Financial Analysis And Risk Assessment For Jolfa Ltd

General Instructions

Instructions to Student Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	General Instructions: 1. Complete and submit all assessment tasks by the due date. 2. Answer all questions in this booklet. 3. Write your responses in the blank pages which follow each question. Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper 4. Write your name and student number in the space provided on this page. 5. Reference is to be made to the prescribed textbook for this subject and other sources including online research. 6. All materials used to answer questions must be referenced appropriately (listing sources). 7. This assignment presumes that you are working in a financial consulting firm.  Therefore, all responses are to be presented in a professional manner. 8. You are required to read and analyse each question to formulate an informed response. 9. You must respond to each question using appropriate detail, working and calculations as though you are providing information to a client who does not have a thorough knowledge of business finance. 10. Save your document regularly to a USB or your computer as you work through this booklet. 11. Once you have answered all questions save this document to your computer or USB and then upload the document at the Assessment Centre. Information / Materials provided:  Assessment booklet  with Case Study Parts A and B Assessment Criteria: Specifically this case study will assess skills and outcomes associated with providing financial information.   To indicate that you have achieved the elements of competency listed in this unit you must provide evidence of the ability to: · access clients’ needs and analyse their financial data · prepare and document appropriate advice for clients that: · complies with financial legislation and accounting standards, practices and principles · assesses taxation, compliance and business viability issues faced by clients · Assesses risk management options and practices. Students must also demonstrate the following knowledge by providing evidence they can: · Explain the key requirements of taxation legislation relating to deductions, allowances and charges · List the key areas that can cause significant taxation issues · Compare and contrast forecasting techniques · Identify and explain the key features of government financial policy and secretary’s financial management instructions · Explain the key requirements of relevant corporations and consumer legislation · Describe a range of methods for presenting and formatting financial data · Identify and explain the key principles of cash flow and budgetary control · Identify and categorise sources of information on financial products and markets · Outline a range of risks and contingencies and risk management options relating to financial and business performance · Outline client rights and responsibilities.” To achieve a satisfactory result, your assessor will be looking for your ability to demonstrate the following key skills/tasks/knowledge to an acceptable industry standard: Part A:   · Calculate correctly nine financial ratios · Prepare report to management on ratios with appropriate conclusions/recommendations · Identify and categorise source of information on financial products and markets Prepare report to management on risks of expansion overseas · Calculate WACC Part B: · Calculate six alternative methods of evaluating projects · Select correct answer to M/C question on evaluating independent projects Number of Attempts: You will receive up to two (2) attempts at this assessment task. Should your 1st attempt be unsatisfactory (U), your teacher will provide feedback and discuss the relevant sections / questions with you and will arrange a due date for the submission of your 2nd attempt. If your 2nd submission is unsatisfactory (U), or you fail to submit a 2nd attempt, you will receive an overall unsatisfactory result for this assessment task. Only one re-assessment attempt may be granted for each assessment task. For more information, refer to the Student Rules.
Submission details	Insert your details on page 1 and sign the Student Declaration. Include this template and a copy of the Marking Criteria in your submission.   Access the information in Connect for your Due Date. This assessment is to be typewritten and then uploaded to Connect.  Assessment to be submitted via · TAFE Queensland Learning Management System: Connect   url: https://connect.tafeqld.edu.au/d2l/login · Username; 10 digit student number · For Password: Reset password go to  https://passwordreset.tafeqld.edu.au/default.aspx>
Instructions for the Assessor	· Students to complete all questions listed in this assessment. · All work to be completed by word processor. · Assessment documents to be uploaded to Connect for marking. · This is an untimed assessment. · Students are allowed access to any notes, workbooks and the internet to complete the assessment. · Please refer to marking guide to ensure consistency, validity and fairness of student outcomes.
Note to Student	An overview of all Assessment Tasks relevant to this unit is located in the Unit Study Guide.

 Part A

1. Read the case study.
2. Record your response to the Assessment task in the blank pages which follow.

Jolfa Ltd. is an Australian retailing company. Currently, Jolfa Ltd. only operates in Australia. The Balance Sheet and Income Statement for Jolfa Ltd. are given below.

