Financial Analysis of Wealth Grounding and Accumulation

This assignment presents a comprehensive financial analysis, encompassing wealth grounding, investment planning, and retirement planning. It begins with an analysis of a cash flow statement and personal balance sheet, calculating and interpreting key financial ratios such as the basic liquidity ratio, debt service ratio, liquid-assets to net worth ratio, net investment assets to net worth ratio, and debt-to-asset ratio. The assignment then delves into wealth accumulation strategies, specifically investment planning, including the calculation of additional life insurance needs. Furthermore, the assignment explores retirement planning, evaluating the validity of financial statements, analyzing unit trust investments, and assessing the impact of stock options on portfolio risk. The analysis also discusses the limitations of ratio analysis and evaluates the potential gains and losses associated with call options, providing a well-rounded understanding of financial management principles.

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By student name
Professor
University
Date: 07 March 2018.
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Contents
Question No. 1: WEALTH GROUNDING – FOUNDATIONAL PART................................................................3
Question No. 2: WEALTH ACCUMULATION - INVESTMENT PLANNING.......................................................6
Question No. 3: WEALTH ACCUMULATION - RETIREMENT PLANNING........................................................7
References.................................................................................................................................................10
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Question No. 1: WEALTH GROUNDING – FOUNDATIONAL PART
a. The cash flow statement for the period 01.01.2017 to 31.12.2017 has been shown below in the
given template:
Amount ($) Amount ($)
INFLOWS
Active Income
Gross salary and bonus 60,000
(including employee CPF)
Employer CPF contribution 10,000
Passive Income
Home business 10,000
Dividend income 6,500
Interest income 3,000
89,500 89,500
OUTFLOWS
Savings 8,000
Fixed Outflows
CPF for house mortgage 20,000
Additional cash for house 6,500
mortgage
Car loan payments 4,800
Insurance premiums 5,200
Total fixed outflows 36,500
Variable Outflows
Tax 5,600
Food 6,200
Transportation 3,150
Clothing 2,450
Entertainment/vacation 4,450
Medical/dental care 1,200
Utilities/household expenses 1,000
Miscellaneous 1,450
Total variable outflow 25,500
70,000 70,000
19,500
TOTAL OUTFLOWS
NET INFLOW
TOTAL INFLOWS
Particulars
Statement of Cash Flow
As of 31 December 2017
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b. The personal balance sheet as on 31.12.2017 has been shown below in the given template:
ASSETS Amount ($) LIABILITIES & NET WORTH Amount ($)
Cash Liabilities
Current account 120,000 Credit Card balances 12,000
Savings account 8,000 Car Hire purchase 98,000
Fixed account 5,000 Mortgage loan balance 183,500
Total Cash/Cash equivalent 133,000 Total Liabilities 293,500
Invested Assets
Unit trust 68,200
CPF Savings 46,300
Total Invested Assets 114,500
Assets for Personal Use NET WORTH 214,700
Residence 112,000
Personal Property 33,500
Car 115,200
Total personal use assets 260,700
TOTAL ASSETS 508,200 TOTAL LIABILITIES & NET WORTH 508,200
Personal Balance Sheet
As at 31 Dec 2017
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c. Based on the cash flow statement and the personal balance sheet as on 31st December, 2017 as
shown above, financial ratios analysis have been computed and analysed below to know the
current financial health.
Sl. No. Financial
Ratio Benchmark/Analysis Formula Result Interpretation
1
Basic
Liquidity
Ratio
Between 3 – 6 months
would be an optimum
Monetary
Assets /
Monetary
Expenses
2.15
The basic liquidity is
below the benchmark
and it shows the
monetary assets are not
good enough to meet all
the monetary expenses
for 3-6 months.
2 Debt Service
Ratio
Below 35% to be
sufficient and above
'45% would be
considered unhealthy
Total debt
service / Net
operating
income
45%
It is just on the brink of
45% and it can be said
that the company's debt
service ratio is near to
normal and can be
considered healthy
(Choy, 2018).
3
Liquid-Assets
to Net Worth
Ratio
Minimum of 15% is
sufficient
Liquid Assets /
Net worth 62%
The ratio is 62% and it
shows that the
companyy is having
adequate liquid assets
and it is thus a positive
sign.
