Financial Management | Assignment-1

Running Head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Answer to question 1...........................................................................................................2
Answer to question 2...........................................................................................................2
Answer to question 3...........................................................................................................3
Answer to question 4...........................................................................................................3
Answer to question 5...........................................................................................................3
Answer to question 6...........................................................................................................4
Answer to question 7...........................................................................................................6
Answer to question 8...........................................................................................................7
Reference list.......................................................................................................................8

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Answer to question 1
Ratio analysis is important for the evaluation of the financial performance of the firm by
analyzing the risk, profitability, solvency and efficiency. It helps to compare the trend of one
company with the other. Ratio analysis helps to interpret the financial statement to prepare data
which is essential for both the internal and external stakeholders of the firm. Stakeholders uses
this ratio to calculate the return they are going to get form their investment in the company while
creditors uses this ratio to ensure themselves that they are going to get their payment on due date
(Shapiro and Hanouna 2019).
Answer to question 2
I. Future value = present value (1+ r)^n
= $7000(1+0.10) ^5
= $ 11273.57
II. Time value of money is a concept or idea which shows that the present value of the
money available is worth more in the future of the same value as it has more earning
capacity. This concept says that the money provided will earn interest and will be worth
more in the future. This concept is also known as the present discounted value.

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Answer to question 3
year cash inflow cumulative cah inflow
1 25000 25000
2 25000 50000
3 25000 75000 initial invetsment = 150000
4 25000 100000 payback period = 9 year
5 10000 110000
6 10000 120000
7 10000 130000
8 10000 140000
9 10000 150000
10 10000 160000
Answer to question 4
total gross sales 100000
less:cash sales 20000
less: return 7000
net credit sales 73000
Account Receivable Turnover = net credit sales/account receivable
6.636363636
Average collection Period Ratio = account receivable/(net sales/365)
43.17204301
Answer to question 5
(a)
SOURCE AMOUNT PROPORTION COST WEIGHT
Debentures 300000 0.14 0.07 0.01
Prefernce 100000 0.05 0.09 0.004286
Equity 1500000 0.71 0.15 0.107143
Debt 200000 0.10 0.10 0.009524
2100000 0.130952
Weighted avergae cost of capital
under book vale weight
WACC under Book value weight = 13.09%

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(b)
SOURCE AMOUNT PROPORTION COST WEIGHT
Debentures 330000 0.14 0.07 0.009957
Prefernce 110000 0.05 0.09 0.004267
Equity 1700000 0.73 0.15 0.109914
Debt 180000 0.08 0.10 0.007759
2320000 0.131897
Weighted avergae cost of capital
under market value weight
WACC under market value weight = 13.18%
(c) The factors that affect the cost of capital are as follows:
 Current economic condition
 Current capital structure
 Current dividend policy
 Getting of new fund
 Financial and investment decisions
 Current income tax rates
 Breakpoint of marginal cost of capital
Answer to question 6
(a)

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project M
Initial invetsement $100,000 year 1 2 3 4 5
Annual cah inflow 10000 15000 20000 25000 30000
Interest rate 10%
NPV $72,216.88
Profitability Index 0.72216875
Project N
Initial invetsement $100,000 year 1 2 3 4 5
Annual cah inflow 25000 25000 25000 25000 25000
Interest rate 10%
NPV $94,769.67
Profitability Index 0.94769669
Project N is recommended based on both the method as the NPV and PI is more in the Project N
than the project M
(b) The key decisions a finance manager has to take in an organization are as follows:
 Investment decision – This relates to the careful selection of assets on which
funds of the firm is to be invested. There are many options for investment but
without selecting the proper investment, the firm will not get the maximum
benefit. So, it is the job of the finance manager for proper selection of
investment.
 Financing decision – This is an important decision that the finance manager has
to take which is related to the source of finance. A firm raises fund with the help
of the finance manager decision relating to how much to raise, from where to
raise and how to raise (Pandey 2015).
 Dividend decision – This decision is related to the distribution of dividend where
the profit of the firm is distributed among the shareholders. Profit is distributed to

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the shareholders or retained with the firm. Here fiancé manager decides how
much to be distributed and how much to be kept in retained earnings.
Answer to question 7
(a) Risk- return trade off state that there is higher risk with the high return and lower risk
with the small return. This is the situation where investor faces the trade off between risk
and return while considering the investment which is known as the risk and return trade
off. With the help of this, investors take decision whether to invest money for high return
which is associated with the high possibility of loss (Karadag 2015).
(b) Cash is king is a term which is used to say that the cash is more valuable than any other
form of investment. This term is used when the prices in the security market are high and
investors takes decision of saving their cash for later period to invest in cheaper source.
Investor goes for short-term debt rather than buying high priced securities.
(c) Incremental cash flow count is the additional cash flow from operation that an
organization incurs for taking new projects. Positive incremental cash flow shows that an
organization is going to increase its cash flow by engaging in the new project. It shows
the indication that the organization is investing in right project (Mien and Thao 2015).
(d) Agency problem is the conflict of interest in relationship where one party act for the best
interest of another party. It is a conflict which usually arises between the company
management and shareholders. Here manager act as an agent between the company and
the shareholders to minimize the conflict and maximize the companies wealth.
(e) Ethic is important in every filed as it is assumed to be of great importance especially in
finance. Finance is related to the daily lives whether it is finance for buying daily items or

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making investment. Ethics consist of truthfulness, honesty, fairness, justice and integrity
which helps to maintain the stability and also helps to resolve the conflicts.
(f) Efficient capital market is the market where securities prices revels all the information
which are available with the securities. It has been developed when the securities are of
low cost information and having an active securities. It helps the firm to raise capital as
the price is determined by the market (Zietlow et al., 2018)
Answer to question 8
Taxable income 601,500.00$
less: Tax @ 33% 198,495.00$
Net income( excluding surcharge) 403,005.00$
surcharge @ 2% 3,969.90$
Total tax liability 202,464.90$
Calculation for tax liability

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Reference list
Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A
strategic management approach. EMAJ: Emerging Markets Journal, 5(1), pp.26-40.
Mien, N.T.N. and Thao, T.P., 2015. Factors affecting personal financial management behaviors:
evidence from vietnam. In Proceedings of the Second Asia-Pacific Conference on Global
Business, Economics, Finance and Social Sciences (AP15Vietnam Conference), 10-12/07/2015.
Ogiela, L., 2015. Intelligent techniques for secure financial management in cloud
computing. Electronic commerce research and applications, 14(6), pp.456-464.
Pandey, I.M., 2015. Essentials of Financial Management, 4th Edtion. Vikas publishing house.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. Wiley.
Zietlow, J., Hankin, J.A., Seidner, A. and O'Brien, T., 2018. Financial management for nonprofit
organizations: policies and practices. John Wiley & Sons.