INDIVIDUAL ASSIGNMENT

CASE STUDY 1
MANAGERIAL FINANCE (FIN 745)

PREPARED BY:
NURUL ANIYYAH MD ISA
2013881164
BM7002DF

SUBMITTED TO:
PROFESSOR DR CATHERINE S F HO

SUBMISSION DATE:
21
st
APRIL 2014
QUESTION 1
RATIO ANALYSIS OF UNIVERSAL OFFICE FURNISHINGS

1.0 LIQUIDITY
Liquidity ratio refers to firms ability to pay its short term obligation. In 2009, the current
ratio of Universal Office Furnishing is 1.55 but then the ratio decline in 2010 to 1.29. The
highest current ratio experienced by the firm for period 2009-2012 is in 2011 which is 1.69.
However, the current ratio of firm decreases to 1.34 in 2012. Overall, liquidity ratio of firm
shows fluctuation trend but the firm able to maintain a level that is relatively consistent with
the industry average in 2012. Thus, the firms liquidity seems to be good.
2.0 ACTIVITY
Activity ratio measures how efficiently firm operates along a variety of dimensions such as
inventory management, disbursements and collections. In 2009, the inventory turnover of
Universal Office Furnishing is 15.25 times and increases to 17.17 times in 2010. The firms
inventory turnover declined slightly in 2011 but the firm manages to improve back their
inventory level in 2012. Generally, the trend of inventory turnover for the firm is increasing
year by year which means the firm has strong sales performance and less cash the firm has
tied up in inventory. In term of receivable turnover, the firm has reasonably stable trend and
succeeded to perform at a level above industry average over the 2009-2012 periods. It shows
the firms extension of credit and collection of account receivables is efficient. Universal
Office Furnishings total asset turnover signifies the improvement in the efficiency of total
asset utilization between 2009 and 2012.
3.0 LEVERAGE
Universal Office Furnishings indebtedness increased over the 2010-2011 period which
indicates the firm has high financial leverage. Even though this increase in the debt ratio
could be signal firm to reduce dependency on firms creditor in generating profit but the
firms debt ratio is still below industry average of 2012. Besides that, the firm is also able to
meet interest and fixed payment obligations from 2009 till 2012 and if compared with the
industry average, the firms time interest earned ratio is much better. In general, Universal
Office Furnishings leverage seems to be good.
4.0 PROFITABILITY

Profitability ratios measure the income or operating success of a company for a given period
of time. Based on the financial ratios provided, Universal Office Furnishing has enjoyed
remarkable growth. The firms net profit margin is increases from 6.6% to 8.0% in 2009 and
2011. In year 2012, the net profit margin of the and marginally declined to 7.2%. The firms
return on assets, return on equity also behaved much as its net profit margin did over 2009-
2011 period. Both return on assets and return on equity of Universal Office Furnishing
decreases to 14.8% and 47.4% respectively in 2012. Although 2012 was an off year, it
appears that the firms net profit margin, return on assets and return on equity was better than
the average company in the industry.

5.0 MARKET VALUE
Market value ratios give insight into how investors in the marketplace feel the firm is doing in
term of risk and return. Investors have greater confidence in 2012 than in the previous 3 years
as reflected in the price/earnings ratio. This ratio is also above the industry average which
indicates the investors have greater confidence in the firms future performance since they are
willing to pay more for each dollar of a firms earning compared to prior year. The firms
price to book value ratio has increased from 2009-2011 period but in 2012, the ratio decrease
in small amount. Although the price to book value ratio decrease in 2012 but it remains above
the average firm in its industry. This implies that investors are positive about the firms future
performance and expect earn high future return as compensation for the firms above-average
risk. In short, the firm has shown good performance in 2012 and previous years.
6.0 STRENGTHS & WEAKNESSES

The firm has stable liquidity performance and was efficient in managing its overall companys
activity. The firm also might not have a problem to meet its obligation and enjoy sustainable
growth since the firm has higher profitability and lower financial leverage compared to
industry. Apart from that, the firms earning per share is increasing over the years which can
attract investors to invest in the company. The investors also have greater confidence in the
firms future performance as reflected in firms price/earnings ratio.

In contrast, the firm only manages to collect their receivables between 39 days to 43 days.
Although the firms receivable turnover is higher than industry average, it only beneficial to
the firm if the firms credit term is more than 40 days. If Universal Office Furnishing extends
30-day credit terms to customers, 39 days to 43 days collection period signify a poorly
managed credit or collection department. The debt equity ratio of the firm also could hurt the
firms performance since it increasing in the beginning before declined in year 2012. Even
though the firms leverage is below industry average, the firm has to cautiously choosing their
capital structure in order to minimize financial risk.

























