NEPAL ENGINEERING COLLEGE

(POKHARA UNIVERSITY)
PRAYAGPOKHARI, LALITPUR

M.Sc. IN CONSTRUCTION MANAGEMENT

FINANCIAL MANAGEMENT

ASSIGNMENT - 1

SUBMITTED BY:
NIKESH SHRESTHA
CRN: 1046

2077
 FINANCIAL MANAGEMENT

Q. No. 1. Indicate whether the following statements are “True or false” support
your answer with reasons.
I. The wealth maximization objectives consider the risk and timing of returns.
True. Shareholders wealth is measured in terms of share price. Share price
depends upon the cash flow, risk, time and rate of return. So, wealth
maximization considers both the risk and uncertainty factor as well as time
value of money.

II. Both the balance sheet and income statement shows the financial position of
the firm at the end of year.
False. Balance sheet is a statement of assets and liabilities of a business
enterprise at a given date. It is a statement summarizing the financial position
of the firm. Whereas, income statement is that statement which presents the
net results of the business operation during an accounting period. It shows all
the company's revenues and expenses during this period.

III. In case if company liquidation, common stockholders receive the money

before the creditors and after the preference stockholders are paid.
False. Common stockholders will not receive assets unless the creditors and
preference shareholders are paid first. Thus, in case of company liquidation,
creditors are paid first. Then, preference stockholders are paid. Common
stockholders are last in line to receive money.

IV. In a large corporation, the firm’s owners are usually also its top managers.
False. Usually management owns only a small fraction - if any at all - of the
company´s common stock.

V. A high inventory turnover ratio would be more important to a dairy company

than to a jewelry store.
True. Inventory turnover ratio (ITOR) measures how frequently the firm's
inventory turned into sales. A diary company need to have higher inventory
turnover ratio, because their products will expire and lose their value much
faster. Whereas a jewelry store will keep their value even if they are not sold
for longer time.

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VI. Goodwill and patent are the examples of tangible fixed assets.
False. Tangible assets are physical. They include cash, inventory, vehicles,
equipment, etc. Intangible assets do not exist in physical form. Goodwill and
patent are examples of intangible assets.

VII. Current assets and current liabilities are included on operating activities.
True. Operating activities includes all cash flows from transaction of current
assets and current liabilities except, short term investment, notes receivables,
notes payable i.e. current assets which earn interest and current liabilities
which pay interest.

Q. No. 2. Complete the balance sheet and sales information of Himalayan Brewery
using the following financial data.
Total liabilities to assets ratio 50%
Total assets turnover 1.5:1
Quick ratio 0.8:1
Days sales Outstanding 36 days
Gross profit margin 25%
Inventory turnover 5 times
Days in years 360 days

Himalayan Brewery
Balance sheet as end of year
Assets Amount Liabilities Amount
Cash …………… Account payable ……………
Account receivable ………….. Long term debt 60,000
Inventories ………….. Common stock ……………
Fixed assets …………… Retained earnings 97,500
Total assets 3,00,000 Total liabilities and …………..
equity
Sales …………… Cost of goods sold ……………

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 FINANCIAL MANAGEMENT

Solution:
Total Assets = 300,000
Total Liabilities and Equity = 300,000
Total liabilities to assets ratio = 50% = 0.5
Total liabilities = Total Assets * 0.5 = 300,000 * 0.5 = 150,000
Total Assets Turnover Ratio = Annual Sales/Total Assets = 1.5
Annual Sales = Total Assets * 1.5 = 300,000 * 1.5 = 450,000
Days sales Outstanding = Receivables*360 / Sales = 36 days
Account Receivables = 36 * Sales / 360 = 36*450000/360 = 45,000
Current Liabilities = Total Liability–Long Term Debt = 150000–60000 = 90,000
Account Payable = 90,000
Quick Ratio = Total Quick Assets / Total Current liabilities = 0.8
Total Quick Assets = Quick Ratio * Total Current Liabilities = 0.8*90000 = 72,000
Cash = Total Quick Assets – Accounts Receivables = 72000 – 45000 = 27,000
Gross Profit Margin = Gross Profit / Sales = 25%
Gross Profit = Gross Profit Margin * Sales = 0.25*450000 = 112,500
Cost of Goods Sold = Sales – Gross Profit = 450000 – 112500 = 337,500
Common Stock = Total liabilities and equity – Account Payable – Retained Earning
– Long term Debt
Common Stock = 300000 – 90000 – 97500 – 60000 = 52,500
Inventory Turnover = Cost of Goods Sold / Average Inventory = 5 times
Average Inventory = Cost of Goods Sold/5 = 337500/5 = 67,500
Total Quick Assets = Current Asset – Inventory
Current Assets = Total Quick Asset + Inventory = 72000 + 67500 = 139,500
Fixed Asset = Total Assets – Current Assets = 300000 – 139500 = 160,500

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 FINANCIAL MANAGEMENT

Himalayan Brewery
Balance sheet as end of year
Assets Amount Liabilities Amount
Cash 27,000 Account payable 90,000
Account receivable 45,000 Long term debt 60,000
Inventories 67,500 Common stock 52,500
Fixed assets 160,500 Retained earnings 97,500
Total assets 300,000 Total liabilities and 300,000
equity
Sales 450,000 Cost of goods sold 337,500

