Robert arias recently inherited a stock portfolio

Finance

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College of Administrative and Financial Sciences

Assignment 1

Principles of Finance (FIN101)

Deadline: End of Week 6 (10/10/2020 @ 23:59)

Course Name: Principles of Finance

Student’s Name:

Course Code: FIN101

Student’s ID Number:

Semester: 1st

CRN:

Academic Year: 1441/1442 H, 1st Term

For Instructor’s Use only

Instructor’s Name:

Students’ Grade: /5

Level of Marks: High/Middle/Low

Instructions – PLEASE READ THEM CAREFULLY

· This assignment is an individual assignment.

· The Assignment must be submitted only in WORD format via allocated folder on Blackboard.

· Assignments submitted through email will not be accepted.

· Students are advised to make their work clear and well presented. This also includes filling your information on the cover page.

· Students must mention question number clearly in their answer.

· Late submitted assignments will NOT be entertained.

· Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.

· All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).

Submissions without this cover page will NOT be accepted.

Assignment Workload:

· This Assignment comprise of a short Cases.

· Assignment is to be submitted by each student individually.

Assignment Purposes/Learning Outcomes:

After completion of Assignment-1 students will able to:

LO1. Understand the financial environment of the company. (1.1)

LO2. Examine the relation between finance and accounting. (2.3)

LO3. Measure financial corporate performance.(1.2)

LO5. Analyse the relationship between risk and return. (1.1)

Assignment Question(s): (Marks 5)

1. Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark – 0.2 each)

a) Is a decrease in land and buildings an inflow or an outflow of​ cash?

b) Is an increase in accounts payable an inflow or an outflow of​ cash?

c) Is a decrease in vehicles an inflow or an outflow of​ cash?

d) Is an increase in accounts receivable an inflow or an outflow of​ cash?

e) Is the payment of dividends an inflow or an outflow of​ cash? 

2. Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now​ invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed here:

Island

Burger

Fink

Roland

Ratio

Electric Utility

Heaven

Software

Motors

Current ratio

1.06

1.35

6.79

4.55

Quick ratio

0.92

0.87

5.23

3.73

Debt ratio

0.69

0.45

0.04

0.34

Net profit margin

6.25%

14.33%

28.46%

8.43%

Assuming that his uncle was a wise investor who assembled the portfolio with​ care, Robert finds the wide differences in these ratios confusing. Help him out.

a. What problems might Robert encounter in comparing these companies to one another on the basis of their​ ratios? (Select all the answers that​ apply.) (0.25 Marks)

1. The four companies are in very different industries.

2. The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.

3. Financial ratios from software companies are never very reliable.

4. Caution must be exercised when comparing older to newer​ firms, e.g., utility company vs. software company.

b. Why might the current and quick ratios for the electric utility and the​ fast-food stock be so much lower than the same ratios for the other​ companies? (Select all the answers that​ apply.) (0.25 Marks)

1. Their inventory balances are going to be very close to zero because it is impossible to stockpile electricity and burgers.

2. The explanation for the lower current and quick ratios most likely relates to poor management performance.

3. Their accounts receivable balances are going to be much lower than for the other two companies.

4. The explanation for the lower current and quick ratios most likely rests on the fact that these two industries operate primarily on a cash basis.

c. Why might it be all right for the electric utility to carry a large amount of​ debt, but not the software​ company? (Select all the answers that​ apply.) (0.25 Marks)

1. A high level of debt can be maintained if the firm has a​ large, predictable, and steady cash flow.

2. The software firm will have very uncertain and changing cash flow.

3. Utilities tend to have steady cash flow requirements.

4. The software industry is subject to greater competition resulting in more volatile cash flow.

d. Why​ wouldn't investors invest all of their money in software companies instead of in less profitable​ companies? (Focus on risk and​ return.) (Select all the answers that​ apply.) (0.25 Marks)

1. Software companies tend to carry large debt which represents senior claims on the​ companies' assets.

2. Investors​ wouldn't invest all of their money in software companies because their average collection period is usually very high.

3. By placing all of the money in one​ stock, the benefits of reduced risk associated with diversification are lost.

4. Although the software industry has potentially high profits and investment return​ performance, it also has a large amount of uncertainty associated with the profits.

3. You have $5,100 to invest today at 11​% interest compounded annually. Find how much you will have accumulated in the account at the end of​: (0.5 Marks each)

(1) 4 years,

(2) 8 years, and​

(3) 12 years.

4. Using the values​ below, answer the questions that follow:

Amount of annuity

Interest rate

Deposit period​ (years)

​$500

9​%

10

a) Calculate the future value of the​ annuity, assuming that it is

(1) ​An ordinary annuity. (0.5 marks)

(2) ​An annuity due. (0.5 marks)

b) Compare your findings in parts a​(1) and a​(2). All else being​ identical, which type of annuity—ordinary or annuity due—is preferable as an​ investment? Explain why. (0.5 Marks)