SEMESTER SPRING 2012 Business Finance (ACC501) No.1 Assignment No.

1
Due Date: 26th April 2012
Objectives of the Assignment:
The first question of the assignment will enable the students to use the commonsize analysis for comparing the companies having different financial strength. The second question of the assignment will enable the students to use the DuPont Analysis for investigating the reason for unsatisfactory ROE of a company. Question No.1 (10 Marks)

Marks: 20

ABC Company Limited and XYZ Company Limited are involved in the manufacturing of Leather products. Following are the balance sheets of both the companies for the year 2010. Balance Sheets As on 31st December 2010
Particulars Cash Account Receivable Inventory Total Current Assets Net Plant and Equipment ABC Company Rs. (in millions) 86 172 396 654 2,735 XYZ Company Rs. (in millions) 20 27 45 92 49

Total Assets
Accounts payable Notes payable Total Current Liabilities Long term debt common stock and paid in surplus Retained earnings Total owners equity

3,389
315 232 547 532 510 1800 2,310

141
8 10 18 50 55 18 73

Total Liabilities & Owners Equity

3,389

141

Although both the firms are involved in the same kind of business but their balance sheets represent a huge difference in their financial strength. As a finance student, you are required to analyze these balance sheets by using the common size analysis technique. Also provide comments on the liquidity and leverage position of both the companies with the help of your analysis. Note: Your solution should be in the following form of single comparative statement followed by the comparative comments regarding the liquidity and leverage position of both companies.

Comparative Common-Size Balance Sheet As on 31st December 2010

Particulars Cash ABC Company XX.XX % XYZ Company XX.XX %

Comparison of Liquidity Position ABC Company

(comments on the liquidity position of ABC Company)

XYZ Company
(comments on the liquidity position of XYZ Company)

Comparison of Leverage Position ABC Company

(comments on the Leverage position of ABC Company)

XYZ Company
(comments on the Leverage position of XYZ Company)

Question # 2

(10 Marks)

Fawad Farooq is working as Chief Financial Officer (CFO) in a manufacturing concern. One of his job responsibilities is to analyze the companys financial results every year in order to make necessary improvements. While analyzing the financial results for the current year, he noticed that Return on Equity (ROE) of the company is lower than that of previous year. He called up Faiq Aslam, the Finance Manager of the company, to discuss the matter but Faiq remained failed to provide any reasonable justification in this regard. Fawad was well aware of the fact that the technique of DuPont Analysis is widely used to analyze ROE of the company by looking at its different aspects. He asked Faiq to provide him with some information and Faiq presented him the following information related to the current year and previous years:

Particulars Total Assets Total Equity Total Debt Sales Gross Profit Net Profit Profit Margin Total Assets Turnover Equity Multiplier

Current Year Rs.10,253,000 Rs. 6,582,000 Rs. 3,671,000 Rs. 5,352,000 Rs. 3,201,000 Rs. 2,000,000 -

Previous Year Rs.5,250,000 Rs.3,198,000 52% 0.50 times 1.55 times

You are required to explain (with the help of calculations) that how CFO will perform the Du-Pont Analysis by using the above information. Also, indicate the exact reason of unsatisfactory ROE for the current year. Note: You are required to provide complete calculations along with interpretations.

Instructions:
Please read the following instructions carefully before preparing the assignment solution: Do follow the instructions provided with each question. Put your genuine efforts in order to understand the concepts thoroughly.

Note:
Only in the case of Assignment, 24 hours extra / grace period after the due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.

Important Instructions:
Please read the following instructions carefully before attempting the assignment solution. Deadline: Make sure that you upload the solution file before the due date. No assignment will be accepted through e-mail once the solution has been uploaded by the instructor.

Formatting guidelines: Use the font style Times New Roman/ Arial and font size 12. It is advised to compose your document in MS-Word (2003/2007/2010).

Use black and blue font colors only.

Solution guidelines: Every student will work individually and has to write in the form of an analytical assignment. Give the answer according to question. Do follow the instructions provided with each question. For acquiring the relevant knowledge dont rely only on handouts but watch the video lectures and use other reference books also.

Rules for Marking Please note that your assignment will not be graded or graded as Zero (0) if: It has been submitted after due date The file you uploaded does not open or is corrupt It is in any format other than *.doc/*.docx (MS Word) It is cheated or copied from other students, internet, books, journals etc