Q. no. 3. The following information is available on the Vanier Corporation

Balance sheet
As on December 31, 2006(in thousands)

Assets Amount Liabilities + equity Amount

Cash and marketable 500 Account payable 400
securities ? Bank loan ?
Accounts receivable ? Accruals 200
Inventories ? Current liabilities ?
Current assets ? Long term debt 2650
Fixed assets ? Common stock+ 3750
Retained earnings

Total assets ? Total liabilities and ?

equity

Income statement for 2006 (in thousands)

Net sales (all credit) 8000
Cost of goods sold ?
Gross profit ?
Selling, general and administration ?
expenses
Interest expenses 400
Profit before tax ?
Taxes ?
Profit after tax ?

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 FINANCIAL MANAGEMENT

• Other information
• Current ratio 3:1
• Depreciation Rs 500
• Net profit margin 7%
• Total liabilities/ shareholders equity 1:1
• Average collation period 45days
• Inventory turnover ratio 3:1
• Tax rate 44%
• Assuming that sales and production are steady
throughout a 360 day year, complete the balance sheet
and income statement for Vinier Corporation.

Solution:
Total liability/shareholder's equity = 1:1
Total liability = shareholder's equity = 3750
Total liability = Current liability + Long term debt
Current Liability = Total Liability – Long term debt = 3750 – 2650 = Rs. 1100
Current Liability = Account Payable + Bank loan + Accruals
Bank loan = 1100 – 400 – 200 = Rs. 500
Total liability and equity = 3750 + 3750 = Rs. 7500
Total Assets = Total liability and equity = Rs. 7500
Current Ratio = Current Assets / Current Liabilities = 3 (given)
Current Assets = 3*Current Liabilities = 3*1100 = Rs. 3300
Fixed Assets = Total Assets – Current Assets = 7500 – 3300 = Rs. 4200
Average Collection Period or Days Sales Outstanding = 45 days
DSO = (Average Receivables*360) / Annual Sales = 45
Average Receivables = 45*8000 / 360 = Rs. 1000
Current Assets = Cash + Account Receivables + Inventory
Inventory = 3300 – 500 – 1000 = Rs.1800

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 FINANCIAL MANAGEMENT

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = 3 (given)

Cost of Goods Sold = Average inventory * 3 = 1800*3 = Rs. 5400
Gross Profit = Sales–Cost of goods sold–Depreciation = 8000-5400-500 = Rs. 2100
Net Profit Margin = Net profit / Sales = 7% = 0.07
Net Profit = Sales * 0.07 = 8000 * 0.07 = Rs. 560
Net Profit = EBT – EBT*0.44 = 560
EBT = Rs. 1000
Tax = 44% = 0.44*1000 = Rs. 440
EBIT = EBT – Interest = 1000 – 400 = Rs. 600
EBIT = Gross Profit – Expense
Expenses = Gross Profit – EBIT = 2100 – 600 = Rs. 1500
Assets Amount Liabilities Amount
Cash & marketable 500 Account payable 400
securities
Account receivable 1000 Bank Loan 500
Inventories 1,800 Accruals 200
Current Asset 3,300 Current Liabilities 1,100
Fixed assets 4,200 Long Term Debt 2650
Common stock+ 3750
Retained earnings
Total assets 7,500 Total liabilities and 7,500
equity

Net Sales (All Credit) 8000

Cost of goods sold 5,400
Gross Profit 2,100
Selling, general and administration expenses 1,500
Interest expense 400
Profit before tax (EBT) 1000
Taxes 440
Profit after tax (Net Profit) 560

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Q. no. 4. The following data apply to Muktinath Publishing Company (MPC)

Solution:
Current Ratio = Current Assets / Current Liabilities = 3
Current Assets = 3*Current Liability
Quick Ratio = Current Asset – Inventory / Current Liabilities = 2.4
Substituting the value of current assets from above,
(3*Current liability – Inventory) / Current Liability = 2.4
Solving for Current liability,
Current Liability = Rs. 25000
Current Assets = 3*Current Liabilities = Rs. 75000

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i. Quick Assets = Current Assets – Inventory = 75000 – 15000 = Rs. 60000

ii. Current Liability = Rs. 25000

iii. Current Assets = Rs. 75000

iv. Total Assets = Fixed Asset + Current Assets = 75000 + 65000 = Rs. 140000

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
v. Return on Assets = = 13000/140000 = 0.0928 = 9.28%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
vi. Common Equity = = 13000/0.065 = Rs. 200000
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

vii. Debtor's Turnover Ratio = 360 / Days Sales Outstanding = 360/40 = 9

viii. Net Profit Margin = Net Income / Sales = 13000/104000 = 0.125 = 12.5%

ix. Working capital = Current asset- current liability=75000-25000= Rs 50000

x. Fixed Assets Turnover Ratio = Sales/Fixed Assets = 104000/65000 = 1.6

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