FIN7101 FINANCING BUSINESS: TEST 1 (10%)

AZDZHARULNIZZAM ALWI
PBS21101107

Question 1 (50 marks)

Given the following balance sheet, income statement, historical ratios and industry
averages;

a) Calculate the NAS Sdn Bhd. financial ratios for the most recent year, i.e., fill up
table 1 for the 2021 ratios’ column.

Income Statement
NAS Sdn Bhd
For the Year Ended December 31,
2021
Sales Revenue RM2,080,976
Less: Cost of Goods Sold 1,701,000
Gross Profits RM379,976
Less: Operating Expenses 273,846
Operating Profits RM106,130
Less: Interest Expense 19,296
Net Profits Before Taxes RM86,834
Less: Taxes (40%) 34,734
Net Profits After Taxes RM52,100

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 Assets
Cash RM 95,000
Accounts receivable 237,000
Inventories 243,000
Total current assets RM 575,000
Gross fixed assets 500,000
Less: Accumulated depreciation 75,000
Net fixed assets RM425,000
Total assets RM1,000,000
Liabilities and stockholders’ equity
Current liabilities
Accounts payable RM 89,000
Notes payable 169,000
Accruals 87,000
Total current liabilities RM 345,000
Long-term debt 188,000
Total liabilities RM 533,000
Stockholders’ equity
Common stock 255,000
Retained earnings 212,000
Total stockholders’ RM 467,000
equity
Total liabilities and stockholders’ RM1,000,000
equity

Table 1: Historical and Industry Average

Ratios
NAS Sdn Bhd
Industr
Ratio 2019 2020 2021 y 2021
Current Ratio 1.6 1.7 1.67 1.6
Quick Ratio 0.9 1.0 0.96 0.9
Inventory Turnover 8.1 9.3 8.56 8.5
Average 33 days 37 days 42 days 38 days
Collection Period
Total Asset Turnover 2.3 2.2 2.08 2.2
Debt Ratio 60% 56% 53% 60%
Times Interest Earned 2.5 3.5 4.5 2.3
Gross Profit Margin 21% 19.7% 18.3% 20.4%
Operating Profit Margin 4.7% 4.8% 5.1% 4.7%
Net Profit Margin 1.8% 1.6% 2.5% 1.4%
Return on total assets 4.1% 3.5% 5.2% 3.08%
Return on Equity 10.3% 7.9% 11.1% 7.3%

(20 marks)
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Current Ratio = Current Assets / Current Liabilities

= RM 575,000 / RM 345,000 = 1.67

Quick Ratio = (CA – Inventory) / CL

= (575,000 – 243000)/345000 = 0.96

Inventory Turnover = Sales (or COGS)/ Inventory

= RM2,080,976/243,000 = 8.56

Average collection period (ACP) = Accounts receivable x 365 / Credit sales

= 237,000 x 365 / 2,080,976 = 41.5 = 42 days

Total assets turnover ratio = Sales / Total assets

=2,080,976/ RM1,000,000 = 2.08

Debt ratio = Total debt / Total assets = RM 533,000/ RM1,000,000 = 0.533 =53%

Times interest earned = EBIT / Interest expense = RM RM86,834/ 19,296 = 4.5

Gross Profit margin = Gross Profit income / Sales = RM379,976/2,080,976 = 18.3%

Operating Profit margin = Operating Profit income / Sales = RM106,130/2,080,976 = 5.1%

Net Profit margin = Net Profit income / Sales = RM52,100/2,080,976 = 2.5%

Return on Assets (ROA) = Net income / Total Assets = RM52,100/ RM1,000,000= 5.2%
Return on Equity (ROE) = Net income / Total equity = RM52,100 / RM 467,000 = 11.1%

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 b) Analyze its overall financial situation for the most recent year. Analyze its overall
financial situation from both a cross sectional and time series viewpoint. Break your
analysis into an evaluation of the firm’s liquidity, activity (asset performance ratio),
debt, and profitability.

