FINC6001: Corporate Finance Assignment Answer to Questions

FINC6001 – Finance for Business Assignment Template

 

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FINC6001 ASSIGNMENT

Task 1

FINC6001 COMPANY ANALYSIS – RATIO

You are the Vice President of Corporate Credit Department at CIMB Bank. Your main responsibility is to review applications for loans. You are at present reviewing a short-term loan application of RM8 million by the Lion Tools Corporation (LTC). LTC manufactures various types of high-quality punching and deep-drawing press tools for kitchen appliance manufacturers.

CASE CONTEXT

LTC has been into the market for 2 years and has recently gone through the initial public offering (IPO) process and has become a public company. LTC has an annual sale of RM45 million in year 2016. LTC makes unique tools for kitchen appliances. For the past 2 years LTC has spent so much on the R&D.

LTC’s 2-years performance revealed challenges in terms of Account Receivables collection. Within this 2-year period, LTC availed loans from HLBB and Agro Bank. Though Mr Fauzie Fau has proven himself to be very likeable and persistent person, the company’s 2-year performance poses a challenge for him and for LTC to avail the RM8M from CIMB.

You as the VP of the Credit and Corporate Loan is in dilemma now on whether to approve the LTC’s request for the short-term loan given the information he got from asking the other 2 banks who handled LTC’s loan. LTC has a good working relationship with the other two banks. Both Banks have praises for the company and its determined manager. However, unwilling to increase LTC’s borrowing limit based on their average leveraged position.

LTC had experienced extraordinary growth, fuelled by heavy spending on research and development and a rapid expansion of its sales force. Its technical staff was very well regarded at developing new products with a wide range of applications. The combination of state-of-the-art products and a rapidly expanding market resulted in sales growth of 10% per year. Mr. Fauzie believed that industry sales would continue to grow at this rate and that any failure to maintain LTC’s market position would be damaging in terms of competitive position and internal morale.

Sales volume, which had grown continuously from the start, was always large in relation to the available capital. The situation was exacerbated by large operating losses as LTC entered new markets aggressively. Management met the financing pressures by heavy reliance on short-term credit

With the two-year financial statements, you will have to assess the viability of approving LTC’s loan request.

The case will be analyzed using your perspective. Also, it will be assumed that LTC is a start-up company and this is the main reason why LTC relied heavily on short term loans to finance their initiatives for growth

Mr Fauzie Fau, the financial manager of LTC, has submitted a justification to support the application for a short-term loan from CIMB for a 8M loan. Extracts of the Statement of Comprehensive Income and Statement of Financial Position of LTC, submitted with the justification to BBB, are provided below:

Mr. Fauzie Fau was perfectly willing to pledge the company’s accounts receivable, inventory or anything else that the bank thought would be desirable security as long as the arrangement was fair to the company and specific enough so that he could count on having the funds available when he needed them. You explained that the bank was always interested in sound loan proposals from companies that showed the promise of developing into good accounts. You promised to study the request and said that you hoped to visit the company in the near future.

Mr. Fauzie Fau also pointed out that LTC was a familiar name to two other major banks and suggested you to consider seeking the insights of the loan officers involved. Summaries of their comments are provided as below:

Bank of HLBB (Asset Based Lending Division)

“Fauzie Fau is a very likeable, magnetic person who puts you through challenging but enjoyable mental gymnastics during negotiations. He is also a grinder who comes back once a week with a new request. He never lets up when he wants something; just keeps coming at you and grinding away. The CEO, Pak Wan also tries to get to the highest possible authority, even on mundane issues. He left HLBB because of our unwillingness to add to LTC’s highly leveraged position. We simply didn’t believe that the quality of the assets warranted higher lending limits.”

AGRO Bank (Technology Lending Group)

“Pak Wan is extremely honest and made LTC an open book. The bankers were invited to the strategic planning meetings and were kept informed of developments at the company. Pak Wan is well trained, with an MBA from MIU, and is a tough, effective CEO. He is a doer and a shaker.”

