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1.Bogart Traders Statement of Financial Position for 2018 and 2017 financial years are below: Assets 2018 2017 Non-current Assets 5 000 000 4 700 000 Inventory 600 000 700 000 Receivables 300 000 320 000 Cash 300 000 100 000 6 200 000 5 820 000 29 BACHELOR OF COMMERCE: ACCOUNTING YEAR 3 - ACADEMIC AND ASSESSMENT CALENDAR (RD) Equity and Liabilities Share Capital (R2 shares) Share Premium Retained Income Long term Debt Payables 2018 2 400 000 600 000 550 000 2 000 000 650 000 6 200 000 2017 2 200 000 200 000 400 000 2 100 000 920 000 5 820 000
Additional information 1. Bogart's shares are currently trading at R3.20 per share. Replacement cost of assets is R6 000 000. 2. Their abbreviated Statement of Comprehensive Income for the year ended 2018: Sales (75% on credit) 2 000 000 Cost of sales (all purchases on credit) 850 000 Depreciation 80 000 Interest expense 90 000 Tax (30%) 160 000 Net Income after tax 300 000 Dividends 150 000 Retained Income 150 000 2.1 2.2 Calculate the current ratio for 2018 and comment. (The ratio for 2017 was 1.22:1) (4) Calculate the debtors' collection period for the current year. Note: Debtors terms: 60 days net. The ratio for 2017 was 66 days. (4) Calculate the following ratios for 2018: 2.3.1 Earnings per share (2) 2.3
2.4 2.3.2 Dividends per share. Would shareholders be happy with this dividend? Explain? (3) Calculate the Market to Book Ratio and explain the relevance of this ratio to decision makers. (4) Calculate the Price Earnings ratio for 2018 and explain the significance of this ratio. (3) 2.5
2.Asbestos company belongs to a risk class of which the appropriate capitalization rate is 15 percent. It currently has 1,00,000 shares selling at Tk. 100 each. The firm is contemplating the declaration of a Tk. 8 dividend at the end of the current financial year, which has just begun. Answer the following questions based on M-M model :
I. What will be the price of the shares at the end of the year, if the dividend is not declared and if the dividend is declared?
II. Assuming that the firm pays dividend and has a net income of Tk. 20 lacs and makes new investment of Tk. 40 lacs during the period, how many new shares must be issued?
III. Calculate the value of the company if the dividend is declared & not declared and interpret the result.
3.Capital Expenditure Data of Bennett Company: Particulars Project A Project B Initial Investment $ 42,000 $ 45,000 Operating Cash Inflows: Year 1 $ 14,000 $ 28,000 2 $ 14,000 $ 12,000 3 $ 14,000 $ 10,000 4 $ 14,000 $ 10,000 5 $ 14,000 $ 10,000 Cost of Capital 10% Calculate PBP, NPV and IRR of each project. As a financial analyst of the company which project would you like to suggest and why?
1.Current ratio = CurrentAsset (Inventory +Receivable cash) /Current liabilties (A/c payable)
CR = 1200000/650000 = 1.8462 times
Answer 2
Debtor COllection peirod =(Total debotrs /Credit sales )*365
Note only 75% of the sales are credit sales
DOP = (300000/(2000000*75%))*365 = 73 days
Answer 3
EPS = Earning available for shareholder/No. of outstanding shares
No. of Outstanding shares = Share capital /Face value per share
EPS = 300000/(2400000/2) = 0.25/Share
Dividend per share - Dividend paid / No of Outstanding shares
DPS = 150000/1200000 = 0.125/ Share.
(Shareholder should be happy as half of the current year profits has been distributed to them)
Answer 4.
