Hi there,

I need to answer question question three. I have completed part1 but haven't done part 2,3 and 4 for question 3: Financial statement analysis

below i have attached my work which you will need to refer to Question 3 part 1 to answer the second part of question 3. Part 3 and 4 for question 3 are totally different.

NO PLAGIRISM PLEASE and also try keep the word count low as possible

Thanks

Assignment #1 1396167 Rushabh Patel Table of Contents Question 1 (A).................................................................................................................................1 i)................................................................................................................................................................... 1 ii).................................................................................................................................................................. 1 iii)................................................................................................................................................................. 1 Question 1 (B).................................................................................................................................1 Question 2 (A).................................................................................................................................1 i)................................................................................................................................................................... 1 ii).................................................................................................................................................................. 1 iii)................................................................................................................................................................. 1 Question 2 (B).................................................................................................................................1 i)................................................................................................................................................................... 1 ii).................................................................................................................................................................. 1 iii)................................................................................................................................................................. 1 iv)................................................................................................................................................................. 1 Question 3: Financial Statement Analysis............................................................................1 Part 1)................................................................................................................................................1 a).................................................................................................................................................................. 1 b).................................................................................................................................................................. 1 c)................................................................................................................................................................... 1 d).................................................................................................................................................................. 1 e).................................................................................................................................................................. 1 Part 2)................................................................................................................................................1 i)................................................................................................................................................................... 1 ii).................................................................................................................................................................. 