Business Finance - Desklib

This article covers topics related to Business Finance such as computation of net cash inflows, IRR, financial viability, liquidity ratio, and more. It includes solutions to questions related to investment analysis, inventory management, and share valuation. The content is suitable for students pursuing courses in finance, accounting, and business management.

BUSINESS FINANCE

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
a) Computation of net cash inflows and net present value..........................................................1
b) Determination of internal rate of return...................................................................................2
c) Analysis of financial viability of investing in the project........................................................2
d) Determining and comparing the different methods that can be account for risk while
analyzing the viability of project. ...............................................................................................2
QUESTION 2...................................................................................................................................4
a) Calculation of average operating cycle in days and how this measure is put to use ..............4
b) Calculation and interpretation of current and acid test ratio...................................................5
c) Evaluating the different types of risk & cost that can be reduced inventory level..................6
QUESTION 3...................................................................................................................................6
a) Calculating the theoretical ex right price of an ordinary share in Mainsbury PLC.................6
New share price = 54*65% = 35.1...............................................................................................7
b) Calculate the value of the rights associated with holding shares in Mainsbury PLC..............7
c) Evaluating each of the option available to investor.................................................................7
d) comparing and contrasting the various options available to business.....................................8
QUESTION 4...................................................................................................................................8
a) Calculating the ratios for Crusher PLC ...................................................................................8
b) Analysing the financial position of the Crusher PLC ...........................................................13
REFERENCES..............................................................................................................................15

QUESTION 1
a) a) Computation of net cash
inflows and net present value
Particulars Year 2011 Year 2012 Year 2013 Year 2014 Year 2015
Sales (no. of units * rate) (In£) 3600000 4275000 5625000 4050000 2700000
Less: expenses (in£)
Variable labor cost 375 375 375 375 375
Variable material cost 250 250 250 250 250
Lease 550000 550000 550000 550000 550000
Administrative cost 600000 600000 600000 600000 600000
Total expenses 1150625 1150625 1150625 1150625 1150625
Less: Depreciation 500000 500000 500000 500000 500000
Earning before interest and tax 1949375 2624375 3974375 2399375 1049375
Less: Interest 0 0 0 0 0
Earning before tax 1949375 2624375 3974375 2399375 1049375
Less: Tax 0 0 0 0 0
Earning after tax 1949375 2624375 3974375 2399375 1049375
Add: Depreciation 500000 500000 500000 500000 500000
Net cash inflows 2449375 3124375 4474375 2899375 1549375
Year Net cash
inflows
Present
value
factor
Discounted
cash inflows
2011 2449375 0.926 2267939.815
2012 3124375 0.857 2678647.977
2013 4474375 0.794 3551903.133
2014 2899375 0.735 2131127.179
2015 1549375 0.681 1054478.591

Total of present value factor & discounted
cash inflows
14496875 11684096.7
Computation of Net present value
Total discounted cash
inflows 11684096.7
Less: Initial investment 2500000

Net present value 9184096.695
b) Determination of internal rate of return.
Computation of IRR:
IRR
Year Cash inflows
0 -2500000
2011 2449375
2012 3124375
2013 4474375
2014 2899375
2015 1549375
Total of IRR 112%
c) Analysis of financial viability of investing in the project.
The outcome derived by the net present value and internal rate of return are viable as the
NPV derive is 9184096.695 and IRR comes out to be 112%. So, the company should invest in
this project.
d) Determining and comparing the different methods that can be account for risk while analysing
the viability of project.
Internal rate of return: This aid investors in calculating and knowing the profitability of their
investments made. However, IRR function can be determined by using excel tool or
financial calculator. The ideal internal rate of return for a project ought to greater than cost
of capital required in the project. The source person who are thinking to maximize the
potential of capital invested need to vantage the IRR (Alles and et.al., 2021). However, this
rate is formed to make NPV of all cash inflows and outflows in a project equal to Zero.
