Financial Management: Tax Liabilities, Risk & Return, Financial Statements

FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1....................................................................................................................................3
Question 2 ...................................................................................................................................4
Question 3 ...................................................................................................................................6
Question 4 ...................................................................................................................................8
Question 5 .................................................................................................................................13
Question 6 .................................................................................................................................14
Question 7 .................................................................................................................................17
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
The term financial management can be defined as a systematic process of planning,
organising and controlling the monetary activities in an effective manner (Finkler, Smith and
Calabrese, 2018). This management of financial aspects is essential for companies in order to
make better utilisation of resources. The aim of project report is to demonstrate understanding
about different terms of finance. The project report covers about tax liabilities, risk & return,
preparation of financial statements. The further part of project report concludes about different
kinds of ratios and financial planning. In the end part of report, role of capital-budgeting
technique for choosing projects is covered.
MAIN BODY
Question 1.
(A) Taxable liability:
Earnings ×
Marginal Tax
Rate = Taxes
50000 × 15.00% = 7500
25000 × 25.00% = 6250
626500 × 34.00% = 213010
226760
Add: Additional Surtax
[5% on income between $100,000
and $335,000]
235000 x 5.00% = 11750
Total Tax Liability = 238510
(B) ‘Taxes are a fact of life, and businesses, like individuals, must pay taxes on Income’ –
Elucidate.

The taxes play a crucial role in aspect of development of a nation. It is so because if a
country's total taxable income is lower then this can be difficult to develop various aspects of
environment due to lack of funds (Horton and Farnham, 2015). On the other hand, if in a nation
taxable income is higher then there will be more chances of development. Thus, it is important
for businesses and individuals to pay tax on time on generated amount of expenditures.
Question 2 .
(A)
Expected return= P*R
Herein,
P= Probability
R= Return on probability
Return on common stock A:
Expected return= (0.30*0.12)+ (0.40*0.16)+ (0.30+0.18)
= 0.036+0.064+0.054
0.154 or 15.4%
Return on common stock B:
Expected return= (0.20*0.15)+ (0.30*0.06)+ (0.30*0.13)+ (0.20*0.21)
= 0.03+0.018+0.039+0.042
=0.129 or 12.9%
Standard deviation ^ 2 = summation of P(r-R)^2
For common stock A
Probability r r-R (r-R)^2 P(r-R)^2
0.3 0.12 -0.03 0.0009 0.00027
0.4 0.16 0.01 0.0001 0.00004
0.3 0.18 0.03 0.0009 0.00027
0.00058
Thus,
Expected return= 15.4%

Standard deviation= 0.058%
For common stock B
Probability r r-R (r-R)^2 P(r-R)^2
0.2 0.15 0.021 0.000441 0.0000882
0.3 0.06 -0.069 0.004761 0.0014283
0.3 0.13 0.001 0.000001 0.0000003
0.2 0.21 0.081 0.006561 0.0013122
0.002829
Thus,
Expected return= 12.9%
Standard deviation= 0.2829%
So, stock A should be preferred because of higher expected return.
(B) ‘Understanding the relationship between risk and return and how it’s affected by time is
probably one of the most important aspects of investment’ – Discuss.
(I) Different types of risks: The term risk can be defined as a possibility of loss on
investment made by companies into different types of projects. There are different types of risks
and some of them are mentioned below that are as follows:
 Business risk- It can be defined as a kinds of risk that is related with business entities.
This occurs due to different factors such as competition, customers preference and many
more.
 Volatility risk- It can be defined as a kinds of risk in which a portfolio can face changes
in value because of variation in prices (Renz and Herman, 2016).
 Inflation risk- This is also known as purchasing power risk. It can be defined as a kinds of
risk in which cash from investment will not be useful because of inflation in purchasing
power.
 Market risk- It can be defined as a kinds of risk which is faced by companies due to
different types of factors such as change in interest rate, currency risk and many more.
(ii) Diversification reduces risk

In the aspect of minimising risk, term diversification plays a significant role. This is so
because under it, different types of investments are allocated into various financial instruments
(Mitchell, 2017). Basically, the main objective of this approach is to maximise returns by making
investments into various kinds of areas.
(iii) Common measures of risk
There are basically, five risk measures which provides a better way to assess risk in
investments. Description of these risks is mentioned below in such manner:
 Alpha- It measures risk regards to market or a particular benchmark index. In the case
when funds exceed the benchmark then it is considered as a positive alpha (Bryce,
2017). On the other hand, if funds fall below the benchmark then it is assigned that alpha
is negative.
 Beta- It measures the systematic risk of funds as compare to benchmark index. Under
this, if betas are below one then volatile considers as below then benchmark. On the other
hand, betas over one are considered more volatile compare to benchmark.
 R- Squared- It measures the percentage of a particular investment movement which is
attributable to variation in its benchmark index. Basically, it shows the correlation
between evaluated investment and its benchmark.
 Standard deviation- It can be defined as a way of measuring data dispersion in related to
value of data (McKinney, 2015).
 Sharpe ratio- It measures performance as per the associated risks. This is being done by
abstracting the rate of return on a risk free investment.
Question 3
(A)Income Statement for the year ended December 31, 2018
Particulars Amount
sales 123000
Less: Cost of Sales
62000
Add: Closing Stock 82000