1 Part 3)................................................................................................................................................1 Part 4)................................................................................................................................................1 1 Assignment #1 1396167 Rushabh Patel Question 1 (A) i) Year 0 1 2 3 4 5 6 7 8 9 10 After-tax cash flow -3,000,000 700,000 700,000 700,000 700,000 -1,300,000 700,000 700,000 700,000 700,000 900,000 Discount factor (I/R) = 10% Estimated life (N) = 10 The net present value of the project is $136,462.99. RWE Enterprised Ltd requires and initial investment of $3,000,000 and provides future cash flows that have a present value of $3,136,462.99. The project cash flows is $136,462.99 which is more than the required investment. This project should be accepted because the future cash flows are worth more than the initial cash outlay required to make the investment. ii) Internal rate of return is 11.05% Year Annual Cash flows 0 CF0 = 3,000,000 1 CF1 = 700,000 2 CF2 = 700,000 3 CF3 = 700,000 4 CF4 = 700,000 5 CF5 = 1,300,000 6 CF6 = 700,000 2 Assignment #1 1396167 7 CF7 = 700,000 8 CF8 = 700,000 9 CF9 = 700,000 10 CF10 = 900,000 Interal rate of return = Rushabh Patel 11.05% The profitability index = net value of all cash flow except initital investment / initial investment = 3,136,462.99/3,000,000 Profitabilty index = 1.0454 The profitability index for this project is greater than 1 and therefore it shows that the present value of the investment's future cash flows exceeds the cost of making the investment and the investment should be accepted. Also because the profitability index is positive and greater than 1, the NPV is is also positive so the project should be accepted. The internal rate of return (IRR) for RWE Enterprises Ltd is 11.05% which is higher than the discount value of 10%. RWE Enterprises Ltd requires an initial investment of $3,000,000 and $1,300,000 at the end of year 5. After that future cash flows offer a return on this investment of 11.05%. Because the minimum rate of return expected from this project is 10%, it shows that the project is a good investment opportunity which will be profitiable. iii) Payback period Year 1: 3,000,000-700,000 = -2,300,000 Year 2: 2,300,000 -700,000 = 1,600,000 Year 3: 1,600,000 -700,000 = 900,000 Year 4: 900,000 - 700,000 = 200,000 Year 5: 200,000 + 1,300,000 = 1,500,000 Year 6: 1,500,000 - 700,000 = 800,000 Year 7: 800,000 - 700,000 = 100,000 Year 8: 100,000/700,000 = 0.14 Payback period = 7.14 years. 3 Assignment #1 1396167 Rushabh Patel The payback period tells us that it will take RWE Enterprises Ltd 7.14 years to recover its original investment of $3,000,000. Based on the payback period, it is a good option to accept the project because the payback period is less than the prespecified maximum of years (10). Discounted payback period Year Cash flow Cash flow present value Cumulati ve cash flow Discounte d Cumulativ e PV 0 3,000,0 00 3,000,0 00 3,000,00 0 3,000,000 700000 636363. 64 2300000 2,363,636 .36 700000 578512. 40 1,600,00 0 1,785,123 .97 -900,000 1,259,203 .61 1 2 3 700000 525920. 36 4 700000 478109. 42 -200,000 7,810,94. 19 5 130000 0 807197. 72 1,500,00 0 1,588,291 .91 -800,000 1,193,160 .16 -100,000 8,339,49. 47 600,000 5,073,94. 31 6 7 8 700000 395131. 75 700000 359210. 68 700000 326555. 17 4 Assignment #1 1396167 9 700000 296868. 33 10 900000 346988. 96 Rushabh Patel 1,300,00 0 2,105,25. 97 2,200,00 0 1,364,62. 99 Discounted payback period starts in the 10th year 2,105,25.97 = 6.06 346988.96 10 + 6.06 Discounted payback period = 10.606 years The discounted paybck period tells us it will take 10.606 years to recover the initial cash outlay from the discounted cash flows. Based on the discounted payback period of 10.606 years, RWE Enterprises Ltd should not accept the project because it exceeds the pre-specified number of years (10). Question 1 (B) The modified internal rate of return (MIRR) is preffered over the internal rate of return (IRR) for a few reasons. For example, if a project has more than one IRR, then the IRR is not very useful. To elimate this problem the MIRR is used to rearrange all negative cashflows after the initital cashflow are discounted to year 0 and the same method is used to deal with postive cash flows. MIRR works rightly with the assumption of reinvestments which are always made at the cost of capital. MIRR cannot be used to compare the projects of different size and life spans, which are mutually exclusive. For this, the projects Net present value will be the technique used to evaluate and for making comparison between them. The rate of return calculated under MIRR is not unique to the project because it is influeneced by the discount rate used to discount the negative cash flows. Question 2 (A) i) PV FV I/Yr N PMT -400,000 0 5/12 = 0.4167% 30*12 = 360 $2,147.38 5 Assignment #1 ii) PV I/Yr FV PMT N 1396167 Rushabh Patel -400,000 5/12=0.4167% 0 ($5,800-$2,800) = $3,000 195.04 His retirement income will last 195 months or 16.3 years if his expenses remained the same. He will be approximately 73 years old at the time. PV I/Yr FV PMT N -400,000 5/12=0.4167% 0 0 946 periods If his expenses were reduced to $4,500 his retirement income will last for 946 periods or 78.8 years. His age will be approximately 135 at the time. iii) PV I/Yr FV PMT N $1.00 3.5% $2.00 0 23.45 years Bill will be 79.45 years old (56 +23.45) when the prices have doubled from current levels. PV I/Yr N PMT FV $1.00 3.5% 30 years 0 $2.81 When Bill passes away at age 86, a can of soda will cost $2.81 providing the inflation rate will stay the same at 3.5% if the value of