Learning Objectives:
The first question of the assignment will enable the students to understand the concept regarding time value of money and its different elements.
The second question of the assignment will enable the students to apply the techniques of ROA and ROE for financial decision making.
QUESTION # 1:
Mr. Sohail is currently residing in New Jersey (USA) with his family including his wife and his 5-years old son Ali. He earns such amount of money, which is quite enough to run his house so he often gets worried when he thinks about his son’s education in future as he knows that the tuition fees in the state colleges are quite high at the moment and they will be even higher in future. Annual tuition fee in one of the state colleges is currently $14,500 and it has been increasing at a rate of 8% annually. Ali will be able to join t he college after 10 years. Mr. Sohail has set aside $15,500 to invest in order to meet the education expenses of his son in future.
| Required: | ||
| a) | What will be the tuition fee of state college after 10 years? |
(4) |
| b) | At what rate, Mr. Sohail should invest his $15,500 so that the value of his investment equates the tuition | |
| fee of state college after ten years? |
(6) |
|
QUESTION: 2
ABC Company is involved in the shoe manufacturing business and some of the financial figures of the company are as follows:
| Sales |
$750,000 |
| Net Profit |
$80,000 |
| Total assets Turnover |
0.75 times |
| Total Debt Ratio |
0.36 times |
The company wants to increase its profits but it requires more investment of $250,000 in assets for opening new outlets. 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 $20,000 in the profit of the company.
Required:
| a) | Calculate the Return on Assets (ROA), Return on Equity (ROE) before investment. |
(4) |
| b) | Do you think there is an impact of new investment on ROA and ROE? Support your answer with | |
| calculations. |
(4) |
|
| c) | As a manager of the company, do you recommend this change or not? |
(2) |
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- Do prepare the solution after completely reading and understanding the questions. Put your genuine efforts in order to understand the concepts thoroughly.
Provide complete calculations for all parts of the questions.
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RULES FOR MARKING
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