OLD ASIGNMENT ATTEMPTED

Student Name: DANISH TAJ CMI No: 7650 Course Number and Name: 7003 FINANCIAL MANAGEMENT Submission Date: 26/07/2010

Plagiarism Statement: I declare that, apart from properly referenced quotations, this assignment/report is my own work and contains no plagiarism; it has not been submitted previously for any other assessed unit on this or other courses.

Candidate Signature: DANISH TAJ

CONTENTS

Introduction

This assignment focuses on the importance of measuring Financial Sources/what is financial Management within an organization, its importance towards achieving the organizations strategic objectives as a whole. It also explains the benefits an organization one of the tools has by implementing an efficient and effective performance management system, and describes that can be used in evaluating the performance of different Financial business functions, teams and individuals within the organization. The management of the finances of a business / organization in order to achieve financial objectives Taking a commercial business as the most common organizational structure, the key objectives of financial management would be to, Create wealth for the business Generate cash, and Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested There are three key elements to the process of financial managementThey are some key elements which is necessary for ever firm need to be done for long planning for an organization..So now we will discuss in this assignment some key elements i,e a firm be able to analyse its financial data, Be Able To Assess Budgets Based on Financial Data To Support Organizational Objectives. Be Able To Evaluate Financial Proposals For Expenditure Submitted By others. It points out different factors which influence the firm Financial performance of individuals within the team. It briefs about one of the systems to be used in evaluating

Financial performance of the firm/team members and attempts to explain how to deal with underperforming individuals within the organization/team.

Be Able To Analyze Financial Data.

1.1 Obtain latest available financial statements of a public company of your choice. Analyze the financial data by calculating following types of ratios; 0 Profitability ratios 1 Liquidity ratios 2 Efficiency ratios 3 Investment ratios 4 The answer should show the formula of the ratio, the figures selected from the financial statements, and the ratio so obtained. 1.2 Make comments on the financial health of the organization on the basis of the information obtained in response to 1.1 above. The answer should comprise of about 700 words, and contain references to the ratios calculated. 1.3 Do you think the financial statements have been based on financial data gathered according to generally accepted principles? Comment by citing some of the figures.

The answer should comprise of about 300 words

Be Able To Assess Budgets Based on Financial Data To Support Organizational Objectives.

2.1 On the basis of following expected achievements and constraints prepare budgeted income statements for next three accounting years of the company you have chosen for question 1. Sale revenue will increase by 20% each year Closing inventory will be increased by 5% each year Gross profit ratio will remain the same over these years. The purchase budget will be adjusted to achieve the objectives set in the above mentioned three items of information 5. All operating expenses will increase by 5 percent per year. Tax rate will be 30%of the taxable income.
6. Dividends paid will also increase by 5% each year

1. 2. 3. 4.

The answer should present relevant figures from the income statement of the year ended recently and of next three years in a table, with each year assigned one column.

Be Able To Evaluate Financial Proposals For Expenditure Submitted By Others.

3.1 Illustrate by giving your own examples following three methods of evaluating financial proposals: 1 Payback period method 2 Net present value method 3 Internal rate of return method