a soda is $1.00 6 Assignment #1 1396167 Rushabh Patel Question 2 (B) i) PV N FV r 160,000 12 years 460,000 8.37% ii) PV N FV r iii) PV r N FV PMT 140,000 12 years 420,000 11.61% 140,000 6%/12 = 0.5% 10*12 = 120 420,000 $1,008.57 The monthly payment is $1009 iv) PV 140,000 PMT 500 N 10 years FV 420,000 r 1.14% Annual percentage rate is 13.68% (1.14*12) Question 3: Financial Statement Analysis 7 Assignment #1 1396167 Rushabh Patel Part 1 a) Liquidity Ratios Current ratio Quick Ratio Average collection period Accounts receivable turnover Inventory turnover Workings 2014 Workings 2015 51,137,000 17,875,000 51,137,000 5,583,000 17,875,000 27,358,000 110,621,000/365 2.86 times 2.55 times 60,533,000 28,952,000 60,533,000 - 4,846,000 28,952,000 39,944,000 154,803,000/365 2.09 times 1.92 times 90 days 94 days 110,621,000 27,358,000 4.04 times 154,803,000 39,944,000 3.86 times 70,802,000 5,583,000 12.68 times 100,387,000 4,846,000 20.72 times b) Capital Structure Ratios Debt ratio Interest coverage ratio Workings 17,999,000 76,643,000 720,000 2014 23.48% Workings 2015 30,238,000 88,867,000 1,281,000 34.03% Workings 2015 c) Asset Workings management efficiency ratios Total asset 110,621,000 turnover 76,643,000 2014 1.44 times 154,803,000 88,867,000 1.74 times Fixed asset turnover 12.07 times 154,803,000 9,301,000 16.64 times 110,621,000 9,163,000 d) 8 Assignment #1 Profitability ratios Gross profit margin Operating profit margin 1396167 Workings 70,802,000 110,621,000 720,000 110,621,000 2014 64% 6.51% Rushabh Patel Workings 2015 100,387,000 154,803,000 1,281,000 154,803,000 64.85% 8.27% Net profit margin 10,000 110,621,000 0.01% 2,091,000 154,803,000 1.35% Return on assets Return on equity 720,000 76,643,000 10,000 58,644,000 0.94% 1,281,000 88,867,000 2,091,000 58,629,000 1.44% 0.02% 3.57% e) Market value ratios Price - earnings ratio Market-tobook ratio Workings 2014 Workings 2015 9 \fQuestion1: Investment appraisal (21 marks) a. RWE Enterprises Ltd is a small manufacturing firm located in New Plymouth. The firm is engaged in the manufacture and sale of feed supplements used by cattle raisers. The product has molasses base but is supplemented with minerals and vitamins that are generally thought to be essential to the health and growth of beef cattle. The final product is put in 75-kg or 100kg tubs that are then made available for the cattle to lick as desired. The material in the tub becomes very hard, which limits the animal's consumption. The firm has been running a single production line for the past five years and is considering the addition of a new line. The addition would expand the firm's capacity by almost 120% because the newer equipment requires a shorter downtime between batches. After each production run, the boiler used to prepare the molasses for the additional minerals and vitamins must be heated to 85 degrees Celsius and then must be cooled before beginning the next batch. The total production run entails about four hours and the cool-down period is two hours (during which time the whole process comes to a halt). Using two production lines increases the overall efficiency of the operation because workers from the line that is cooling can be moved to the other line to support the 'canning' process involved in filling the feed tubs. The equipment for the second production line will cost $3 million to purchase and install and will have an estimated after-tax scrap value of $200,000. Furthermore, at the end of five years, the production line will have to be refurbished at an estimated cost of $2 million. RWE's management estimates that the new production line will add $700,000 per year in after tax cash flows to the firm. Required: i. If RWE uses a 10% discount factor to evaluate investments of this type, what is the net present value of the project? What does this NPV indicate about the potential value RWE might create by purchasing the new production line? (6 marks) ii. Calculate the internal rate of return and profitability index for the proposed investment. What do these two measures tell you about the project's viability? (6 marks) iii. Calculate the payback and discounted payback periods for the proposed investment. Interpret your findings. (4 marks) b. What is the rationale of using MIRR as opposed to IRR decision criteria? Describe the fundamental shortcoming of the MIRR method (5 marks) Question 2: Time Value of Money (18 Marks) a. Bill Petty, age 56 has just retired after 31 years of teaching. He is a husband and father of two children who are still dependent. Bill received a $150,000 lump-sum retirement bonus and will also receive $2,800 per month from a retirement annuity for the rest of his life. He has saved $150,000 in a superannuation fund and another $100,000 in other accounts. His superannuation fund is invested in the share market, but most of his other investments are in bank accounts earning 2% or 3% interest annually. Bill has asked your advice in deciding where to invest his lump-sum bonus and