Assignment on The liquidity position of the company (current ratio and quick ratio). What is your view about the status of the liquidity position of Oman Cement Company?

Liquidity ratios calculate to learn about the company's ability to meet the requirement of the financial applications and the liabilities, such as the current ratios and click ratio. The current ratio is the ratio of the business assets to total current liabilities that is calculated by dividing current assets by current liabilities. The ideal current ratio is always 2:1. The quick ratio is calculated as indicated that give the filters of the current ratio by measuring the different kinds of amount that is, most liquid current answered to cover the current liabilities. It is based on the equivalent of cash and marketable investment and account receivable that could be easily convertible in their current liabilities.

The quick ratio is more considered in the better view of the business coupe, its liabilities and the difference of the inventories in the analysis of the liquidity of the business. As for concern with the Liquidity ratio of cement company is based on the fiscal year ended on 31^st December 2019 that represent Oman cement revenue decreased by 5% to OMR 48.1 million. The nature of the new company also decreased by 45% to OMR 4 million. The decrease in net income also affected the liquidity ratio of the company, that is, stay on the. Tweak ratio is on 1.3, four and the current ratio is 3.17. As there is much to decrease in the in finances, the revenue of the company but still quick ratio and current ratio is stable. So according to my analysis, I think the company is doing well in the dealing of liquidity ratios. Company has the ability to repay its liability as compared to revenue generated from the financial year.

(i)                 Cash Operating Cycle in a tabular form (as shown in ppt slide number 10 of working capital management) and present Cash Operating Cycle in a diagram for both years separately (as shown in class ppt slide number 9 of working capital management).

The cash operating cycle can be calculated by adding inventory days and receivables days, and subtracting payables days for 2019,

Cost of sales = 41,773,233x (1 – 0.131) = $36,300,940

Inventory days = 360 x 25,030,963/36,300,940 = 248 days
Trade receivables days = 360 x 9769735/41,773,233= 84 days
Trade payables days = 360 x 7808487/36,300,940 = 77 days

Cash operating cycle of Oman cement Co (2019):

= 248 + 84 – 77 = 255 days

(ii)              Suggestions for working capital management:

According to the working Capital Management changes in the market. There are some important as so is privatized within a man since 2000 and include different kinds of major interpret. Nuer such as petroleum, product Market Company and the government shares intermittent telecommunication is. Reduced from 63.5% two 51%. Following are some suggestions that are given to the man cement company such as:

·         Oman cement company should maintain the equity of shareholder in such position that investors could be attracted by the existing investment.

·         Oman Cement Company must increase its fixed asset as well as increased its sales.

·         There must be the net sale of in Management Company increasing that could be able to maintain the higher profit in the company.

·         Complete should increase current liabilities of the Oman cement company.

·         The sales of the company should be increasing as well as its gross profit is decreasing. It should be avoided.

·         The Profit after tax must be according to the interest and more than the shareholder that is invested in the men working capital of the company.

·         Operating profit before tax and interest of one company is more than the capital employed. Therefore it should be maintained. 

Question no. 2

a)      Expected annual return on equity (ROE)

To calculate return on equity we need to have net income for both options. The following tables represent the calculated net income for option 1 and 2 by considering the average, weak, and strong sales scenario.

While for option 2 the net income is presented below in the table.

Using the above information the return on equity is calculated with the following formula:

The following table represents the return on equity for each option in accordance with the case scenario (weak to strong):

Now calculating for option 2:

b)     Expected average annual return on equity (ROE)

The expected average annual return on equity is calculated below while considering all the options together.

c)      Benefits and drawbacks of capital structure

The benefit and drawbacks of Hassen Constructions into changing capital structure are presented below:

Benefits:

1)      Changing the capital structure will give benefits to the company by reducing the cost. According to the research, the cost of debt is relatively cheaper than the cost of equity.

2)      Increase in interest expense because of debt financing will benefit the company in reducing tax expense.

3)      Issues and administrative cost of debt financing are lower than equity financing therefore the company would be able to save some expenses such as legal fees and issuing cost.

Drawbacks: The key drawbacks of this decision are enlisted below:

1)      Debt is risky for the future operations of a business as a company have to pay back the loan and debt amounts after the maturity date.

2)      The inability of paying back debt can result in bankruptcy. Therefore, excessive debt financing is not a recommended option.

The Hassen constructions company have two available options regarding changes in its capital structure. Firstly to issue 30% debt at the interest expense rate of 7%. Secondly, company can have debt financing at the 7.5%  interest rate. These values are used for the calculation of return on equity in the above question. According to the analysis, the most suitable option for Hassen Construction company is to select option 1. Following the analysis, option 1 would have at least 17.7% net income a greater amount than expected to be generated by option 2.  Somehow, the return on equity ratio of option 2 is greater than option 1. Even in case of strong sales, the company's return on equity (in option 2) is exceeding the maximum limit for return on equity. A recommended range for return on equity value is 15 to 20. Therefore, the analysis of net income and return on equity (ROE) both suggest that the company should select option 1.

d)     Factors that Hassen construction should consider          

The two important factors should be considered by the Hassen Construction company while evaluating the capital structure policy. See the following two factors:

Interest Rate:

When companies take a decision for the equity financing they usually pay attention to the return and market value. Although, while adding the debt financing in the capital structure they should consider the cost of debt financing and interest expenses. A higher interest rate will increase interest expenses. In such a situation, the company will have to pay relatively higher than equity financing. Moreover, overall net income reduces when interest expenses cover a huge amount of EBIT. Therefore, how much debt would require interest expenses is an important question for the company to be considered in the decision making process.