Market to book value ratio = Market capitalization/Book value of company
Book value means the amount remains with the company if the company liquidate all of its assets and paid out its liabilities. i.e. Book value = Total asset - Outside liabilites
MArket capitalization = Outstanding no, of shares * Market value per share
Book value = 6000000 (Total asset) - 2000000 - 650000 (Outside debt)
Note - In calculating the book value,we have taken the replacement cost of asset (Given in the question) instead of the values given in balance because here book value means amount remains with the company if the company liquidate all of its assets and paid out its liabilities. Since the liquidite cost (replacement cost) of the assets is 6000000 therefore 6000000 has been taken into calcuation.
Book value = 3350000
Market to book value ratio = (1200000*3.2)/3350000 = 1.1463
It shows the Market value of the company is overvalued in comparision to its book value.
Answer 5 = P/E = MArket price per share/ Earning price per share
P/E = 3.2/0.25 = 12.8 times
This shows that currently in market investors are paying the company 12.8 times of their current earning or in other words you can also say that you invested price will be completely paid back by the company after 12.8 years if the company earning remains constant.
2.Please use this google drive link to download the answer file.
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3.In general for these kinds of problems we need to calculate the present value of the subsequent cash flows.
Ia: Initial investment for project A = 42000
Ib: Initial investment for project B = 45000
PV: PRESENT VALUE = cashflow/(1+ r)^n
r: cost of capital = 10%
n: number of years
| Time | Project A cash flows | PV of Project A cashflows | Project B cash flows | PV of Project B cashflows |
| 1 | 14000 | 14000/(1+0.1)^1 | 28000 | 28000/(1+0.1)^1 |
| 2 | 14000 | 14000/(1+0.1)^2 | 12000 | 12000/(1+0.1)^2 |
| 3 | 14000 | 14000/(1+0.1)^3 | 10000 | 10000/(1+0.1)^3 |
| 4 | 14000 | 14000/(1+0.1)^4 | 10000 | 10000/(1+0.1)^4 |
| 5 | 14000 | 14000/(1+0.1)^5 | 10000 | 10000/(1+0.1)^5 |
| Annual net cash flows | 53071.01 | 55924.40 |
PBP: PAYBACK PERIOD = (Initial investment- opening cummulative cash flow)/(closing cumulative cash flow- closing cumulative cash flow). This usually refers to the time at which the initial investment is recovered.
Usually, time value of money is not considered for PBP. (unless and untill specificied we would not considere the time value of money)
Project A:
Ia= 42000
In this case since the cash flows are even in all the years and it is equal to 14000, we can easily case at the end of year 3, 42000 would be recovered. ( cash flows of year 1,2 ,3 adds upto 42000)
PBP for Project A = 3 yrs
Project B:
Ib= 45000
We can look at the table and observe that between year 2 and 3, the initial investment would be recovered.
PBP= (45000-40000)/(50000-40000)= 0.5
Therefore the payback period would be 2.5 yrs. ( This also we could have done manually without the formula; till yr 2 we would have recovered 40000, third year we get 10000; so by 2.5 yrs we can easily recover the investment.
NPV: Net Present Value = Annual net cash flows - Initial investment
NPV for project A= 53071.01 - 42000= 11071
NPV for project B= 55924.40 - 45000= 10924.44
IRR: Internal Rte of Return : Rate at which NPV = 0 ; For calculatting IRR we can resort to either a financial calculator or excel or hit and trial method. Please refer to the screen capture of an excel sheet to compute IRR. It is expected annual growth rate an investment is expected to generate.
Now let us collate our results in one table and arrive at the conclusion so as to which project is better.
| PARAMETERS | PROJECT A | PROJECT B |
| PBV | 3 YRS | 2.5 YRS |
| NPV | $11071 | $10924.44 |
| IRR | 20% | 22% |
The highest weightage has also been given to NPV when it comes to the selection of project as compared to IRR. NPV takes into account the cost of capital, profitability and the risk factor. But in this scenario since the NPVs of both the projects are almost same and project B has an edge when it comes to IRR and PBV, as an analyst I would chose Project B.
please see the attached file.