(30 marks)

Liquidity Analysis

Liquidity ratio analysis is the use of several ratios to determine the ability of an
organization to pay its bills in a timely manner. This analysis is important for lenders
and creditors, who want to gain some idea of the financial situation of a borrower or
customer before granting them credit. Liquidity analysis is analyze based on current
ratio, quick ratio and cash ratio. From the table 1 shown that that have increase ratio
from 2019 to 2020 however at 2021 the ratio decrease. However, the ratio 2021 still
meet the industry benchmarking and slightly higher and it became positive business to
NAS.

asset performance ratio

Asset management ratios indicate how successfully a company is utilizing its assets to
generate revenues. Analysis of asset management ratios tells how efficiently and
effectively a company is using its assets in the generation of revenues. They indicate the
ability of a company to translate its assets into the sales. Asset management ratios are
also known as asset turnover ratios, Inventory Management and asset efficiency ratios.
Based on table Nas efficiency used its assets. NAS turn inventory over as quickly as
possible to reduce costs. A high inventory turnover ratio and a low days’ sales in
inventory ratio indicate good management.

Debt Management

Companies with higher levels of liabilities compared with assets are considered highly
leveraged and riskier for lenders. This helps investors and creditors analysis the overall
debt burden on the company as well as the firm’s ability to pay off the debt in future,
uncertain economic times. Nas have lowest percentage on 2021 compare 2019 and 2020
and it also have lower that benchmarking industry 2021 and become higher than
Insdustry benchmarking.

Profitability Analysis

profitability analysis gives business owners a 360° view of your company’s profits,
different ratios that derive profitability ratios have different roles to play. Profitability
analysis helps businesses identify growth opportunities, fast/slow-moving stock items,
market trends, etc, ultimately helping decision-makers see a more concrete picture of the
company as a whole. However Gross Profit Margin for NAS on 2021 decrease from

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2019 and 2020, however in 2021 NAS reduce its expenses and made the Net Profir
Margin become Higher than 2019 & 2020. ROA is a measure of every penny of income
earned on every penny of the asset owned by the company. ROA also helps the
management manage the utilization of assets, diligently. Nas success to increase the
ROA to utiliezed all their assets.

Question 2 (50 marks)

a) Your parents have made you two offers. The first offer includes annual gifts of
RM5,000, RM6,000, and RM8,000 at the end of each of the next three years,
respectively. The other offer is the payment of one lump sum amount today. You are
trying to decide which offer to accept given the fact that your discount rate is 6.2
percent. What is the minimum amount that you will accept today if you are to select
the lump sum offer?
(10 marks)
CF 1 = RM 5,000; CF 2 = RM 6,000; CF 3 = RM 8000, n = 3, i = 6.2%
NPV = RM 16,707.06 is the minimum offer that I will accept if I select lump offer

b) One year ago, YNWA deposited $12,000 in an investment account for the purpose
of buying new equipment four years from today. Today, it is adding another $15,000
to this account. The company plans on making a final deposit of $10,000 to the
account one year from today. How much cash will be available when the company is
ready to buy the equipment assuming an interest rate of 5.5 percent?
(10 marks)
CF 1 = $12,000; CF 2 = $ 15,000; CF 3 = $ 10,000; n = 3, i = 5.5%
When n = 3, NPV = $ 35,202.53, PV = $ 35,202.53, i = 5.5; FV = $ 36,126.85
On the 4th year, the company will have $ 36,126.85

c) Your grandmother will be gifting you $150 at the end of each month for four years
while you attend college. At a discount rate of 3.7 percent, what are these payments
worth to you on the day you enter college?
(10 marks)
PMT = 150; n = 4 * 12 = 48 payments; i = 3.7%/12 = 0.31
NFV = $ 7,750.35 is the value of the payments on the day I enter college.

d) To expand its operation, Dhadibas Tools Inc. has applied to the International Bank
for a 3 year, RM50, 000 loan. Prepare a loan amortization table assuming 8 percent
rate of interest.
PV = RM 50,000
N= 3
I = 8%
Fv = 0

PMT = RM 19,401.67
P1 = Balance, RM 34,598, Principal = 15,401.6, Interest = 4,000
P2 = Balance, RM 17,964.5, Principal = 16,633.81, Interest = 2,767.86
P3 = Balance, RM 0, Principal = 17,964.51, Interest = 1,437.16
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(10marks)

e) If you assume market interest rates are expected to increase over the term of the
loan, would you prefer loan with a fixed rate for the life of the loan or rather a loan
with a variable rate that changes in response to market interest rates? (Assume that
both loans start with the same interest rate.) Would your answer change if market
interest rates are expected to decrease over the term of the loan?

Answers Fixed the rated to secure the payment monthly, because the interest
can’t be control and depends on market issues.

(10 marks)

- End of
Questions -