The answer should show assumed figures of the outflow of cash and inflows of cash in future years from the financial proposal, and show 3.2 Explain which external factors you will keep in mind while assessing impact of the proposal on the strategic objectives. The answer should mention external factors which are to be considered in making strategic policies of a business in about 700 words
2009 2009-02-28 Cash Cash & Equivalents Short Term Investments Cash and Short Term Investments Accounts Receivable - Trade, Net Notes Receivable - Short Term Receivables Other Total Receivables, Net Total Inventory Prepaid Expenses Other Current Assets, Total Total Current Assets Property/Plant/Equipment, Total Gross Accumulated Depreciation, Total Property/Plant/Equipment, Total Net Goodwill, Net Intangibles, Net Long Term Investments Note Receivable - Long Term Other Long Term Assets, Total Other Assets, Total Total Assets Accounts Payable Payable/Accrued Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Total Current Liabilities Long Term Debt Capital Lease Obligations Total Long Term Debt Total Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities Redeemable Preferred Stock, Total Preferred Stock - Non Redeemable, Net Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Treasury Stock Common ESOP Debt Guarantee Unrealized Gain (Loss) Other Equity, Total Total Equity Total Liabilities & Shareholders' Equity Shares Outs - Common Stock Primary Issue Shares Outstanding - Common Issue 2 2,112.0 -3,012.0 5,124.0 276.0 4,047.0 1,112.0 5,435.0 2,669.0 419.0 -13,647.0 31,504.0 (6,813.0) 24,691.0 3,185.0 842.0 1,799.0 1,470.0 419.0 -46,053.0 4,910.0 -1,628.0 4,059.0 525.0 6,918.0 18,040.0 12,693.0 -12,693.0 17,277.0 696.0 57.0 1,629.0 33,115.0 --395.0 4,638.0 8,137.0 (232.0) ---12,938.0 46,053.0 7,895.34 -2008 2008-02-23 1,542.0 -703.0 2,245.0 212.0 0.0 807.0 1,019.0 2,430.0 298.0 -5,992.0 26,740.0 (5,841.0) 20,899.0 1,829.0 507.0 525.0 0.0 412.0 -30,164.0 4,052.0 -1,511.0 2,084.0 443.0 2,173.0 10,263.0 6,079.0 215.0 6,294.0 8,821.0 802.0 87.0 903.0 18,349.0 --393.0 4,511.0 7,115.0 (204.0) ---11,815.0 30,164.0 7,855.70 -2007 2007-02-24 902.0 -248.0 1,150.0 168.0 -791.0 959.0 1,931.0 128.0 -4,168.0 21,929.0 (4,953.0) 17,832.0 1,586.0 459.0 322.0 -440.0 -24,807.0 3,445.0 -1,265.0 1,554.0 87.0 1,801.0 8,152.0 4,398.0 147.0 4,545.0 6,186.0 535.0 65.0 1,004.0 14,301.0 --397.0 4,376.0 5,887.0 (154.0) ---10,506.0 24,807.0 7,947.35 -2006 2006-02-25 -1,325.0 70.0 1,395.0 141.0 -665.0 806.0 1,464.0 86.0 -3,751.0 20,270.0 (4,388.0) 16,627.0 1,137.0 388.0 480.0 -180.0 -22,563.0 2,911.0 -909.0 1,646.0 239.0 1,813.0 7,518.0 4,036.0 -4,036.0 5,921.0 320.0 64.0 1,245.0 13,183.0 --395.0 3,988.0 4,997.0 ----9,380.0 22,563.0 7,894.48 -2005 2005-02-26 Restated 2006-02-25 -1,146.0 0.0 1,146.0 136.0 -585.0 721.0 1,309.0 48.0 -3,224.0 18,545.0 (4,024.0) 15,086.0 1,094.0 314.0 423.0 -14.0 -20,155.0 2,848.0 -884.0 482.0 0.0 1,466.0 5,680.0 4,563.0 -4,563.0 5,045.0 496.0 51.0 762.0 11,552.0 --389.0 3,704.0 4,510.0 ----8,603.0 20,155.0 7,783.17 --

Shares Outstanding - Common Issue 3 Shares Outstanding - Common Issue 4 Total Common Shares Outstanding Total Preferred Shares Outstanding

--7,895.34 --

--7,855.70 --

--7,947.35 --

--7,894.48 --

--7,783.17 --

http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=ANN&symbol=TSCO.L

Profitability ratios
The profitability ratios and other ratios are key to understanding financial statements. Profitability ratios are the financial statement ratios which focus on how well a business is performing in terms of profit. It is a class of financial metrics that are used to assess a businesss ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
http://www.bizwiz.ca/profitability_ratio_calculation_formulas/profitability_ratios.html http://www.investopedia.com/terms/p/profitabilityratios.asp

