MARTIN ARDEY Master of Business Administration STU23984 Financial Management Assignment

Date for Submission: 22th Jan 2011

Question 1a
LIQUIDITY Current Ratio Current Assets/Current Liabities Current Assets Current Liabities Ratio Acid Test Ratio (Current Asset - Stock)/Current liabiliies Current Asset Stock Current Asset - Stock Current Liabilities Ratio BM=Bench Mark Company A $m 658.5 250 2.63 $m 658.5 160 498.5 250 1.99 $m 616.5 155 461.5 616.5 0.75 Company B $m 616.5 300 2.06 $m 633.8 155 478.8 633.8 0.76 Company C $m 633.8 280 2.26 $m 609 165 444 609 0.73 BM=1.5:1 Company D $m 609 300 2.03 BM= 2.2:1

PROFITABILITY Gross Profit Gross Profit= Gross profit/sales*100 Gross Profit Sales

$m

$m

$m

$m

700 1600 43.75

700 1450 48.28

980 1750 56.00

840 1500 56.00 xx%

Net Profit Operating Profit= Net profit/sales*100 Operating Profit Sales

$m 580 1600 36.25

$m 590 1450 40.69

$m 840 1750 48.00

$m 755 1500 50.33 xx%

ROCE Operating Profit /Net Asset Operating Profit Net Asset

$m 700 1028.5 68.06

$m 700 866.5 80.78

$m 980 1213.8 80.74

$m 840 869 96.66 xx%

INVESTMENT Gearing Debit/( Debit+Equity)*100 Debit Equity Debit + Equity

$m

$m

$m

$m

400 1028.5 1428.50 28.00

400 866.5 1266.50 31.58

240 1213.8 1453.80 16.51

240 869 1109.00 21.64

$m ESP Profit after taxation / number of shares Profit after taxation number of shares

$m

$m

$m

324 600 0.54

333 600 0.56

489.6 500 0.98

438.6 500 0.88 $p currency

Dividend cover Profit after taxation / Dividend paid and proposed Profit after taxation Dividend paid and proposed

324 162 2.00

333 166.5 2.00

489.6 144.8 3.38

438.6 119.3 3.68 xxtimes

EFFICIENCY RATIOS Stock turnover ratio Average stock *365/ Cost of sales Average stock Cost of sales Total Asset Turnover Ratio sale/total asset sales Total Asset 900 160 2053.13 750 155 1766.13 820 155 1930.97 660 165 1460.00 xxdays

1600 1678.5 0.95

1450 1566.5 0.93

1750 1733.8 1.01

1500 1409 1.06 xxtimes

Comparing the liquidity ratio of company A, B, C and D against the industry average. Liquidity ratio This measures the company ability to pay its debts as they come due by comparing asset that can be quickly converted to liquidity to offset short term obligation on the part of the company. It consist of current ratio which measures the capability of a company to pay its liabilities using only current asset while Quick ratio focuses on cash , receivable which can be used to offset immediate liquidity issues without converting inventory or stock to cash.

All four of the company can meets its short term liquidity responsibilities however when compared against the industry average A and C have a current ration which is above the acceptable industry bench mark of 2.2:1 which means it can conveniently meet its short term liquidity obligation and still have enough liquidity to give room shrinkage in stock. B and D have current ratio which is below the acceptable industry bench mark though it can still meet its short term liquidity obligations there is need to increase current asset or reduce liability to improve its liquidity ratio. From the acid test point of view only A can meet it short term liquidity obligation without converting stock to cash, as its acid test ratio is way above the acceptable industry bench march of 1.5:1 the other three B,C and D will have to convert stock to cash to be able to meet its short term liquidity obligation. Profitability ratio This is used to measure the companys ability to generate return on investment it has to do how well a company is able to use its fixed and variable asset to generate revenue or income. The profitability of a company is measured using Gross and Net Profit while Gross tell you how well a companys is able to control its inventory, manage its pricing and product efficiency Net profit focuses on how well a company has managed its operational expenses and the volume of sale company has been able to undertake. B,C and D are all profitable as their profitability ratio is above that of the acceptable industry bench mark of 48% and 40 respectively for gross profit and net profit which show that they have been able to manage properly their operating expense and pricing as compared to A which had a higher volume of sales but yet its not profitable. For A to be profitable the operating expense will have to be reduced with increase in product efficiency and review of price.

