BUSINESS FINANCE (ACC501)
ASSIGNMENT NO. 01
DUE DATE: 3RD DECEMBER, 2015
MARKS: 20
Learning Objectives:
After attempting this assignment enthusiastically, the students will be able to:
. Apply the techniques of ROA and ROE for financial decision making.
. Calculate required rate of an investment plan.
Question # 1
Ali Corporation is engaged in the furniture manufacturing business. Following are
some of the financial figures of company:
Sales
Rs. 760,000
Net Profit
Rs. 85,000
Total assets Turnover
0.70 times
Total Debt Ratio
0.30 times
The company wants to increase its profits but it requires more investment of Rs. 240,000 in assets for opening new branches. The company wishes to finance its new assets in equal proportion of debt and equity. There will be an increase in sales that will lead to a positive change of Rs. 21,000 in the profit of the company.
Required: (5 + 5 + 3 +2)
a) Calculate the ROA (Return on Assets), ROE (Return on Equity) before investment.
b) Calculate the ROA (Return on Assets), ROE (Return on Equity) after investment.
c) Compare the findings of above A & B.
d) As a manager of the company do you recommend this change or not?
Question # 2: (5)
Mr. Ali is a salaried person and wants to buy a house after 10 years. At that time, he
would be required to have an amount of Rs. 1,500,000 for the purpose. Currently, he has
Rs. 600,000 to invest. He has found an investment plan that promises to pay Rs.
1,500,000 after 10 years if he invests Rs. 600,000 now. You are required to calculate the
interest rate offered by the investment plan?
SOLUTION
1. Total Debt Ratio
This ratio takes into account all debts of all maturities to all creditors. It is computed as:
Total Debt Ratio =Total Assets-Total Equity / Total Assets
2. Inventory / Asset Turnover Ratio
Inventory turnover can be calculated as:
Inventory turnover Ratio = COST OF GOODS SOLD/ INVENTORY
OR U CAN SAY , IN THIS QUESTION
Inventory turnover Ratio = sales/assets
VERY EASY
ROA(RETURN ON ASSETS=NET INCOME/TOTAL ASSETS
ROE (RETURN ON EQUITY)=NET INCOME/TOTAL EQUIITY