Subsequently, companies should not rely wholly on internal rate of return while calculating
the viability of project and should use another budgeting method. Hence, it is proved that
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none method in capital budgeting can work solely, they have to involve one or the other
option with them.
Net present value: This method is used primarily for financial analysis in determining the
feasibility of investment in a business. Further, they are calculated by deducting net inflow
of money from project with capital invested. Hence, the value of NPV can be computed in
both positive and negative earnings generated by using investment that will transcend the
expected cost of a plan. Consequently, unlike other capital budgeting methods net present
value chronicle for the time value of money so inflation and opportunity cost are not
ignored (Nukala and Rao, 2021). To achieve rate of return expected for investment option,
NPV formula identifies a discounted rate based on the cost of financing. Further, this
method factors in the risk of long term investment and also the formula is well-established
and effective. Accounting for unexpected expenses becomes quiet difficult when making
budget for capital investment, so it turned necessary to consider pay back period prosody
and IRR as alternative.
Accounting rate of return: ARR is also popularly known as the average rate of return which
measures the foreseen gain from any capital invested. This method is calculated by dividing
net income generated through investment by the total amount already infused in the project.
Moreover, accounting rate of return is a useful metric for speedily computing the
lucrativeness of a company, and widely used to examine the occurrence rate of investment
that features multiple projects (Idehen, 2021). However, this method also faces various
drawbacks like it doesn't account for the time value money and along-with lack of
acknowledging cash flows. In disparity to these disadvantages ARR is also useful for
providing a clear picture and idea of expected return on investments. This method
acknowledges depreciation, and earnings after tax, making it effective for making it as a
standard to business current performance.
Pay back period: It is a unique method of capital budgeting. This is a financial investing tool
that defines the period required to earn back the money invested in a project. The price to
earning payback period widely utilized to realize how risky an investment opportunity can
be. Therefore, stated method helps in limiting the peril related with costly projects (Payback
Period, 2021). Pay back period is integral component that is proved to be useful for firms
that are focusing on smaller investments, as they usually don't involve convoluted figures.
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Although, with many merits it also suffers with some demerits like, this method don't
account for the time value money, financing concerns, opportunity cost, etc. in investment.
So any particular method always needs an aid of different other options for the cash flows
and capital assets to ensure their profitability in long run. This, way firm can take full
advantage of capital budgeting.
QUESTION 2
(a) Calculation of average operating cycle in days and how this measure is put to use
Particulars Formula Amount
Operating cycle:
COGS 5106
Average inventory 2648
Sales 8649
Average account
receivable
1428
Inventory turnover Inventory
turnover=
(COGS /Average
inventory)
1.93
Accounts
receivable turnover
Accounts
receivable
turnover=(Net sales
/ Average account
receivable)
6.06
Inventory period Inventory period=
(365/ Inventory
turnover)
189.29
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Accounts
receivable period
Accounts
receivable period=
(365/ Accounts
receivable
turnover)
60.26
Operating cycle Operating cycle=
(Inventory period +
Accounts
receivable period)
249.55
Operating cycle aid in determining the no. of days required for a business by receiving and
selling inventory with collection of cash from such trading. A shorter cycle indicates that
company is able to retrieve its investment quickly and have enough cash to meet obligations.
b) Calculation and interpretation of current and acid test ratio.
Particulars Formulas Amount
Liquidity ratio
Current assets 4076
Current liabilities 2933
Inventories 2648
Quick asset 1428
Current ratio (Current ratio= Current Asset / 1.39
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Current Liabilities)
Liquid ratio (Liquid ratio= Quick Asset /
Current Liabilities)
0.49
Interpretation:
Current ratio:
By comparing the derived outcome, accountant has come to a solution that company is
having £1.39 of current assets for each £1 current liabilities. It suggests that firm is having
enough cash to pay the debts but not too much finance is employed which could be reinvested or
distributed to shareholders. The entity can improve the ratio by paying off its current liabilities,
unproductive assets, etc.