Return on equity:

Hassen Construction company would also consider the amount of return on investment. Companies paying a higher return amount can easily get financing from the markets. Therefore, for a better reputation company would need to generate a higher return as return on equity. The capital structure that provides a higher return on equity should be selected by the company.

Question no. 3

a)       

Capital investment = RO 8 million

Net Profit = RO 10 million

Debt = 25% of capital structure

Equity = 75% of capital structure.

Therefore, equity required as retained earnings would be 75%*RO 8 million

Equity = 75%*8 million

=RO 6 million

Hence, from a profit of R0 10 million, 6 million will be retained earnings and RO 4 million can be distributed as dividend.

Dividend payout would thus be:

Dividend ratio =

b)      To earn money in the market of the business is mainly to earn from equity by investing in the Stock Exchange. A complete distributes its profit to its shareholder by declaring some part of its dividend. In some cases, the company partially distributes profits and some of the parts have remained for the purpose of such expansion and growth of the business. The dividend is distributed according to per unit or share purchased by the shareholder. For example, if a company decides to give ₹10 per share and face value of a single unit, it is called 100% dividend paid ratio. However, another method is to issue bonus here to the shareholders in.

Replacement offer dividend. When the company has not enough profit or there is a requirement to enhance the capital of business, there must be. Bonus here issue in against the amount that is paid in the form of a dividend. According to my Adelphi company could enhance is profit and in development projects by cash is much better, but in the case when the company itself funds to expand the business, there must be a bonus share issue and enhance the equity of the shareholders. That could help to increase the capability to invest in your projects of the company. There should be a bonus share issue to increase the development and growth rate in the projects of the company.

c)      A stock split is a corporate action taken by the company's management and the directors said to increase the number of outstanding shares. It is done by dividing each into different multiple ones and decreasing the stock price. A stock split is not considered as the company's market capitalization. The current snare you. There are several reasons for the company to consider a stock split. Is the price of stock gets higher and higher and there are some investors in the market that feel to increase the price and considered prices too high and avoid the investment in the stock market.

 Splitting the stock brings the share price down and become more attractive to thus investors and they invested in such kind of features and increase the company's capital. The splitting stock also gives the shareholder feeling that they certainly have more shares before they had in hand. If the prices rise, they have more stock to trade in the market. It is also helpful in increasing the liquidity of the store and the number of outstanding shares in the market to trade according to the bid and spreads. There are also benefits linked with the investors as it is good to stock split by indicator as of purchasing the different kinds of share.

d)      In the current situation, Oman being hit by different view shocks and the one is COVID-19 and the other is a shocking decrease in oil prices. The government policy is working on the both are for the development and there are different cases that are registered in the COVID-19 impact. Oman governmental takes different measures, including a reduction in interest rate and operations. Of the extension of three months and reduced the interest rate in different kinds of investment. So this according to the situation, I suggest that complete should decrease the dividend payout ratio to save the future investment and project capital in them. Forms of company.

The pandemic situation of coronavirus is surprising all around the world and infecting the office financial performance of the company as well face the challenging impact of the COVID-19. According to the scenario in the cement industry, there is a temporary reduction of liquidity coverage ratio from 100 to 80%, and restriction from the banks to make banks and other financial institutions to make dividend payout. The dividend payout ratio is classified during the two to three month period according to the requirement and extension of the 90s days.

Question no 4

Required:

(i)                 Calculate the Accounting Rate of Return for both Methanol and Fertilizer project.

(ii)              Calculate Payback Period of Project Methanol and Fertilizer

Hence, the Payback Period for project Methanol is 1.8 years and project Fertilizer is 2 years.

Working is shown in the following table:

(iii)            Calculate the NPV of Methanol and Fertilizer project

(iv)             Calculate IRR of Methanol and Fertilizer project                                         

·         NPV is negative RO 1,956 @ 40% for Menthol Project

·         NPV is negative RO 5,359 @ 40% for Fertilizer Project

(v)               Present the overall results of above in a table and recommend one best proposal to management.  Give a recommendation for your recommendation.

The above figures are shown as the profitability index and I am all for the company. As concerned with the profitability index, it is 1.6814 methanol and 1.6354 fertilizers. The IRR based as 38.14% for methanol and 35.09% for fertilizers. According to the table analysis, it is recommended their company should invest in them for their project as the ARR of the company is from favourable and profitability index is also positive.