CvLTAELG1AAv7GMjp8RSaPGsvS8 ACC501 Assignment no 01 Spring 2013 idea Solution required |
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ACC501 Assignment no 01 Spring 2013 Solution required

  SEMESTER SPRING 2013 BUSINESS FINANCE                                            (ACC501) ASSIGNMENT NO. 01 DUE DATE:                                                           2nd MAY 2013 MARKS:                                                                  20 Topic:                                                                      Ratio Analysis Learning objectives:   After attempting this assignment, the student would be able to:

  1. calculate and interpret different financial ratios.
  2. understand how the decisions may affect liquidity position of a company.

Assignment:   ABC Company is engaged in manufacturing of electronic products since many years. It is listed at Regional Stock Exchange (RSE) and its shares are traded at Rs. 37 each currently. Capital structure of electronics industry is highly relying on debt. So, the industry average for debt to equity ratio is 60:40. Following financial statements relate to ABC:

ABC Company

Balance Sheet

As on December 31, 2012

Assets

Rs. In

Liabilities & Owner’s Equity

Rs. In

Millions

Millions

Current Assets Current Liabilities
Cash

60

Accounts Payable

375

Accounts Receivable

50

Notes Payable

300

Inventory

450

Total Current Liabilities

675

Total Current Assets

560

Long-term Debt

545

Stockholders’ Equity
Fixed Assets Common    Stock    and    Paid-in-

535

surplus
Plant and Equipment

2,980

Retained Earning

1,785

(Net)
Total Stockholders’ Equity

2,320

Total Assets

3,540

Total Liabilities & Equity

3,540

 

ABC CompanyIncome Statement For the year ended 31st December, 2012

Particular

Rs. In

millions

Net Sales

2,450

Cost of Goods Sold

(1,400)

Depreciation

(270)

Earnings before interest and taxes (EBIT)

780

Interest

(145)

Taxable Income

635

Taxes

(216)

Net Income

419

Dividends (40% of Net Income)

167.6

Retained Earnings

251.4

Additional information:  v Management of the company is planning to take loan of Rs. 51 million from a local financial institution to purchase new plant for expansion in its existing plant. v A & N Company – a buyer of ABC Company has recently made an agreement to purchase electronic products for Rs. 20 million on credit basis. The inventory for this deal will cost Rs. 11 million for ABC Company. v Share price of the company will be increased by Rs. 3 owing to good expectations perceived by stock market investors.   Required   1.   Compute current ratio of ABC Company before and after the credit sales have been

made to A & N Co. (3+4=7 Marks)

2.

Analyze how the liquidity position of ABC Company will be affected after making
credit sales to A&N Co. (3 Marks)

3.

Calculate   Debt-Equity   Ratio   of   ABC   Company   before   and   after   taking   loan.
(3+4=7 Marks)
  1. Comment on as how the change in Debt to Equity Ratio would affect the decision of the financial institution if the company requests for a further loan. (3 Marks)

 

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REFERENCING GUIDELINES:

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4 comments

  1. Saneha Princess

    Answer of Question 1:-

    Compute current ratio of ABC Company before and after the credit sales have been
    made to A & N Co.

    As we know the formula

    Current Ratio = Current Asset / Current Liabilities
    =560/675
    =0.83 times
    Abc company has $0.83 in current asset for every $1 liabilities or
    Abc Company has its current liabilities covered 0.83 time less.
    After credit sale made
    Credit sale “20” million will add in account receivable
    Account receivable will rise from 50+20 (credit sale)
    Account receivable =50+20=70
    11 million will go in inventory account
    Which is 450+11=461million

    Debt equity ratio = total debts/total equity =34% / 66% = 0.515

  2. Comment on as how the change in Debt to Equity Ratio would affect the decision of
    the financial institution if the company requests for a further loan.

    Answer:

    * In this Company’s case we come to know about its Balance Sheet shows that its Current Ratio and Liquidity Position is not so good. Because its current ratio is less than 1 which is 0.83: 1 before sale and after sale it goes onto 0.84 : 1 still less than 1.
    * On the other hand we have the company’s Liquidity Position, which is also not satisfactory because it also less than 1.
    * Now the question of Further Loan; the Financial Institution will give them more loan because the company’s Debt- Equity Ratio is good.
    * Because the Debt- Equity Ratio is 60 : 40. Means in any company the Financial Institution invest 60% of cash and the rest 40% invested by the company.
    * The company should less its Inventory and try to sale more of it.

  3. Saneha Princess

    Question No 03 Answer:-

    As we know that
    Debt Equity Ratio = Total Debt/ Total Equity
    Debt-Equity ratio before loan:
    a) Total Debt Ratio = Total Assets- Total equity / Total Assets
    = 3540 – 2320 / 3540
    = 0.344%
    100% – 34.4% = 65.6%
    Total Debts = 34.4%
    Total equity = 65.6%
    Debt-equity ratio = Total Debts / Total Equity
    = 34.4% / 65.6%
    = 0.524 time
    Debt-Equity ratio after loan:
    b) Total Debt ratio = total Assets – total equity / total Assets
    = (3540+51) – (2320+51) / (3540+51) 3591-2371/3591
    = 3591 – 2371 / 3591
    = 1220 / 3591
    = 0.339 times
    100% – 33.9% = 66.1%
    Total Debts = 33.9%
    Total equity = 66.1%
    Debt-equity ratio = total debts / total equity
    = 33.9% / 66.1%
    = 0.512 times

  4. where is requirment no. 2 solution ????

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