Liquid ratio:
After evaluation of quick ratio it has been articulated that entity is having £0.49 quick
assets for £1 current liabilities which reflects that company is not having enough cash to pay off
its debts. Good acid test ratio always attracts and maintains credibility power. So, firm can
improve this by increasing sales, inventory turnover, pay off liabilities as early as possible, etc.
c) Evaluating the different types of risk & cost that can be reduced inventory level
There are variety of risk that required to be emphasized in order to decline inventory.
These comprises inaccurate forecasting, unreliable suppliers, shelf, theft, loss, damage, life
cycle, etc. that can result in reduced level of inventory. There are various expenses that results in
declined extent of stock which required to be emphasized by organization in turn better ability to
meet market forces can be established (Gasparyan and et.al., 2021). In addition to this, the
manager of company should focus on each and every segment related with stock level so that
better productivity by company can be established in turn higher sustainability can be obtained.
Inventory service cost, storage space, risk cost, etc are comprised as result of organizational
declined & inclined inventory level. In addition to this, concentrating on mentioned course of
expenses can lead to such activities that become cause of reduced inventory level. Purchasing,
taxes, labour, obsolescence, insurance, security, transportation, etc are some other types of
expenses that are comprised as the processing of declining inventories. The manager of company
should focus on these risk & cost for accomplishing the objective of particular proposed plan.
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These mentioned action can be taken into consideration by organization for the purpose of
having proposed action level.
QUESTION 3
a) Calculating the theoretical ex right price of an ordinary share in Mainsbury PLC.
Theoretical ex right price = (new share price * issue price+ old shares * market price)/ (New
shares+ old shares)
= (600* 54+3600*35.1)/ (600+3600)
= 158760/4200
= 37.8
Working note:
share market price= 972/18 = 54
Number of shares (Old) = 720/0.20 = 360
New share price = 54*65% = 35.1
New number of shares = 360/6 = 600
b) Calculate the value of the rights associated with holding shares in Mainsbury PLC
Market value of each share= 54
Price to be paid for getting one share in company= 35.1
Value of rights associated with holdings = (Number of right issue / Total holdings )* (Market
value – issue price)
= (600/4200) * (54-35.1)
= 0.142*18.9
= 2.68
c) Evaluating each of the option available to investor
 Right issue for investor
Investor portfolio value = 10,000* 54 = 540000
Number of right shares to be received= (10000/6) = 1667
Price paid to buy right shares= 1667* 35.1 = 58511.7
Total number of shares after practicing the right share = 10000+1667= 11667
Revised value of shares after exercising right issue = 540000+ 58511.7 = 598511.7
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Price of shares post right issue= 598511.7/ 11667 = 51.29
According to this, the obtained share price if goes up then investor will be benefit & in
case of decline he will face loss.
 Selling rights of shares
= (new share price * issue price+ old shares * market price)/ (New shares+ old shares)
= (35.1* 51.29 +10000 *54)/ (10000+1667)
=541800.279/ 11667
=46.43
 Right to lapse calculations
The right to entitlement price= Share current price- price after right issue
= 54- 35.1
= 18.9
From the evaluation it can be interpreted to that investor will be benefited if it will go
with option of right issue for the shares so that its objective of obtaining higher profitability can
be attained. The reason behind particular suggestion is that value of shares is comparatively less
as as compared to right issue option.
d) comparing and contrasting the various options available to business
There are several options for accomplishing the objective of company rather than debt
obtain which can enable organization to have various advantages. It compromises raising
internally and externally for meeting the business objectives rather than using debt option. It
includes equity funding, retained earnings, venture capital, using angle investors, crowdfunding,
government grants, etc.
