11.47% Industry: 11.07% 10.01% 8.82% 2) ROE=ROA x FLM Johnson: 21.79% Industry 18.49% 22.13% 16.92% 21.21% 14.46% b) Profitability: Industry net profit margins are decreasing; Johnson’s net profit margins have fallen less. Efficiency: Both industry’s and Johnson’s asset turnover have increased. Leverage: Only Johnson shows an increase in leverage from 2005 to 2006, while the industry has had less stability. Between 2004 and 2005, leverage for the industry increased, while it decreased between 2005 and 2006. As a result of these changes, the ROE has fallen for both Johnson and the industry, but Johnson has experienced a much smaller decline in its ROE. c) Areas where further analysis is required: Areas which require further analysis are profitability and debt. Since the total asset turnover is increasing and is superior to that of the industry, Johnson is generating an appropriate sales level for the given level of assets. But why is the net profit margin falling for both industry and Johnson? Has there been increased competition causing downward pressure on prices? Is the cost of raw materials, labor, or other expenses rising? A common-size income statement could be useful in determining the cause of the falling net profit margin. rofit while the dustry ndustry, otal asset nerating profit mpetition or other rmining CASH RECEIPTS SCHEDULE: March Sales receipts $50,000 Percentages: Cash Sales $10,000 Lag 1 mo. Lag 2 mo. Other income Total cash receipts CASH DISBURSEMENTS SCHEDULE: Disbursements: Purchases Rent Wages & salaries Dividends Principal & Interest Purchase of new equipment Taxes due Total cash disbursements April $60,000 May $70,000 June $80,000 $12,000 $30,000 $14,000 $36,000 $10,000 $2,000 $62,000 $16,000 $42,000 $12,000 $2,000 $72,000 May June $ 50,000 $3,000 $6,000 $70,000 $3,000 $7,000 $3,000 $4,000 $59,000 $6,000 $93,000 CASH BUDGET: May June Total cash receipts Total cash disbursements Net cash flow Add: Beginning cash Ending cash Minimum cash Required total financing $62,000 $59,000 $3,000 $5,000 $8,000 $5,000 $72,000 $93,000 ($21,000) $8,000 ($13,000) $5,000 $18,000 $3,000 $0 Excess cash balance For May: Invest the $3000 excess cash in marketable securities. For June: Liquidate the $3000 of marketab securities and borrow $18000. July: Borrow another 18000 in July to have the required total financing of 3 May the company has access cash,but in June and July it needs to borrow cash, because the ending cash is than the minimum required balance. Nevertheless, the company should prepare a scenario analysis in ord analyze cash flows under a variety of circumstances. July $100,000 $20,000 $48,000 $14,000 $2,000 $84,000 July $80,000 $3,000 $8,000 $6,000 $97,000 July $84,000 $97,000 ($13,000) ($13,000) ($26,000) $5,000 $31,000 $0 Liquidate the $3000 of marketable the required total financing of 31000. In cash, because the ending cash is way less repare a scenario analysis in order to a) Statement showing cash Budget Particulars Monthly take home pay Housing @30% Utilities @5% Food @10% Transportation @7% [email protected]% [email protected]% for Oct and Nov Clothing for Dec Prpoperty [email protected]% for Nov Appliances @1% Personal [email protected]% [email protected]% for Oct and Nov Entertainment for Dec [email protected]% Other 5% Excess Cash 4.5% Remaining Cash b)Yes, there is a deficit in December c) Cumulative surplus is of $657 by end of Dec 2016 October November 4,900.00 4,900.00 1,470.00 1,470.00 245.00 245.00 490.00 490.00 343.00 343.00 24.50 24.50 147.00 147.00 563.50 49.00 49.00 98.00 98.00 294.00 294.00 367.50 367.50 245.00 245.00 220.50 220.50 906.50 343.00 December Total $ 14,700.00 4,900.00 $ 4,410.00 1,470.00 $ 735.00245.00 $ 1,470.00490.00 $ 1,029.00343.00 $ 73.50 24.50 147.00 $ 294.00 $ 440.00440.00 563.50 $ 563.50 $ 147.00 49.00 $ 294.00 98.00 294.00 $ 588.00 $ 1,500.00 1,500.00 $ 1,102.50367.50 $ 735.00245.00 $ 661.50220.50 $ 657.00 (592.50) ...
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