Muncie Manufacturing is considering increasing its collection period by 25 days in hopes of attracting additional sales. Muncie currently has annual sales of $500,000. They expect revenues to increase $25,000 per year and expenses to increase by $10,000 per year. Muncie believes that an additional $3,000 will go uncollected each year as a result of this change in policy. This $3,000 loss will have to be replaced each year to keep the account receivable balance at the increased 25-day level. They project that they will be able to collect 90% of the outstanding balance at the end of year 4 (after replacement). Using a 4-year life, 40% tax rate, and 10% required return, is the investment attractive?

Financial analysts must evaluate the performance of the company and compare that performance over time. One way to evaluate the financial performance of a company is to calculate financial ratios. Ratios can be used to assess a company’s profitability, liquidity, efficiency, and financial risk (leverage). Changes in these ratios over time can alert a financial analyst to poor management or strong shareholder returns. For this discussion, you will calculate some common financial ratios for your chosen publicly traded company.

Prepare:

Prior to beginning work on this discussion forum,

• Read Chapter 11 of the Essentials of finance.
  • Specifically review the “A Closer Look” feature box in Section 11.3.
• Complete the Week 2 – Learning Activity.
• Make sure you have completed the Week 1 – Assignment 1.

Calculate:

• Calculate two ratios for your chosen company, according to your last name and the list below. Using Appendix A from Week 1, calculate the ratios for your chosen company for the two most recent years available in the financial statements.
  • Last names A through C: Return on assets (ROA) and return on equity (ROE).
  • Last names D through F: Long-term debt to equity ratio and interest coverage ratio.
  • Last names G through I: Gross profit margin and net profit margin.
  • Last names J through L: Current ratio and quick ratio.
  • Last names M through O: Inventory turnover and receivables turnover.
  • Last names P through R: Days sales outstanding and days inventory outstanding.
  • Last names S through U: Book value per share and price-to-book.
  • Last names V through Z: Earnings per share and price-earnings (P/E) ratio.

Need help with your calculations? Check out the videos included in this resource: Week 2 Discussion Help (Links to an external site.).

Write:

In your initial discussion forum post,

• Create a table within your discussion post that includes the following information:
  • the financial data used to calculate each ratio in the 2 years for your chosen company
  • the last 2 years (clearly labeled)
  • the calculations and the concluded ratio
    • Need help making a table? Review the How So I Insert a Table Using the New Rich Content Editor as a Student? (Links to an external site.)
  • Explain what your two ratios measure.
  • Attach your Appendix A (that you completed in Week 1) to your discussion post so that other students can review your data and calculations.

Guided Response: Review several of your colleagues’ posts, and reply to at least two of your peers by 11:59 p.m. on Day 7 of the week. You must respond to two classmates who have calculated different ratios than you. In your written responses to your classmates, address the following:

• Using the included Appendix A provided by your classmate, confirm the calculated ratios or explain a correction to the calculated ratios in the initial post.
• Provide the calculations for one additional ratio for their company for the 2 most recent years. Choose the ratio from the list of ratios for this discussion.
  • Identify which ratio you are calculating, and provide the financial data used for the ratio as well the concluded ratio.
• State whether or not you believe this additional ratio shows another financial strength for the company or if it shows a weakness for the company.

• Many companies use their brand as a competitive advantage. Given your knowledge about the global economy:
  • Identify three brands you believe have the strongest likelihood of remaining a source of advantage in the 21st century and explain why.
  • Next, explain the effects you believe the Internet’s capabilities will have on the brands you identified in the previous question and what the owner of the brand should do in light of them.

Question 1

We want to acquire a new equipment for a price of $150,000. Considering that the banks are currently offering an average annual rate of 5%, calculate each of the following investment options and explain which is more attractive in order to be able to obtain the $150,000 that we need, based on those calculations. Please show your workings for each option.

a)  Investing 90,000 in a product that offers an annual interest of 5% compounded quarterly for 10 years to produce $150,000.

b)  Investing 90,000 in a product that offers annual 6,5% simple interest for 10 years.

c)  Investing 90,000 in a project that will produce annual cashflows of $15,100 for 10 years.

Best option:

Question 2

From a project we could expect to obtain net revenues of $650,000 per year for at least the next 10 years, if we adapt our production line, in order to produce some new parts. Considering this situation

a)  What is the maximum that we should invest on this project if we consider a cost of capital of 4%?

b)  If this project required an initial investment of $4,000,000, what would be its NPV consider a cost of capital of 4%?

c)  What is its payback period given that the initial investment is $4,000,000?

Question 3

Another project would produce net revenues of $180,000 per year, for 9 years. These revenues are expected to grow at a constant 0,5% per year, and are assessed at a cost of capital of 2,5%:

a)  Would it still be profitable if it required an initial investment of $1,900,000?

b)  If we invest these annual revenues of $180,000 growing at a 0,5% per year in a bank account that offers an annual rate of 4% for 9 years, how much will we have at the end?

Question 4

A potential client has offered the possibility to sign a contract that will start in 5 years. This contract is signed for annual revenues of $600,000.

a)  What is the maximum amount of money we could afford to invest if we want a profitability of at least 5%?

Question 5

Considering that our plant produces annual revenues of $260,000 decreasing at a 1,2% annual, and it is expected to last for a very long time.

a)  For how would investors buy the plant if they wanted to obtain a profitability of at least a 6%?