Jolfa Ltd. Balance Sheet
as at 30 June, 2015

Current Assets		$ ‘000	$ ‘000
Cash		50
Accounts Receivable		80
Inventory		120	250
Non-Current Assets
Plant and equipment		950
Land and Building		1100
Goodwill		140	2190
Total Assets			2440
Current Liabilities
Accounts Payable		280
Provn for Long Service Leave		85	365
Non-Current Liabilities
Debentures		550
Mortgage loan		220	770
Total Liabilities			1135
Net Assets			$1305
Equity
Share Capital:
1,150,000 ordinary shares issued at $1.00		1150
Retained earnings		155
Total Equity			$1305

Additional information

• Current share price is $1.55
• Most recent dividend was $0.05 per share. Dividends are expected to grow by 7% per year.
• 550 Debentures were issued with a face value of $1,000 trading at par value of 8.5%
• The mortgage loan is currently at a variable rate of 8.9%.

Jolfa Ltd. Income Statement
for the Year Ended 30 June 2015

		$ ‘000	$ ‘000
Total Sales			2310
Less cost of goods sold
Opening Inventory		220
Purchases		1620
Goods available for sale		1840
Less closing Inventory		120	1720
Gross Profit			590
Less operating expenses
Depreciation		110
Interest		90
Rent		30
Wages		150
Advertising/marketing		20
Other		40
Total Expenses			440
Net Profit before tax			150
Tax		45
Net Profit After Tax			105

Industry standards/benchmarks

Current Ratio 1.45:1

Liquid Ratio 1.06:1

Debt to Equity ratio 160%

Earnings per Share $0.45 per share

P/E ratio 15

Return on Equity 10.5%

Net Profit Ratio 22%

Times Interest Covered 4 times

Dividend Payout ratio 20%

1. From the information provided calculate the:
2. Current Ratio
3. Liquid Ratio
4. Debt to Equity ratio
5. Earnings Per Share
6. P/E ratio
7. Return on Equity
8. Net Profit ratio
9. Times interest covered
10. Dividend Payout Ratio
11. Prepare a report to the management of Jolfa Inc in which you discuss each of the ratios from above. Compare the ratios to the industry standards given. Provide management with some ideas as to how the company could improve the ratios so that the majority are above the industry standards. How would improving these ratios benefit the company? Keep in mind that your suggestions may improve some ratios and worsen others.
12. As a financial manager you would use many different types of products (i.e. for example Money Market magazines, etc.)  To source information on borrowings, investments and any new opportunity available to the business. Briefly identify and categorise sources of information on financial markets and products that you could access.
13. Jolfa Ltd. is considering opening a new outlet in China. It has estimated future cash flows and based on these it has decided that the new outlet will be a profitable investment. What are the possible risks that the company might face if it does so?
14. Calculate the WACC of Jolfa Inc using the above information. Assume a company tax rate of 30%.

Note:  All calculations should be made to at least three decimal places in parts a) and e) above.Case Study—Part A

1. Ratios

Calculation of Ratios		Industry  Benchmarks	Company Ratios
Current ratio	Current assets	1.45:1	0.68
	Current Liabilities
Liquid Ratio	Quick Assets	1.06:1	0.36
	Current Liabilities
Debt to Equity Ratio	Debt	160%	59%
	Equity
Earnings per share	Net Profit	0.45 per share	0.91
	Weighted average Outstanding Shares
P/E ratio	Market Price	15	18
	EPS
Return on Equity	Net Income	10.50%	8.05%
	Shareholders’ Equity
Net Profit ratio	Net Profit * 100	22%	5%
	Sales
Times Interest Coverage Ratio	EBIT	4 times	1.7
	Interest Expense
Dividend Payout ratio	Dividends	20%	5%
	Net Income

1. Report to Management

After calculating the ratios of the Jolfa Limited it can be analyzed that the current ratio of the company is low in comparison and to improve the ratio the company shall improve the cash conversion cycles and make sure that the obligations are paid off after the inclusion of the current assets. The next ratio that has been calculated is the quick ratio which is again low in comparison to the benchmark set by the industry. The possible reason is Jolfa is not able to convert the assets into the liquid assets easily and therefore the current obligations of the company are pending. As it can be observed form the debt to equity ratio the ratio is also in the declining position.