Gross profit margin ratio = gross profit x 100 Sales = 4218 x 100

54327 = 0.0776 x 100

= 7.764 %

Return on Assets Analysis

It indicates the profitability of a company relative to its assets. This is an important ratio for companies to know the earnings which was generated from invested capital. It also helps in deciding whether or not to initiate a new project. The basis of this ratio is that if a company is going to start a project they expect to earn a return on it, ROA is the return they would receive.
http://www.investopedia.com/terms/r/returnonassets.asp

Returns on assets Total assets 46053

net profit before tax = 2954 x 100

x 100

Returns on sales
The companys operational efficiency is evaluated by ROS ratio, which is also know as firms operating profit margin. An increasing ROS indicates the company is growing more efficiently, while a decreasing ROS could signal looming financial troubles.
http://www.investopedia.com/terms/r/ros.asp

Net profit Sale

=

x 100

2161 54327 = =

100

0.0397 x 100 3.97%

Return on investment
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
http://www.investopedia.com/terms/r/returnoninvestment.asp

Return on investment

= Net profit before tax x 100 Shareholder equity = 2954 12938 x 100

= 0.2283 x 100 = 22.83% Liquidity ratios

A class of financial metrics that is used to determine a company's ability to pay off its shortterms debts obligations Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
http://www.investopedia.com/terms/l/liquidityratios.asp

Acid-Test Ratio
A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets.
http://www.investopedia.com/terms/a/acidtest.asp

Acid- test ratio = cash + account receivable +short term investment Current liability =2112 +276 +3012 4910 = 1.097 x 100 = 109.97%

Current ratio
A liquidity ratio measures a companys ability to pay short-term obligations short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.
http://www.investopedia.com/terms/c/currentratio.asp

Current ratio

Current assets Current liability

x 100

13647 x 100 18040

= = Efficiency ratios

0.7564 75.64%

x 100

Efficiency ratios measure the quality of a business' receivables and how efficiently it uses and controls its assets, how effectively the firm is paying suppliers, and whether the business is overtrading or under trading on its equity (using borrowed funds).
http://kbr.dnb.com/help/whgdata/whnvf33.htm

Collection Period Ratio

This ratio is helpful in analyzing the collectability of accounts receivable, or how fast a business can increase its cash supply. Although businesses establish credit terms, they are not always observed by their customers. In analyzing a business, you must know the credit terms it offers before determining the quality of its receivables. While each industry has its own average

collection period (number of days it takes to collect payments from customers), there are observers who feel that more than 10 to 15 days over terms should be of concern. This ratio is calculated using the following formula =Accounts Receivable Sales x 365 Days =276/54327x365 =1.854 days

Assets to Sales Ratio

This ratio rates sales to the total investment that is used to generate those sales. An abnormally high percentage may indicate that a business is not being aggressive enough in its sales efforts, or that its assets are not being fully utilized. A low ratio may indicate that a business is selling more than can be safely covered by its assets. This ratio is calculated using the following formula: Total Assets Net Sales =46053/ 54327 x 100 =0.8477 x 100 =84.77%

Average inventories turnover period =Average inventories held x 365 Cost of sales =2669 x 365
50109 = 0.0532 x 365 = 19.44 days

Sales revenue to capital employed=

Sales revenue________________ Share capital + reserves + non-current liabilities

= =

54,327 / 7895.34+8137+17277 1.6309

Investment ratios
The relationship of gains from investments (including realized capital gains) resulting from insurance operations to earned premiums

Earnings per share (EPS) = Profits after paying tax and preference dividends No of ordinary shares issued = 2166/7695.34 = 0.2814

Price Earning Ratio =

Price per share Earning per share

Financial health of Asda

10.0% growth in underlying profit before tax, 12.4% rise in Group trading profit 9.7% increase in underlying diluted earnings per share on a 52-week, constant tax rate Basis; 9.7% increase in dividend to 11.96p Sales & profit growth reported on a consistent basis. Group sales (inc.VAT) growth 14.8% and Group profit before tax growth on a statutory basis

