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Homework answers / question archive / 1) The information below was taken from a financial ratio analysis prepared by Canned Foods Ltd to assess its financial performance for 2019
1) The information below was taken from a financial ratio analysis prepared by Canned Foods Ltd to assess its financial performance for 2019. Sales revenue R50 000 000 Gross profit margin 65% Operating profit margin 40% Net profit margin 6% Return on total assets 16% Return on ordinary shareholders' equity 18% Total asset turnover Average collection period 58 days Number of days in a year 365 SBS Page 2 of Assignment 4:49 pm TUTORIAL LETTER 1 (ASSIGNMENT 1) - 2020 SECOND SEMESTER FMA 101 FINANCIAL MANAGEMENT I Required: Use the ratios and other information provided to calculate the rand value for the following accounts: 1.3.1. Gross profit 1.3.2. Cost of goods sold 1.3.3. Operating profit 1.3.4. Operating expenses 1.3.5. Profit available to ordinary shareholders 1.3.6. Total assets 1.3.7. Total shareholders' equity Show all calculations.
2)Barry has just taken out a $200,000, 30-year, 5% mortgage. He has heard from friends that if he increases the size of his monthly payment by one-twelfth of the monthly payment, then he will be able to: (1) pay off the loan much earlier, and (2) save a bundle on interest costs. Barry is not convinced. Use the necessary calculations to help convince him that his friends are speaking the truth.
1)
Answer 1.3.1) : Formula is Gross Profit margin = Gross Profit/Sales Revenue
65% = Gross Profit/ Rs 5,00,00,000
Gross Profit = Rs 5,00,00,000*65% = Rs 3,25,00,0000
Hence gross Profit is Rs 3,25,00,000
Answer 1.3.2) : Formula is Cost of Goods Sold = Sales Revenue - Gross Profit
Cost of goods Sold = 5,00,00,000 - 3,25,00,000
Cost of goods Sold = 1,75,00,000
Answer 1.3.3) Formula is Operating Profit Margin = Operating Proft / Sales Revenue
40% = Operating profit / Rs 5,00,00,0000
Operating Profit = Rs 5,00,00,0000*40% = 2,00,00,000
Hence operating profit is Rs 2,00,00,000
Answer : 1.3.4) : Formula is Net Profit Margin = Net Profit /Sales Revenue
6% = Ne tprofit/ Rs 5,00,00,000
Net Profit = 5,00,00,000*6% = Rs 30,00,000
formula = Operating Expenses = Gross Profit - Net Profit
Operating Expenses = Rs. 3,25,00,00,000 - 30,00,000
Operating Expenses = 2,95,00,0000
Answer : 1.3.5) inadequate information
Answer 1.3.6) Formula is Total Assets turnover ratio = Net profit / Total Assets
4% = Rs 30,00,000/ Total Assets
total assets = Rs 30,00,000/ 0.04
Total Assets = 7,50,00,0000
Answer 1.3.7) Formula = Return on Equity Shareholders = Netprofit / Equity Capital
= 18% = 30,00,00,000/ Equity Capital
Ordinary Equity Capital = 30,00,000/0.18 = Rs 1,66,66,667
2)
Facts of the Question
Loan taken by Barry $ 200,000
Monthly repayment 30 year or 360 Equated monthly installment.
Annual percentage rate 5%.
To calculate Equated Monthly Installment (EMI) using the following formula:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1],
where:
P stands for the loan amount or principal,
R is the interest rate per month [if the interest rate per annum is 5%, then the rate of interest will be 5/(12 x 100)=0.4167% per month] and
N is the number of monthly installments.
IF REPAYMENT PERIOD IS 30 YEARS:
If mortgage taken for $ 200,000 with repayment period of 30 years with monthly repayment rest, and fixed Annual percentage Rate 5% (APR) then, we use the above formula to arrive Equated monthly Installment (EMI) then EMI that would be:
EMI = ((200000*0.004167)*(1.004167)^360)/((1.004167)^360-1) = $ 1,073.6432
Total amount paid principal and with interest for 30 years = $ 1,073.6432 X 360 EMI= $386,529.1701
Therefore, total interest paid for 30 years = $386,529.1701 - $200,000(loan) = $186,511.5686
IF REPAYMENT PERIOD IS LESS THAN 30 YEARS:
If Barry has to increase his monthly payment in accordance with his friend’s opinion by one-twelfth of the monthly payment then he will pay off the loan approx. 303 equated monthly installment, then for this scenario EMI would be $1,163.3679.
Increased EMI would be = $1,073.6432 + ($ 1,073.6432/12) = $1,163.3679
Total amount paid principal and with interest for 303 EMI OR 25.25 years = $ 1,163.3679 X 303 EMI = $352,500.4692
Therefore, total interest paid for 303 EMI or 25.25 years = $352,500.4692 - $200,000(loan) = $152,500.4692
Total interest saved by Barry if, he repay the mortgage within 25.25 years instead of 30 years are as follows:
Total interest paid for 30 years $186,511.5686
Less: Total interest paid for 25.25 years $152,500.4692
Total interest saved by Barry $ 34,011.0994
Since, Barry has to pay lesser interest of $ 34,011.0994 if, he repay the mortgage within 303 EMI or 25.25 years instead of 30 years his friend’s opinion of suggestions are true.