other accounts now that he has retired. He also wants to know how much he can withdraw per month, considering he has two children and a nonworking spouse. Because he has children, his current monthly expenses total $5,800. (Ignore tax) Required: i. ii. iii. Bill has an emergency fund already set aside, so he can use his $400,000 of savings for retirement. How much can he withdraw on a monthly basis if his investments return 5% annually and he expects to live 30 more years? (2 Marks) Is the amount determined in question 1 sufficient to meet Bill's current monthly expenses (keep in mind that he will receive a monthly payment of $2,800)? If not, how long will his retirement last if his current expenses remain the same? What if his expenses were reduced to $4,500 per month? (3 Marks) If the inflation rate averages 3.5% during Bill's retirement, how old will he be when prices have doubled from current levels? How much will a can of soft drink cost when Bill dies, if he lives the full 30 years and the soft drink costs $1 today? (3 Marks) b. You deposited $160,000 into an education savings plan, hoping to have $ 420,000 available 12 years later when your first child starts university. However, you did not invest very well, and two years later, the account's balance has dropped to $140,000. You approached a financial advisor and he agreed to work with you to get the investment value back on track. i. ii. iii. iv. What was the original annual rate of return needed to reach your goal when you started the fun two years ago? (2 Marks) With only $140,000 in the fund and 10 years remaining until your child starts university, what annual rate of return would the fund have to make for you to reach your $420,000 goal if you add nothing to the account? (2 Marks) Shocked by your experience of the past two years, you feel the education savings fund has invested too much in shares, and you want low-risk fund in order to ensure you have the necessary $420,000 in 10 years. You are willing to make end-of-the-month deposits to the fund as well. You find you can get a fund that promises to pay a guaranteed annual return of 6% that is compounded monthly. You decide to transfer the $140,000 to this new fund and make the necessary monthly deposits. How large a monthly deposit must you make into the new fund each month to obtain the $420,000 required at the end of 10years? (4 Marks) After seeing how large the monthly deposit would be in part (biii) above, you decide to invest the $140,000 today and $500 at the end of each month for the next 10 years into a fund comprising 50% shares and 50% bonds and hope for the best. What APR would the fund have to earn in order to reach your $420,000 goal? (2 Marks) QUESTION 3: FINANCIAL STATEMENT ANALAYSIS (36 MARKS) Using the annual report of a2 milk Company, for 2014-2015, (https://www.thea2milkcompany.com/wpcontent/uploads/2015/09/A2ML00022_a2_REPORT_Spreads_vLR.pdf) answer the following questions. (Refer also to the press coverage documents attached in Blackboard - AUTonline) Required: 1. Using the consolidated accounting information, Compute all the ratios that fall under the following categories for the year ended 30/6/15 and for the previous year: a. Liquidity b. Capital structure c. Asset management efficiency d. Profitability e. Market value (8 marks) 2. Based on the ratios computed above, write a comprehensive report 1 to the management of a2 milk Company, evaluating the overall financial health of the company in comparison to the prior year. (Your report should synthesise all information obtained from the ratios and arrive at an overall conclusion reflecting industry knowledge rather than interpret each category of ratios independently. You report, in addition to the evaluation of financial health of the firm should also cover the following: i. The company's ability to generate cash flows in the future ii. Its future external financing needs (Maximum 1000 words excluding appendices) (10 marks) 3. Assume you are a banker evaluating a loan request from a2 milk Company for $ 150 million. What would be your concerns when making a decision regarding approval or denial of the loan request? Justify. (Maximum 750 words excluding appendices) (10 marks) 4. Assume you are an investor in the shares of a2 milk Company and rely on receipt of regular cash dividends as part of your return on investment. You have $ 200,000 available for investment which is currently deposited in a term-deposit at an interest rate of 5.2% per annum which you would like to utilise to buy additional shares in a2 milk Company. The company's shares are trading at an average price of $1.80 per share. What would your decision be? Justify. (Maximum 750 words excluding appendices) (8 marks) 1 The report should be prepared in professional format with the following features: (a) Title of the report; (b) from whom to whom; (c) nature of the report; (d) terms of references; (e) executive summary; (f) discussion on findings; (g) conclusion; (h) references