Business Finance: Ratios, Cash Conversion Cycle, Risk and Return Trade-off, Credit Monitoring, Agency Problem and Shareholder Activism

RUNNING HEAD: BUSINESS FINANCE
Finance

Business finance 2
Section A
Question 1
a) Following are the ratios calculated for JG Corporations
2016 2017
Earnings per share (EPS) 1.50 1.64
Price / Earnings (P/E) ratio 16.67 17.11
Book value per share (BV) 20.00 20.91
Market / Book (M/B) ratio 1.25 1.34
b) Comment on the firm’s performance
Based on the calculation done in part a, it can be said that JG has performed well in 2017. An
increasing trend is been notice in all the market value ratios calculated. Taking about EPS, it
has been increased over the year to 1.64 cents from 1.50 cents. This is due to the increase in
the earnings of the company as well as in its number of shares. It implies that company has
made more earnings for its shareholders. The P/E ratio of JG has also increased in year 2017
due to the upsurge in market price of the share and EPS. Along with this, M/B ratio and book
value ratio also rises in the same year. Increase in all these indicates that the profitability
position of JG has improved along with its performance (Weil, Schipper and Francis, 2013).
c) Total asset turnover ratio
TATR is basically a financial ratio which is used for measuring the efficiency of a firm in
respect of generating revenue from its assets. It shows how well a company manages its
assets so that more revenue can be generated. So it is very important for the company to
always improve its TATR because a high turnover ratio will reflect better position of the

Business finance 3
business. Also it gives insights to the investors and creditors about the internal management
of the firm. Thus, value of total asset turnover ratio do helps the firm in managing its
activities and resources (Bragg, 2012).
Question 2
a) The Cash Conversion cycle of the firm is 45 days. Following are the ways of reducing
the conversion cycle:
 Reducing the inventory days can help in reducing the CCC. By using
Inventory optimization technologies, a firm can improve and manage its
inventory so that less amount of cash will get tied up in them (Platt, 2010).
 Increasing the payment period also reduces the CCC. Having a longer debt
repayment period will allow the firm to have more cash in hand (Ehrhardt and
Brigham, 2016).
b) (ii) The cost of giving up the cash discount for supplier A is 29.80% and for supplier
B is 9.22%. The decision regarding taking or giving up the cash discount is directly
depends upon the firm’s cost of borrowing. The company’s cost of borrowing from
the bank is 12% which is less very much less than cost of giving up the cash discount
with supplier A. So the firm should take the cash discount from supplier A. talking
about supplier B, the company should give up the cash discount because the cost of
this action is 9.22% which is less than the cost of borrowing (Reider and Heyler,
2003).
c) Risk and return trade-off is basically a principle which states that the potential return
rises with the increase in the risk. They mainly include the risk of illiquidity which
every firm wants to avoid by investing in large cash and marketable securities.
Investments in them will give more returns as compare to other investments.
However, huge funding in these assets will reduce the return on the investments.