The company earlier was sourcing itself from the debentures but now the count of the debentures is low and therefore the company need not pay fixed income to the debenture holders. This can be a good initiative to cut the costs yet form the point of view of taxation, the company shall consider the debentures more.

The P/E ratio has also declined as the Net profit ratio has fallen from 22% to 5% in comparison to the industry benchmark. The management shall focus on improving the net income so that the value of the EPS gets improved. The volume of the sales has been drastic in nature and therefore the gross profit literally affected the company. The cost of goods sold of the company is 79% of the sales which is too high for any company. Also the company needs to incur fixed expenses like salaries, depreciation, taxes which cannot be avoided hence the company shall focus on reducing the cost of goods sold by manufacturing the material itself (Cronk, 2017).

Assessment Criteria

The times interest coverage ratio is also 4 times in the area of the industry whereas the company is having low earnings to pay back the interest. Since the company is not able to perform satisfactorily the dividends are also not available for the shareholders after their investment. The company is not sharing the dividends to fuel the growth of the company and hence the company should improve the performance according to the market returns so that the positive reflection can be observed.

1. Briefly identify and categorise source of information on financial markets and products that you could access.

The different types of the financial market are as follows.

Money market

Foreign exchange market

Derivatives market (Pilbeam, 2018)

Over the counter derivatives

Insurance market and

Exchange traded markets

Report on Possible Risks of New Chinese Operation

There are several risks involved while opening a new outlet in any country. Since Jolfa has an idea of opening the outlet in China following risks can be encountered by the company.

The first risk is the risk of the pricing while expanding the business. The risk is major when the company is selling the custom made goods. Also at times there is the risk of the pricing error.

The second risk is the risk of the economic conditions because the items which are sold are of the disposable nature. Many of the retail stores are using downturns for their advantage but later on are suffered by the economic crisis (Finkler, Smith and Calabrese, 2019).

The taste and preferences of the customer is again a challenge as well as the risk Jolfa is going ot experience. The new city though has the opportunities yet the customer base cannot be made without the needs and preferences being satisfied by the company.

Lastly the theft and the damage of the goods and the services could be a biggest risk for the comaony operating in the competitive environment (Dees, 2017).

1. WACC Calculation

WACC
Market value of Equity	1150
Market Value of Debt	770
Total	1920
Cost of Equity	12%
Cost of Debt	17%
Corporate Tax	30%
WACC	17.3%

Case Study—Part B

Part B consists of two sections.

In (a) you must calculate six methods to evaluate projects.

In (b) you must select the correct response to one multiple choice question. (Highlight/indicate which option is the correct answer.)

• Jolfa Ltd is also considering the following investment project:

Capital outlay $200,000

Net Profit p.a. (before depreciation and tax) $ 90,000

Depreciation p.a. $ 40,000

Economic life: 5 years

Salvage value: Zero

Tax rate payable (assume paid in year of income): 30%

Required rate of return: 12% (WACC + Risk factor)

Assessment Task: Calculate the following:

(i) The Net Profit After Tax for each year.

(ii) The Annual Cash Flow for each year.

(iii) Accounting Rate of Return (using total investment).

(iv) Payback Period.

(v) Net Present Value.

(vi) Internal Rate Of Return

• Evaluating projects on an Independent Basis (rather than Mutually Exclusive) and using NPV evaluation method would mean:
• Choose the individual project with the highest NPV (Net Present Value).

(ii) Choose the individual project with the highest ARR.

(iii) Choose all projects with a positive NPV.

(iv) Choose all projects with an ARR greater than the W.A.C.C.

This page has been left blank for you to write your response to Part B of this Case Study

Net Profit After Tax For Each Year
					90000	90000	90000	90000	90000
Less: Depreciation				40000	40000	40000	40000	40000
					50000	50000	50000	50000	50000
Tax @ 30 %				15000	15000	15000	15000	15000
Net Profit / Loss				35000	35000	35000	35000	35000