Investment ratio

Its a form of financial ratio that com compares owners equity to borrowed funds It can be measured using gearing, which demonstrates how a firm's activities are funded by owner's funds versus creditor's funds the lower the gearing the less risky the investment. it tell the owners if all the effect put into the invest has been worth it All four investment A,B,C and D have gearing ratio which is less than the bench mark ratio of 60% . more so the dividend cover for all four company meets the average industry bench mark though C and D dividend ratio is higher than the bench mark which means company will continue to pay dividend to Investors.

Efficiency This ratio is used to evaluate how well a company manages its asset and also how well its liabilities are managed. Total asset turnover ratio show event management of the company as all four company A,B,C and D have a higher ration than the average acceptable industry bench , receivable are collect when due and payable sorted off as when due to. 1b. From shareholder perspective i will recommend my manager invest in company C Company C has the least gearing ratio 16.51% as against the industry bench mark of 60% which shows low risk for share holders losing their investment as investor funds are properly managed more so the implication is the company C has a low debit profile which makes it very attractive to investor

Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-toearnings valuation ratio, Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company with the above analysis company C has the highest earnings per share EPS of 0.98 even with a low equity of $500M which shows that company C is very efficient at using its capital to generate income for the company so investing in C will result in higher earnings per share for my manager.

Dividend cover expresses a company's ability to pay ordinary dividends to shareholders out of profits earned. It shows how many times the ordinary dividend is covered by the profit available company C has a dividend cover of 3.38 which is way above the acceptable average industry bench mark and the implication is that its able to pay dividend and that its net profit is over three time was it paid out as dividend as such even in the event of reduce profit margin company C can still pay out dividend.

Q2a

wacc% Tridad Ltd End year 0 (now) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 NPV $'000 Outflow -20000 -20000 -30000 -20000 -10000 -5000 10000 20000 30000 40000 50000 40000 50000 40000 40000 50000 -4000 -5000 -3000 -3000 -6000 -7000 -8000 -10000 -15000 -15000 $'000 Inflow 11 $'000 $'000 $'000 $'000 Taxation Net Cash Discount favtor Present Value -20000 -20000 -30000 -20000 -10000 -5000 10000 16000 25000 37000 47000 34000 43000 32000 30000 35000 -15000 1.0000 0.9009 0.8116 0.7312 0.6587 0.5935 0.5346 0.4817 0.4339 0.3909 0.3522 0.3173 0.2858 0.2575 0.2320 0.2090 0.1883 -20000 -18018 -24349 -14624 -6587 -2967 5346 7707 10848 14464 16553 10788 12291 8240 6960 7315 -2824 11143

wacc% Tridad Ltd End year 0 (now) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 NPV $'000 Outflow -20000 -20000 -30000 -20000 -10000 -5000 10000 20000 30000 40000 50000 40000 50000 40000 40000 50000 -4000 -5000 -3000 -3000 -6000 -7000 -8000 -10000 -15000 -15000 $'000 Inflow $'000 Taxation 14 $'000 $'000 $'000 Net Cash Discount favtor Present Value -20000 -20000 -30000 -20000 -10000 -5000 10000 16000 25000 37000 47000 34000 43000 32000 30000 35000 -15000 1.0000 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.3996 0.3506 0.3075 0.2697 0.2366 0.2076 0.1821 0.1597 0.1401 0.1229 -20000 -17544 -23084 -13499 -5921 -2597 4556 6394 8764 11378 12678 8045 8925 5826 4791 4903 -1843 -8228

WACC $'000 Shares Debt Total % 100 50 150 cost(%) 12 9 $ 12 4.5 16.5

0.11 11

Increased WACC by premium of 3%

WACC $'000 Shares Debt Total % 100 50 150 cost(%) 15 12 $ 15 6 21

0.14 14

With WACC of 11% the Net present value returned positive value which shows that the project is profitable or viable and would yield return on investment but by taking a premium of 3% and the WACC becomes 14% the Net present value becomes negative which is a sign the its not a viable project at that rate and will not yield good return on investment.