STATEMENT OF FINANCIAL POSITION OF LION TOOLS CORPORATION

AS AT 31 DECEMBER

2019 (‘000) 2018 (‘000)
ASSETS
Non-current assets
Land 1 000 1 000
Plant and equipment 31 000 26000
Dep (13000) (10000)
Current assets
Cash and cash equivalents 1 800 2 000
Trade receivables 7 600 6 000
Inventories 5 220 5 000
TOTAL ASSETS 33 620 30 000
EQUITY AND LIABILITIES
ordinary share 4 000 4 000
Retained earnings 6 620 4 000
Non-current liabilities
Debentures 4 000 4 000
Current liabilities
Trade payables 15 600 15 000
Accrued expenses 3 400 3 000

 

EXTRACT OF THE STATEMENT OF COMPREHENSIVE INCOME OF LION TOOLS CORPORATION FOR THE YEAR ENDED 31 DECEMBER
2019 (‘000) 2018(‘000)
Revenue (all credit) 45 000 40 909
Cost of sales (23 000) (20 909)
Gross profit 22 000 20 000
Selling and admin expenses (13 000) (11 818)
Other expenses (depreciation) (3 000) (2 000)
Finance costs (412) (400)
Profit before tax 5 588 5 782
Income tax expense (2 235) (2 313)
Profit for the year 3 353 3 469
**ordinary dividend 733 000 758 000
TOTAL LIABILITIES AND EQUITES 33620 33000

 

REQUIRED

Prepare REPORT to submit to your boss, as to whether finance should be granted to Lion Tools Corporation. The contents should have:

  1. Ratio Analysis for year 2018 and 2019 (in table)
    • Profitability Ratio
      • Gross profit margin
      • Operating profit margin
      • Net profit margin
    • Liquidity Ratio
      • Current ratio
      • Acid test ratio
    • Leverage Ratio
      • Debt ratio
      • Interest cover ratio
    • Efficiency Ratio
      • Inventory turnover
      • Average Collection period
    • Market Value Ratio
      • Earnings Per share
      • Dividend per share
      • ETC
  • Compute the Horizontal and Vertical Analysis
  1. Recommendation.

Based on ratio analysis, evaluate the performance of the company and your suggestion to your boss.

FORMAT

  • Provide comments and evaluations under the respective topics provided.
  • You may assume 365 days in a given year and you are not required to use averages.
  • Assume credit purchases are equal to cost of sales.
  • Show all your workings and round to 2 decimal points.
  • Use font Arial 11 in preparing your report.
  • Prepare slides for group presentation
  • You need to submit hardcopy and softcopy.

 

ASSIGNMENT

 

Task 2

INSTRUCTION: ANSWER ALL

STRUCTURED QUESTIONS                                                                               [TOTAL: 50 MARKS]

Answer All Questions.

 

QUESTION 1 (30 MARKS)

 

(a).  As stated by Robert T. Kiyosaki, there are four quadrants on how to reach financial goals and achieve success with different approaches. As he said, one of the smartest people is when he or she is smart in “investing”. Making a good decision especially in choosing the best financial instruments of investments for instance bond and shares will give individuals better return in the future.

 

Based on that statement above you were required to:-

  1. Explain THREE (3) characteristics of bond  (6 marks)
  2. Describe THREE (3) characteristics of shares (6 marks)

(b).  Dato Sri Shanmuga has recently inherited RM200,000 and is considering purchasing 180 bonds of the SP Setia Corporation. The bond has a par value RM1,000 with 10 percent coupon rate and will mature in 10 years. Calculate the value of bond and justify whether Dato Sri Shanmuga has enough money to buy the 180 bonds if the required rate of return is 8 percent.  (6 marks)

(c).  Briefly explain the following terms:

  1. Financial position  (3 marks)
  2. Cost of goods sold  (3 marks)
  3. Fixed deposit  (3 marks)
  4. Financial Statement  (3 marks)

 

QUESTION 2 (20 MARKS)

 

Ghazali Ventures Sdn Bhd has the following mutually exclusive projects.

 

Year                Project A (RM)                      Project B (RM)

0                         (1,500,000)                             (2,000,000)

1                            380,000                                  120,500

2                           490,000                                  1,600,000

3                            470,000                                  450,000

4                            530,000                                 200,000

 

(a).  Suppose Ghazali Ventures Sdn Bhd payback period (PP) cut-off is two years. Compare these two projects.  (8 marks)

(b).  Suppose Ghazali Ventures Sdn Bhd uses the Net Present Value (NPV) rule to rank these two projects. Calculate the NPV and choose which project should be chosen if the appropriate discount rate is 10 percent.   (8 marks)

(c).  Based on the answer in (a) and (b), identify which project should be finally chosen and explain your answer with the support of payback period (PP) and Net Present Value (NPV).  (4 marks)

 

 

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