Madiha Baqai (12258)

BBAH

Principles of Finance

QUESTION No.1 (A)

1 – Liquidity ratios
 Current ratio
Formula:
Current assets / current liabilities
year 2001 2000
current assets 1,926,802 1,124,000
Current liability 1,733,760 481,600
=Current assets / current =1926802/17337 =1124000/4816
liabilities 60 00
Current ratio 1.111 2.333

 Working Capital
Formula :
Current assets - current liabilities
Year 2001 2000
Current assets 1,926,802 1,124,000
current liabilities 1,733,760 481,600
= current assets - current liabilities 1926802-1733760 1124000-481600
working capital 193,042 642,400
2 - Profitability
 Net profit margin :

Formula:

Net profit margin /total sales

year 2001 2000

net profit margin -519,936 87,960
Sales 5,834,400 3,432,000
Net profit margin /total sales = -519936 /5834400 =87960/3432000
net profit margin -0.0891 0.0256

 Return on assets :
Formula:
Net profit margin / total assets

year 2001 2000

net profit margin -519,936 87,960
total assets 2,866,592 1,468,800
Net profit margin /total assets -519936 / 2866592 87960 /1468800
net profit margin -0.1813 0.0598

3 – Leverage

 Debts Ratio
Formula:
Total debts / total assets

year 2001 2000

total debts 2,733,760 805,032
total assets 2,866,592 1,468,800
=805032/146880
total debts / total assets =2733760 / 2866592 0
Debts Ratio  1 0.548
  Equity multiplier
Formula:
Total assets / shareholder equity
= total assets – total  shareholder equity
shareholder equity formula   Years liabilities amount
shareholder equity 2001 2,866,592-2733760 132832
shareholder equity 2000 1,468,800 - 805032 663768

years 2001 2000

shareholder equity 132,832 663,768
total assets 2,866,592 1,468,800
=1468800/66376
=total assets /shareholder equity =2866592/132832 8
Equity multiplier ratio 22 2.212

4 - Efficiency ratio /Asset Activity

 Fixed assets turnover :

Formula:
= net sales / net fixed assets

year 2001 2000

net sales 5,834,400 3,432,000
net fixed asset 939,790 344,800
net sales / net fixed assets 5834400/939790 3432000/344800
Fixed assets turnover 6.208 9.953

 Assets turnover
Formula:
Net sales / total assets

assets turnover Formula net sales / total assets

  2001 2000
total sales 5,834,400 3432000
total assets 2,866,592 1468800
3432000/1468
net sales / total assets 5834400/2866592 800
 assets turnover 2.04 2.34

5 Coverage ratio

Coverage ratios Formula =EBIT/ interest expense

year 2001 2000
EBIT -690,560 209,100
INTEREST EXPENSE 176,000 62,500
= EBIT/ interest expense = -690560/176000  = 209100 /62500 
Coverage ratios -3.923 3.345

6 Market ratio

Equity ratio : Formula total shareholder equity / total assets

years 2001 2000
total shareholder equity 132832 663768
total assets 2,866,592 1468800
= total shareholder equity / total
assets =132832 /2866592 =663768/1468800
Equity ratio 0.046 0.451

Question no 1 (b)

1- Liquidity ratios:

 Current ratios:

2001:
Interpretation: 1.111: 1
Current Assets > Current Liabilities
Comment:
Company have its current ratio above 1 they have no trouble meeting short-term commitments.

2000:
Interpretation: 2.333: 1
Current Assets > Current Liabilities
Comment:
Company have its current ratio above 1 they have no trouble meeting short-term commitments.
  Working capital

2001:
Interpretation:
Current Assets > Current Liabilities
Comment:
Company have more current assets than its current liabilities they have no trouble meeting short-term
commitments

2000:
Interpretation:
Current Assets > Current Liabilities
Comment:
Company have more current assets than its current liabilities they have no trouble meeting short-term
commitments

2- Profitability

 Net profit margin

2001:
Interpretation:

Sales < cost of goods sold

Comment:

This profit margin shows in negative which can caused by a high cost of goods sold, which can be
recognized to adverse purchasing policies, low sales, low selling prices, wrong sales promotion policies
or stiff market competition.

2000:

Interpretation:

5% margin considered as a low margin ratio in industry.