2b The IRR internal rate of return was calculated using interpolation and perfected by trial and error method as can be seen below.
Tridad ltd End year 0 (now) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 NPV Outflow -20000 -20000 -30000 -20000 -10000 -5000 10000 20000 30000 40000 50000 40000 50000 40000 40000 50000 -4000 -5000 -3000 -3000 -6000 -7000 -8000 -10000 -15000 -15000 $'000 Inflow $'000 Taxation WACC $'000 Net Cash -20000 -20000 -30000 -20000 -10000 -5000 10000 16000 25000 37000 47000 34000 43000 32000 30000 35000 -15000 12.5936 $'000 $'000 Discount favtor Present Value 1.0000 0.8881 0.7888 0.7006 0.6222 0.5526 0.4908 0.4359 0.3872 0.3439 0.3054 0.2712 0.2409 0.2140 0.1900 0.1688 0.1499 -20000 -17763 -23664 -14012 -6222 -2763 4908 6975 9679 12723 14354 9222 10359 6847 5701 5907 -2248 0

IRR= positive rate +( positive npv/ positive npv -negative npv) * range of rate positive rate 11 negative rate 14 positive npv 11143 negative npv -8228 range of rate 3 positive npv/ positive npv -negative npv 0.575241 IRR 12.72572

2c

3a Scenario 1

Scenario one Fixed cost (fc) Premises a share of the rent and rates Front desk staff Support staff Depreciation of equipment Maintenance Repairs Insurance Administration Total Fixed cost Variable Cost(vc) no of client Opening hrs in a year Cost of facilities per hr ($) Total Variable cost Total Cost Revenue no of client Opening hrs in a year Revenue from facilities per hr ($) Total Revenue Profit contribution margine FC/(Revenue from facilities per hr -less Cost of facilities per hr) fc +vc

10,000.00 28,000.00 42,000.00 10,000.00 10,000.00 15,000.00 17,000.00 8,000.00

140,000.00

10 2304 4.95 114,048.00 254,048.00

10 2304 15 Revenue - cost 345,600.00 91,552.00 10.05

No of client hr to breakeven Breakeven Turnover

13,930.35 208,955.22

Scenario Two

Scenario Two Fixed cost (fc) Premises a share of the rent and rates Front desk staff Support staff Depreciation of equipment Maintenance Repairs Insurance Administration Additional cost Total Fixed cost Variable Cost(vc) no of client Opening hrs in a year Cost of facilities per hr ($) Total Variable cost Total Cost Revenue no of client Opening hrs in a year Revenue from facilities per hr ($) Total Revenue Profit contribution margine FC/(Revenue from facilities per hr -less Cost of facilities per hr) fc +vc

10,000.00 28,000.00 42,000.00 10,000.00 10,000.00 15,000.00 17,000.00 8,000.00 30,000.00

170,000.00

12 2304 9 248,832.00 418,832.00

12 2304 18 Revenue - cost 497,664.00 78,832.00 9.00

No of client hr to breakeven Breakeven Turnover

18,888.89 340,000.00

3b

Scenario one is more profitable generating a profit of $91,552 with a lower fixed and variable asset, while scenario two generated a profit of $78,832 whith higher fixed and variable cost. More so, the start up capital for scenario one is cheaper than scenario two in essence asset are put to more efficient use in scenario one than in scenario two owning to lower operating cost. In conclusion scenario one outside of the above reason has less client hour to break just 13930.35 client hrs as compared with scenario two which requires 18,888.89 client hrs to breakeven and become profitable. 3bi. The financial project is looks feasible and more attract for scenario one but however breakeven analysis is a predictor of demand so due diligence should be taken in pricing to ensure its competitive. 3bii. Breakeven analysis is a very useful tool or model for pricing product and service and the time required to break even the technique has it own limitation which should be noted when applying it. That it is not always possible that all output are sold off All cost and revenue are express in linear relations which does not always hold Fixed cost does not remain the same as in reality it grows with demand and inlation Values outside the breakeven zone are not always reliable.

Bibliography

RDI, (2010a) Financial Management, Unit 2, Cost Evaluation, P10. RDI, (2010b) Financial management, Unit2, Discounted cash flow,P9-11. RDI, (2010c) Financial Management Unit1,Ratio Analysis,P3-8 How to do Break even Analysis [Online] Available from: http://entrepreneurs.about.com/od/businessplan/a/breakeven.htm [accessed 17th January 2011] Wael Al Aawar. 2010,Financial ratio Type and application Gearing Ratio [Online] Available from:http://www.investopedia.com/terms/g/gearingratio.asp[accessed 12th January 2011] Premium risk [online] Available from http://www.investorwords.com/4306/risk_premium.html[accessed [16 January 2011] Calculate and interpret return on capital employed [Online] Available[accessed 13-Jnauare] http://www.stockresearchpro.com/calculate-and-interpret-return-on-capital-employed-roce