Debt option for obtaining the funds can provide certain disadvantages to organization
rather than mentioned course such as equity raising funds (Hein and et.al., 2019). In equity firm
can opportunity to pay dividend after accomplishing all other obligations. In addition to this,
venture capitalist & using angel investors can be beneficial for the firm by providing certain like
managing risk, large capitals, experienced leadership, etc allow the organization to have better
sustainability & processing. Retained earning can be more beneficial for the company to avoid
interference of other parties as compared to debt raising.
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QUESTION 4
a) Calculating the ratios for Crusher PLC
I. Return on capital employed Ratio
Particulars Formula 2019 2020
Operating profit 3751 3453
Total Assets-total
liabilities
14393-
4,331
=10062
23115-11621=
11494
Return on capital
employed Ratio
Operating
profit/(Tot
al Assets-
total
liabilities )
*100
37.28
%
30.04%
ii. Return on ordinary shareholder funds ratio
Particulars Formula 2019 2020
Profit for the year 2809 2332
Shareholders equity 10062 11494
Return on ordinary
shareholder funds
ratio
Profit for
the
year
/Sharehol
ders
equity
0.279169
1513
0.2028884635
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iii. Gross profit margin
Particulars Formula 2019 2020
Gross profit 7540 8710
Sales turnover 17640 25690
Gross profit
margin
Gross
profit
/Sales
turnover*
100
42.74% 33.90%
iv. Operating profit margin
Particulars Formula 2019 2020
Operating profit 3751 3453
Sales turnover 17640 25690
Operating profit
margin
Operating
profit/Sales
turnover*10
0
21.26% 13.44%
v. Inventories turnover period
Particulars Formula 2019 2020
COGS 17640 25690
Inventories 1840 3934
Inventories
turnover period
ratio
COGS/
Inventories
9.58695652
17
6.5302491103
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vi. Settlement period for trade receivables
Particulars Formula 2019 2020
Trade
Receivables
1011 2190
Sales
turnover/Sales
turnover*365
17640 25690
Trade receivable
collection period
Trade
Receivables
/
20.919217
6871
31.1152199299
vii. Settlement period for trade payable ratio
Particulars Formula 2019 2020
Trade Payables 1605 3598
COGS 17640 25690
Trade payable
period ratio
Trade
Payables/CO
GS*365
33.21003
40136
51.1198910082
viii. Current ratio
Particular
s
Formula 2019 2020
Current
Assets
3273 6235
Current
Liabilities
4331 8846
Current
ratio.
Current
Assets/Current
0.7557146 0.704838345
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Liabilities 156
ix. Acid test ratio
Particular
s
Formula 2019 2020
Quick
assets
Current Assets -
Inventories
3273-
1840=143
3
6235-3934=
2301
Current
Liabilities
4331 8846
Acid test
ratio
Quick assets/Current
Liabilities
0.3308704
687
0.2601175673
x. Gearing ratio
Particulars Formula 2019 2020
Total Debt 4331 11621
Total equity 10062 11494
Gearing ratio Total Debt/Total
equity
0.430431
3258
1.0110492431
xi. Interest cover ratio
Particulars Formula 2019 2020
Net profit 2809 2332
Interest
Payable
- 344
Interest
cover
Net profit /Interest - 6.7790697674
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ratio Payable
xii. Earnings per share Ratio
Particulars Formula 2019 2020
Net income –
Dividend paid
4331000-
800000
= 3531000
11621000-
900000
= 10721000
Number of shares 16000 16000
Earnings per
share ratio
(Net income –
Dividend
paid)/Number of
shares
220.6875 670.0625
xiii. Dividend cover ratio
Particulars Formula 2019 2020
Earnings per
share.
1748.8855869
242
5307.42574257
43
Divided pers
share
50 56.25
Dividend cover
ratio
Earnings per
share/Divided per
share
34.977711738
5
94.3542354235
b) Analysing the financial position of the Crusher PLC
 From the evaluation of above calculated ratio regarding the return on capital employed it
can be articulated that in the year 2019 & 2020 the obtained outcome is 37.28% and
30.40%. which is in declining trend. It is negative indication of organizational
performance.