4
Net
Investment
Assets to Net
Worth Ratio
50% or more to be
healthy
Net
Investments
in assets / Net
worth
53%
It is over 50% and it
shows that the company
has made good
investments as a
percentage of the net
worth.
5 Debt-to-
Asset Ratio
Not more than 50% to
be safe Debt / Assets 55%
This is just above 50%
and thus it can be said
that the company is not
safe in terms of the total
debt.
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d. In case the decision is taken to purchase the car (suppose $120000) at this point of time, it will
be taken out of the liquid funds by net -36000, the fixed asset by +120000 and the debt would
increase by +84000. Therefore, the liquid assets position would be $97000 and Net Worth would
be $ 214700. The liquid assets to net worth ratio would then be 45.18% which is still above the
benchmark of 15% and would be ideal for the company but it would drop from original as there
is an increase in the proportion of the debt in the total capital (Goldmann, 2016).
Question No. 2: WEALTH ACCUMULATION - INVESTMENT PLANNING
2(c) The additional amount of life insurance required by BareBone has been shown below in the
workings.
Particulars Amount ($)
Income Needed for the family 70,000
Littlebone's University education expenses 42,000
Retirement income for his wife 180,000
Misc. needs 25,000
Total funds requirement 317,000
Savings 35,000
Investment in Shares 78,000
Life insurance Policy 50,000
Total available funds 163,000
Additional Amount of Life insurance that Barebone needs 154,000
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Question No. 3: WEALTH ACCUMULATION - RETIREMENT PLANNING
a. Debentures are secured bonds.: TRUE
In Singapore, treasury bills are discounted instruments issued by the MAS on behalf of
the Singapore government, with maturities more than a year.: TRUE
For investors to have confidence in the ratings assigned, credit rating agencies must be able
to provide ratings that are clear, credible and accurate, based on a fundamental
understanding of credit risk.: TRUE
Junk bonds are bonds of higher credit quality and they possess a higher probability of
default.: FALSE
Current yield is the most important concept of yield because it is the yield on which most
fixed income prices are based: FALSE
b. (ii) Barebone’s average cost per unit trust is 111.61, i.e. option (II) as shown below.
Year Investment Purchase price No. of units
1 1,000 120 8.33
2 1,000 100 10.00
3 1,000 118 8.47
4 1,000 97 10.31
5 1,000 130 7.69
Total 5,000 44.81
111.61Average cost per unit
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(iii) Stock given in option (I) and option (II) would reduce the overall level of risk in the current
portfolio of BareBone as the superior stock as lower beta i.e., lower risk, higher correlation
coefficient which means that all the stocks would be connected and thereby will have lower
variations among them. This would certainly decrease the level of risk and increase the returns.
c. Ratio analysis is undertaken as one of the analytical approaches to carry out the analysis and
know the financial health of the company. It gives the trend and when compared to the industry
averages, it gives the real position of the company as to what is the strength and what is the
weakness of the company. However, it also suffers from a number of limitations.
1. Historical and business conditions: It gives the historical view whereas the business is
futuristic. The business conditions of the company might have changed a lot and it does not
takes into account the same. Thus, it may give a wrong view to the company.
2. Inflation: The impact of inflation is also not taken into account in the analysis. Due to this,
the numbers might not be comparable as year on year there may be a huge price impact
which is not being captured in the ratio analysis.
3. Change in the accounting policies: It might be that the company has followed straight line
method of depreciation in one of the year’s and then the written down method of
depreciation in the other or it might be that 2 companies in comparison are using different
methods of depreciation. Thus, ratio analysis does not make the data comparable when the
base assumptions itself are different. It renders the entire analysis to be redundant and
wrong.
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d. (i) The maximum loss that BareBone could incur in case it opts for buying the call strategy option
is $ 0.30 per call option exercised i.e., the cost of the call option. This is because, the benefit in
the case of increase of the share price of DYNAMIC stock would go to the investor and in case
the share prices fall below $ 3, then the maximum loss is the cost of the call option being paid,
i.e., $ 0.3
(ii) There is no maximum limit on the gain that BareBone can have on buying the call option of
the company as the share prices of DYNAMIC stock might shoot up to any level and any price
beyond $ 3.30 would be a benefit/gain to the investor without no limits to it.
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References
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4, 103-112. Retrieved from
https://doi.org/10.1007/978-3-319-39919-5_
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