5.4% plus Growth in underlying diluted EPS has been adjusted to reflect a constant tax rate year on year. Growth was 7.0% on a statutory basis Across the Group Asda have made a good start to the new financial year with total sales up by 9.2% in the first six weeks. For these Preliminary results, sales and profit growth is reported on a consistent basis Underlying profit before tax rose to 3,128m in the year (last year 2,843m), an increase of 10.0%. On a 52-week comparable basis, underlying profit before tax rose by 8.8%. In the same year, In competitive market conditions, the core business delivered a year of solid progress. UK sales increased by 9.5% to 41.5bn (last year 37.9bn), including like-for-like growth of 4.3%, 2.7% growth from net new stores, a contribution of 2.1% from the 53rd week and a first-time contribution from the consolidation of TPF. Excluding petrol, like-for-like sales grew by 3.0%, with increases of 2.0% and 2.7% in the third and fourth quarters respectively. Increased productivity and good expense control enabled Asda to maintain solid margins and deliver good profit growth despite these challenges, whilst also absorbing initial trading losses totaling around 22m on Asda Direct. After these costs, UK trading profit rose 12.7% to 2,381m (last year 2,112m), with trading margins at 6.2%, including TPF, slightly up on last year. On a 52-week comparable basis, UK trading profit rose 10.7%. Asda share of profit (net of tax and interest) for the year was 110m, an increase of 35m compared with last year. Asda has a strong, property-backed balance sheet, with sufficient funding in place to meet the needs, including no material bond maturities during the current financial year. Plan to fund the growth of the group predominantly from internal sources recognizing the current uncertainties in financial markets and this will be achieved by reducing capital expenditure to below our operating cash flow. Group capital expenditure (excluding acquisitions) rose to 4.7bn (last year 3.9bn), slightly higher than the forecast made at our Interim Results. This increase compared with last year was attributable principally to the purchase of a small number of trading stores from a competitor and investment in new mixed-use development schemes in the UK, combined with higher International capital expenditure, including our initial investment in freehold shopping centre developments in China. Furthermore, International capital spending, and as a result total Group expenditure, was impacted by the decline in Sterling relative to most of our trading currencies. Cash flow from operating activities totaled 5.0bn (last year 4.1bn), including an improvement

of 582m within working capital, driven in part by good control of stock. Net debt rose to 9.6bn at the year-end (last year 6.2bn). 1.9bn of this increase is attributable to the impact of acquiring TPF and However, and a further 1bn to the effect of unfavorable currency movements. The transactions completed so far with pension funds, property companies and other investors have delivered aggregate proceeds of 2.2bn. Whilst yields have increased modestly in recent months, it was expect to be able to complete further transactions on attractive terms in the months ahead and Asda are currently in discussion with potential counterparties. Proceeds for the remainder of this year will principally be used to pay down debt. The net book value of our tangible fixed assets is 24.7bn, most of it in freehold store portfolio even after recent property divestments linked to our 5bn programmed. It was estimate the current market value of these assets to be 30.4bn, representing a 23% premium to book value. So over all Asda is in good position and there are good chances for Asda to grow in future further more.

Question 2
2009 Revenue Cost of sales Gross profit 54327x1.20 (50,109) 4218 2010 65192x1.20 2011 78230

(60,133) 5059

(72159) 6071

Selling/general/admin 1248x1.05 Unusual Expanses Total operating expanse Operating income 236 51121 3206

1310x1.05 248 61193 3997

1376 260 73275 4955

Payback period method

The payback is another method to evaluate an investment project. The payback method focuses on the payback period. The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates. This period is some time refered to as" the time that it takes for an investment to pay for itself." The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment. The payback period is expressed in years. When the net annual cash inflow is the same every year, the following formula can be used to calculate the payback period

Formula Payback period = Investment required / Net annual cash inflow

http://www.accountingformanagement.com/pay_back_method_of_capital_budgeting_decisions.htm

Example:1 Year Cash Flow 1 2 3 4 5 22,000 18,000 21,000 20,000 17,000

Needed 82,796 60,796 42,796 21,796 1,796

Balance 60,796 42,796 21,796 1,796

Payback Years 1.0 1.0 1.0 1.0 ----0.1

Total payback period in years 4.1 Example:2 XYZ Company needs a new shredding machine. The company is considering two machines. Machine A costs 15,000 and will reduce operating cost by 5,000 per year. Machine B costs only 12,000 but will also reduce operating costs by 5,000 per year.