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 Return on equity ratio of Crusher PLC is in downward sloping movement that can create
dissatisfaction among shareholders due to improper performance of mentioned company
that is has decreased from 2019 to 2020 from 0.2792 to 0.2029.
 Gross profit helps in analyzing the how effectively company can decrease its COGS to
generate profitability (Cooley and Hansen, 2021). In 2019 & 2020 the derived GPR is
42.74 and 33.90% that is negative sign for financial health of ionization as its in
decreasing pattern.
 Operating profit ratio of company has drastically fallen in 2020 as compared to 2019
which is reflecting poor financial performance of company. It has decreased from 21.26
to 13.44 which requires improvement (Pedersen, Ritterand Di Benedetto, 2020).
 Inventory turnover period has lessened as compared to earlier year that is positive sign
for increasing sales as stocks replacing time has reached 6.53 from 9.58 times that is
showing good liquidity (Oktalina, 2020).
 Trade receivable collection period has increased from 2019 to 2020 by 20.91 to 31.11
days. From the analysis it can be said that liquidity of organization is in decreasing
pattern.
 Trade payable ratio has move upward direction that is favorable as it can enable
enterprise to have sufficient time to meet its operational practices. In 2019 & 2020 firm
takes 33.21 to 51.11 days.
 Current ratio shows how effectively firm meet its short term liabilities with its current
assets. In 2019 & 2020 it has CR of 0.75 and 0.70 respectively that is lower than ideal
ratio which less between 1.2 to 1.5 times.
 Quick ratio of Crusher PLC is 0.33 to 0.26 for 2019 and 2020 respectively that is
showing decreased efficiency of meeting short term liabilities with cash & equivalent
assets.
 Gearing ratio is associated with measuring risk and from assessment it can be articulated
that it has inclined from 0.43 & 1.01 respectively that can make investors uninterested in
firms practices.
 Interest coverage ratio in 2020 is 6.77 & 2019 si nil which si showing firm has enough
liquidity to meet its short term liability.
15

 Earnings per share & dividend coverage ratio are in upward moving direction that is
positive sign for organizations financial performance.
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REFERENCES
Books and Journals
Alles, L. and et.al., 2021. An investigation of the usage of capital budgeting techniques by small
and medium enterprises. Quality & Quantity. 55(3). pp. 993-1006.
Cooley, T. F. and Hansen, G. D., 2021. 7 Money and the Business Cycle. In Frontiers of business
cycle research (pp. 175-216). Princeton University Press.
Gasparyan, S. B. And et.al., 2021. Adjusted win ratio with stratification: calculation methods and
interpretation. Statistical Methods in Medical Research, 30(2), pp.580-611.
Hein, A. amnd et.al., 2019. Value co-creation practices in business-to-business platform
ecosystems. Electronic Markets. 29(3). pp.503-518.
Idehen, A. V., 2021. Capital investment decisions of small and medium enterprises in Benin-City,
Nigeria. International Journal of Research in Business and Social Science
(2147-4478). 10(3). pp. 101-108.
Nukala, V. B. and Rao, S. P., 2021. Role of debt-to-equity ratio in project investment valuation,
assessing risk and return in capital markets. Future Business Journal. 7(1).
pp. 1-23.
Oktalina, G., 2020. Analysis of Regional Financial Performance through the Independence Ratio,
Effectiveness Ratio, and Growth Ratio in the District South
Bangka. International Journal of Finance Research. 1(2). pp.60-73.
Pedersen, C. L., Ritter, T. and Di Benedetto, C. A., 2020. Managing through a crisis: Managerial
implications for business-to-business firms. Industrial Marketing
Management. 88. p.314.
Online
Payback Period. 2021. [ONLINE]. Available through:<https://xplaind.com/849768/payback-
period>
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