Comment:

A low profit margin shows a high cost of goods sold, which can be recognized to adverse purchasing
policies, low sales, low selling prices, wrong sales promotion policies or stiff market competition.
3 – Solvency:

Leverage ratio:

 Debts Ratio

2001:

Interpretation:
1=1
Liabilities = assets

Comments:

Company has equal assets to pay off its total liabilities

2000:

Interpretation
1 > 0.548
Comments:

Company has assets to pay off its total liabilities in 2000 year, solvency is maintain in this year.

Question 2 (a)

1- Computation for Sales

1.5 = sales / 300000

300000 × 1.5 = 450000
Sales = $ 450000

2– Computation for account receivable

account receivable
¿
annual sales/365

account receivable
36.5 =
450000 /365

account receivable
36.5 =
12328767

12328767 × 36.5= account receivable

Account receivable = $ 45000

2- Computation for inventory :

 450000
5=
inventory

450000
Inventory =
5
= $ 90000

4 - Computation for fixed assets

3 = 450000 /fixed assets
Fixed assets =450000 / 3
Fixed assets = $ 150000

5 - Solve for cash

Cash+45000+90000+150000=300000
Cash+285000=300000
Cash=300000-285000
Cash=15000

6 - Computation for current liabilities

2 = 15000+45000+90000 / current liabilities
2 = 150000 /current liabilities
Current liabilities = 150000 /2
Current liabilities = $ 75000

7 - Computation for common stock:

Common stock + 75000+60000+97500 = 300000
Common stock+232500 =300000
Common stock = 300000-232500
Common stock = $ 67500

8 -computation for cost of goods sold:

25 % = 450000-cost of goods sold /450000
25% × 450000 = 450000 - cost of goods sold
112500 = 450000 - cost of goods sold
Cost of goods sold = 450000 -112500
Cost of goods sold = $ 337500
X,Y,Z Co
Balance Sheet
As on year ended __________
Assets Liabilities and Equity
Cash $15,000 Current Liabilities 75000
A/c Receivables $45,000 Long Term Liabilities 60000
Inventories $90,000 Common Stock 67500
Fixed Assets 150000 Retained Earnings 97500
       
  Total Assets $300000   Total Equity $300000

Sales $45,000 Cost of goods sold $337,500

Question 2 (b)

1 - Current ratio: 2:1

Company current asset is twice greater as a current liabilities.

2 - Total assets turnover ratio: 1.5:1

The total assets turnover, indicating that company is using its assets efficiently to generating
revenues.

3 - Inventory turnover ratio: 2: 1

Inventory turnover ratio is an efficiency ratio this company is managing its inventory
efficiently. High ratio is indicating the reduction of this company holding and storage cost.

4 -Profit margin on sales:

This company is able to convert more of it sales into profits with a ratio of 25 %

Question no 3

I will choose corporation. Because in this business if they lose all their money. I only would lose
the money I invested for making profit in this business .In another words corporation business
has unlimited lives and make easier to transfer stock. After the investment I will be called
stockholder stock certificates are issued by the corporation after getting my shares certificates I
will be free to sell some or all of these share of mine Shareholders do not manage the day to
day operations of the corporation instead appointed mangers.

Question: 4

Part: 1
Future value = present value × (1+r¿t

Cash future
cases flow($) interest rate year value
A 200 5% 20 53066
B 4500 8% 7 772121
C 10000 9% 10 2367364
D 25000 10% 12 7846071
E 37000 11% 5 6234715
Part: 2
Formula for present value =present value =future value / (1+r) t
Cash interest Present
cases flow($) rate year value
A 7000 12% 4 444862
B 28000 8% 20 600734
C 10000 14% 12 207559
D 150000 11% 6 8019612
E 145000 20% 8 1046556

Part: 3
Formula:
( 1+ r ) t−1
Future value annuity = R (r )
Cash interest Ordinary
cases flow($) rate year annuity’s
39843.5
c 2500 10% 10 6
77876.0
D 3000 20% 10 5

Explanation:

If we compare both cases the case D is better than case c .because when Jorsen investing with
3000 then interest rate is going higher & the amount higher too. We can see in case C that the
interest rate goes down the value of an ordinary annuity goes down.