©Al Tareeqah Management Studies XXXXXXXXXXAnswer all questionsQuestion 1a) Calculate the following...

Question

©Al Tareeqah Management Studies XXXXXXXXXX

Answer all questions

Question 1

a) Calculate the following ratios for Rio Tinto plc for the year ended 31st December2019 XXXXXXXXXX20 Marks)

1. Return On Capital Employed2. Inventory Turnover (stock days)3. Debtor ratio (debtors’ days)4. Creditor ratio (creditor days)5. Current ratio6. Quick ratio7. Debt/equity ratio8. Interest cover9. Return on Equity10. Price Earnings Ratio (P/E Ratio)

Additional InformationShare price at close of business on 31st December 2019 = 4,503 pence£/$ exchange rate @ 31st December 2019 = $1.326

b) Using the 2019 ratios you calculated in question 1 (part a) and the 2020 ratios calculatedin class write a brief report (500 words in total) which compares the performance ofRio Tinto plc across both years.Your marks for this question will not be affected by any errors you may make in thecalculations in question 1. If you have been unable to calculate any ratios in question1 you can assume an answer for 2019 and write your report accordingly. XXXXXXXXXX10 Marks)

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Question 2Bonsall Plc are a manufacturing company who produce components for high performancemotorcycles. The product research team have been working on a new lightweight handlebarwhich they are now proposing to launch. The production and sales teams have supplied thefollowing data to you- Bonsall’s Finance Manager.Year Sales£’s
Fixedcosts£’s
Variablecosts£’s
Scrapproceeds£’s
Yr1 250,000 120,000 125,000Yr2 305,000 125,000 152,500Yr3 375,000 130,000 187,500Yr4 475,000 135,000 237,500Yr5 400,000 140,000 200,000Yr XXXXXXXXXX

A new machine will be required to produce the handlebar at a cost of £150,000 payableimmediately.

After 5 years the sales team forecast that the product will become obsolete and hence thehandlebar will be withdrawn from sale. At this point the original machine will be sold for anexpected scrap value of £5,000

Bonsall use a discount rate of 10% to appraise new investments. For an investment to beauthorized it must meet or exceed the following targets:1. NPV- positive at 10% discount rate2. IRR- 15%3. Undiscounted Payback- 3yrs or less

RequiredUsing the information above for the new project calculate:1) The undiscounted payback2) The Net Present Value and3) The Internal Rate of Return

Considering your answers state whether the project is acceptable.

(30 marks)

Question 3Discuss the benefits and drawbacks of raising funding using the following 3 sources of finance1) Ordinary shares2) Preference shares3) Redeemable bonds

Your answer should consider issues of ownership, financial risk and cost.(15 marks)

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Question:4

a) Discuss the merits and limitations of ratio analysis.

b) Explain your understanding of the risk/return relationship and why it is so important inFinancial Management.

c) What should be the primary objective of a commercial firm? How does this work inreality and what other objectives might be important for the company? XXXXXXXXXX15 Marks)

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Shreyanse · Accepted Answer

Answer 1 (a)
Ratios for 2019
1) Return on capital employed = PBIT/Capital Employed = 11,767/(87,802-11,125)*100 = 15.34%
2) Inventory Turnover (Stock Days) = Stock/ COGS *365 = 3,463/(9,485+4,522+42)*365 = 89.97 days
3) Debtor ratio (debtors’ days) = trade debtors / turnover * 365 = 2,097/43,165* 365 = 17.73 days
4) Creditor ratio (creditor days) = trade creditors / cost of sales * 365 = 2,855//(9,485+4,522+42)*365 = 74.17 days
5) Current ratio = Current assets / current liabilities = 17,303/11,125 = 1.55 (times)
6) Quick ratio = (Current assets – stock ) / current liabilities = (17,303 - 3,463) /11,125 = 1.24(times)
7) Debt/equity ratio = Long-term debt/ share capital and reserves * 100 = 13,093/45,242 *100 = 28.94%
8) Interest Cover = PBIT / interest charges = 11,767/ 554 = 21.24 times
9) Return on equity = Earnings (after preference share dividend)/shareholders fund * 100 = 6,972/ 45,242 * 100 = 15.41%
10) Price Earnings ratio = Market price of shares / earnings per share = 4,503/ (491.4/1.326) = 12.15 times
Answer 1 (b) 
	 
	Ratios
	2020
	2019
	Comments
	1
	Return on capital employed
	20%
	15.34%
	the RoCE has improved year on year which indicates the company is able to better utilize its capital and able to make more profits on the invested capital
	2
	Inventory Turnover (stock days)
	108 days
	89.97 days
	The inventory turnover ratio has become worse year on year which indicates the slow movement of inventory as the days increased from 90 days to 108 days
	3
	Debtor ratio (debtors’ days)
	21 days
	17.73 days
	The debtor’s ratio has become worse year on year which indicates the slow recovery of debtors as the days increased from 18 days to 21 days. The company's cash flow has become worse as the company is able to recover money now every 21 days as compared to 18 days
	4
	Creditor ratio (creditor days)
	86 days
	74.17 days
	The creditors ratio has improved year on year which indicates the slow payment to debtors has increased from 74 days to 86 days. The company's cash flows has improved as the company is able to delay the payment from 74 days to 86 days 
	5
	Current ratio
	1.8 times
	1.55 times
	The current ratio has improved year on year which indicates that the company has better working capital management. The Company has now 1.8 times current assets which indicates sound liquidity available with the company to run day to day operations
	6
	Quick ratio
	1.5 times
	1.24 times
	The quick ratio has improved year on year which indicates that the company has better working capital management. The Company has now 1.5 times quick assets which indicates sound liquidity available with the company to run day to day operations
	7
	Debt/equity ratio
	25.50%
	28.94%
	Debt equity ratio has improved year on year. The company has decreased borrowing and leverage which is a good indicator, as less leverage means less risk
	8
	Interest cover
	64 times
	21.24 times
	The interest cover improved significatly year on year. The company has not 64 times of the interest payment capacity as compared to 21.24 times which indicates sound profitability and capacity to repay the loans and interest
	9
	Return on Equity
	20%
	15.41%
	RoE improved Year on year which indicates a good sign for the investor. Company is able to give 20% return to its investors as compared to 15.41%
	10
	Price Earnings Ratio (P/E Ratio)
	12.4 times
	12.15 times
	no significant movement 
Answer 2
1) Undiscounted payback
	Year
	Sales
	Fixed Costs
	Variable Costs
	Machine
	Yearly CFs
	0
	 
	 
	 
	           (150,000)
	       (150,000)
	1
	        250,000 
	       (120,

©Al Tareeqah Management Studies XXXXXXXXXX Answer all questions Question 1 a) Calculate the following ratios for Rio Tinto plc for the year ended 31st December2019 XXXXXXXXXX20 Marks) 1. Return On...

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