Calculation Machine A payback period = 15,000 / 5,000 = 3.0 years Machine B payback period = 12,000 / 5,000 = 2.4 years According to payback calculations, XYZ Company should purchase machine B, since it has a shorter payback period than machine A. Net present value method Under the net present value method, the present value of a project's cash inflows is compared to the present value of the project's cash out flows. The difference between the present value of these cash flows is called "the net present value". This net present value determines whether or not the project is an acceptable investment. To illustrate consider the following data.
http://www.accountingformanagement.com/net_present_value_method.htm

Example1 Year Cash Flow 0 1 2 3 4 5 6 7 (82,796) 22,000 18,000 21,000 20,000 17,000 19,000 18,000

P.V. Factor 1.000 .909 .826 .751 .683 .621 .564 .513

Present value (82,796) 19,998 14,868 15,771 13,660 10,557 10,716 9,234 12,282 Net Present Value = 24290

8 26,300 .467 Present value = 107,086

Example2 Samuel Company is contemplating the purchase of a machine capable of performing certain operations that are now performed manually. The machine will cost 5,000, and it will last for five years. At the end of five-year period the machine will have a zero scrap value. Use of the machine will reduce labor costs by 1,800 per year. Samuel Company requires a minimum pretax return of 20% on all investment projects. Should the machine be purchased? Samuel Company must determine whether a cash investment now of 5,000 can be justified if it will result in an 1,800 reduction in cost each year over the next five years. It may appear that the answer is obvious since the total cost savings is 9,000 (5 1800). However, the company can earn a 20% return by investing its money elsewhere. It is not enough that the cost reductions cover just the original cost of the machine. They must also yield at least 20% return or the company would be better off investing the money elsewhere. To determine whether the investment is desirable, the stream of annual 1,800 cost savings is discounted to its present value and then compared to the cost of the new machine. Since Samuel Company requires a minimum return of 20% on all investment projects, this rate is used in the discounting process and is called the discount rate

Internal rate of return method The internal rate of return is the rate of return promised by an investment project over its useful life. It is some time referred to simply as yield on project. The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash out flow with the present value of its cash inflow In other words, the internal rate of return is that discount rate that will cause the net present value of a project to be equal to zero.

The formula Factor of internal rate of return = Investment required / Net annual cash inflow

Example

The factor derived from formula is then located in the present value tables to see what rate of return it represents. Using formula and the data for school's proposed project, we get: Investment required / Net annual cash inflow = 16,950 / 3,000 = 5.650 Thus, the discount factors that will equate a series of 3,000 cash inflows with a present investment of 16,950. Now we need to find this factor in the table to see what rate of return it represents. We would use the 10-period line in the table since the cash flows for the project continue for 10 years. I we scan along the 10-period line, we find that a factor of 5.650 represents a 12% rate of return. We can verify this by computing the project's net present value using a 12% discount rate.

REFRENCES
http://www.zeromillion.com/business/financial/business-finance.html http://www.accountingformanagement.com/use_of_internal_rate_of_return_m.htm viewed 30 June 2009 http://www.reuters.com/finance/stocks/incomeStatement? stmtType=BAL&perType=ANN&symbol=TSCO.L viewed 02 July 2009 http://www.Asdaplc.com/plc/ir/pres_results/results/r2009/2009-04-21/2009-04-21.pdf viewed july 2009 http://www.accountingformanagement.com/net_present_value_method.htm viewed july 2009