Q No. 1 Financial Ratio of ABC Company

Profitable Ratio

Year Net Asset Return on Financial Return on Gross Operating Return on

Profit Turnover Assets Leverage Equity Profit Return on Capital

Margin Margin Assets Employed

2013 27.204311 0.39599 11.976797 1.2 17.2234 35.39 12.2 14.858744

2014 21.707263 0.396281 8.60217081 1.2713841 10.9367 34.4259 12.41374 14.163817

2015 27.833978 0.368713 10.2627588 1.2095523 12.4133 34.2846 12.93982 14.279002

2016 26.235569 0.38841 10.1901551 1.2423426 12.6597 38.9151 14.54331 16.328471

2017 24.182998 0.329092 7.95843722 1.36676 10.8773 37.3425 11.69163 13.451284

Liquidity Ratio

Year Current Ratio Quick Ratio Cash to Current Liabilities

2013 2.5379686 1.793695 3.45

2014 4.8291736 3.844546 3.78282211

2015 4.3604403 3.380666 3.32363512

2016 3.0708846 2.434411 2.38405767

2017 1.853497 1.13657896 1.13657896

Activity Ratios

Year Inventory No. of Receivables No. of Payable No. of Working Cash

Turnover Days in Turnover Days in Turnover Days in Capital Conversion

Ratio Inventory Ratio Receivables Ratio Payable Turnover Cycle

2013 11.635384 20.45 45.75 8.36 34.54 10.9 1.09 20.45

2014 14.201233 25.70199 54.734196 6.6685916 36.7044 9.94432 1.06593 22.426263

2015 14.750045 24.74563 37.957614 9.615989 26.0353 14.0194 1.111081 20.342262

2016 23.872628 15.28948 52.9922021 6.8878059 14.9294 24.4485 1.479644 -2.271193

2017 18.088527 20.17854 192.388881 1.897199 25.9389 14.0715 2.471969 8.004218

Valuation Ratios

Year Market Earnings Price Dividend Cash Book

Price Per Per Earnings Payout Dividend value

Share Share Ratio Ratio Per Share per

2013 120.45 16.01554 7.52081823 0.23 2.5 148.55

2014 87.96 13.74859 6.39774684 0.2545716 3.5 141.252

2015 142.77 17.92927 7.96295528 0.2788735 5 147.619

2016 190.49 19.13036 9.95747087 0.3136376 6 154.607

2017 213.16 17.92541 11.8915 0.4184005 7.5 174.987

Solvency Ratios

Year Debt Debt to Debt to Interest

Equity Assets Capital Cover

Ratio Ratio Ratio Ratio

2013 0.3512274 0.21 0.17 7.6335585

2014 0.2091102 0.184808 0.19022915 12.221825

2015 0.2099753 0.177424 0.19209065 30.067903

2016 0.2732471 0.22503 0.24411703 82.993964

2017 0.4493816 0.349124 0.35990622 31.541006

Instructions:

Write report of around (around two pages of word document) on ABC company as a new junior analyst keeping in mind all areas that you studied in your Financial Management subject at undergraduate level. You can take assumptions with valid logical reasoning. All relevant ratios of five years are given with broad category, read carefully and write based on various performance areas given in these financial highlights. You can discuss all ratios based on the broader category given in this question.

Marks (08)

Q No. 2

Osama Co. is a listed company operating in the textile industry. Osama Co's board of directors met recently to discuss a new strategy for the business. The proposal put forward was to sell all the old plant and machinery and use this fund as well as borrow from market to purchase new plant and equipment. The new plant and machinery are more productive and meet the current standard quality required by the international buyers. It is also argued that new plant is more energy efficient and environment friendly that gives more advantage when facing international competitors.

The proposal stated that the funds raised from the sale of the old plant and machinery would be used to buy the new plant and machinery.

New borrowing for the balance amount will be made from local bank which offered lowest rate. Since inflation is on higher side compared to last few years so cost of borrowing is on higher side which will increase firm cost of capital.

The board of directors are of the opinion that increasing the level of debt in OSAMA Co. will increase the company's risk and therefore it can increase its cost of equity capital. It is assumed that due to change in plant and equipment current local sales of the product will not be affected.

New Plant price Rs.5.32 million

Sales of old plant Rs.1.32 million

Firm existing capital structure i.e. debt to assets ratio is 40:60.

At this level firm interest rate on all debt is 9.5%.

After borrowing firm capital structure will shift to 60:40 and at this level firm beta will shift from earlier 1.2 to 1.4. Risk free rate of return is 7% and market risk premium is 6%. New loan is negotiated with HBL bank and it is agreed that this loan will be for five years at 11% mark up.

Instructions:

1.How much borrowing required by firm?

2.Why risk factor will increase if firm is changing its capital structure?

3.What is the current weighted average cost of capital?

4.What the new cost of equity capital?

5.What would be new Weighted Average Cost of Capital?

Marks (10)

Q No. 3

The Calgary Company is attempting to establish a current assets policy. Fixed assets are

$600,000, and the firm plans to maintain a 40 percent debt-to-assets ratio. Calgary has no operating current liabilities. The interest rate is 12 percent on all debt. Three alternative current asset policies are under consideration: 40, 50, and 60 percent of projected sales. The company expects to earn 18 percent before interest and taxes on sales of $6 million. Calgary's effective tax rate is 40 percent.

1.What is the expected return on equity under each alternative?

2.Evaluate ROE from owner point of view and suggest which option is best for him?

3.Suggest which option would you like if you are managers of the company and do not have much concern about business?

4.Why current assets policy is important in this particular situation?

Marks (07)

Q No. 4

K Co. is a publicly listed company involved in the production of highly technical and sophisticated electronic components for complex machinery. It has a number of diverse and popular products, an active research and development department, significant cash reserves and a highly talented management who are very good in getting products to market quickly.

A new industry that K Co. is looking to venture into is biotechnology, which has been expanding rapidly and there are strong indications that this recent growth is set to continue. However, K Co. has limited experience in this industry. Therefore, it believes that the best and quickest way to expand would be through acquiring a company already operating in this industry sector.

Discussions taken place about the possibility of acquiring Tee Co. being acquired by K Co. Price of Tee company in stock market during last one year are as follows.

Price at the end of month

Month Month end KSE 100

Price Index

Jan 175 32600

Feb 185 33900

March 152 33500

April 190 34000

May 195 33500

June 188 33800

July 190 33700

Aug 195 33200

Sep 190 32900

Oct 185 33100

Nov 190 33900

Dec 88 34100

1.Calculate average return for both stock and market

2.Calculate Standard deviation for both

3.Calculate coefficient of variation for both

4.Calculate Beta of stock

5.Suggest what you understand from Beta

Marks (10)

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