QUESTION 2
You plan to purchase a house for $250,000 and make a 10% down payment. At 9%, what is
the difference between the monthly payments under a) a 30 year loan and b) a 15 year loan?
c) How much interest is saved under the 15 year loan?

Formula:
CF = (PV r) [1 - 1/ (1 + r)
n
]
Where CF = Cash Flow
PV = Present Value of Money
r = Interest rate per period
n = Total number of payments or periods

Solution:
a) 30 year loan

PV = $250, 000- (0.1 $250,000)
= $225,000
r = 9% annually 12 months
= 0.75% monthly
n = 30 years 12
= 360 periods

CF = ($225,000 0.0075) [1 - 1/ (1 + 0.0075)
360
]
= $1,810.40
b) 15 year loan

PV = $250, 000- (0.1 $250,000)
= $225,000
r = 9% annually 12 months
= 0.75% monthly
n = 15 years 12
= 180 periods

CF = ($225,000 0.0075) [1 - 1/ (1 + 0.0075)
180
]
= $2,282.10

c) How much interest is saved under the 15 year loan?





15 year loan 30 year loan
Total paid

= $2,282.10 180
= $410,778

= $1,810.40 360
= $651,744

Total interest saved
under 15 year loan
= $651,744 - $410,778
= $240,966

QUESTION 3
You take a conventional fixed rate mortgage to purchase a house for $350,000. What is your
monthly payment in the terms of the loan are 9% over 30 years?

Formula:
CF = (PV r) [1 - 1/ (1 + r)
n
]
Where CF = Cash Flow
PV = Present Value of Money
r = Interest rate per period
n = Total number of payments or periods

Solution:
PV = $350,000
r = 9% annually 12 months
= 0.75% monthly
n = 30 years 12
= 360 periods

CF = ($350,000 0.0075) [1 - 1/ (1 + 0.0075)
360
]
= $2, 816.18



QUESTION 4
You plan to save $100 per month for the next 5 years. a) At 3% compounded monthly, how
much will you have accumulated at the end of the next 5 year period? b) How much
difference does it make if the payments are made at the beginning of the period rather that at
the end?

Solution:
a) At 3% compounded monthly, how much will you have accumulated at the end of the
next 5 year period?

Formula:

FV
a
= CF [{(1 + r)
n
-1}/ r]

Where FV
a
= Future Value Annuity
CF = Cash Flow
r = Interest rate per period
n = Total number of payments or periods

CF = $100 per month
r = 3% monthly
n = 5 years 12
= 60 periods

FV
a
= $100 [{(1 + 0.03)
60
-1}/ 0.03]
= $16, 305.34




b) How much difference does it make if the payments are made at the beginning of the
period rather that at the end?

Formula:

FV
a
= CF [{(1 + r)
n
-1}/ r] (1 + r)

Where FV
a
= Future Value Annuity
CF = Cash Flow
r = Interest rate per period
n = Total number of payments or periods

CF = $100 per month
r = 3% monthly
n = 5 years 12 months
= 60 periods

FV
a
= $100 [{(1 + 0.03)
60
-1}/ 0.03] (1 + 0.03)
= $16, 794, 50

Difference = $16, 794, 50 - $16, 305.34
= $489.16









QUESTION 5
You want to retire in 30 years at age 60. a) Assuming you can earn an annual rate of return of
9%, how much do you need to invest each month until retirement to accumulate $1,000,000
by age 60? b) Assuming the same return and a life expectancy of 80 years, how much can
you withdraw each month from your $1,000,000 retirement fund starting 30 days after you
turn 60?
0 years 9% 30 years 9% 50 years


Solution:
a) Assuming you can earn an annual rate of return of 9%, how much do you need to
invest each month until retirement to accumulate $1,000,000 by age 60?

Formula:
FV
a
= CF [{(1 + r)
n
-1}/ r]
Where FV
a
= Future Value Annuity
CF = Cash Flow
r = Interest rate per period
n = Total number of payments or periods

FV
a
= $1,000,000
r = 9% annually 12 months
= 0.75%
n = 30 years 12 months
= 360 periods

$1,000,000 = CF [{(1 + 0.0075)
360
-1}/ 0.0075]
$1,000,000 = CF $1,830.74
CF = $1,000,000/$1,830.74
= $546.23

b) Assuming the same return and a life expectancy of 80 years, how much can you
withdraw each month from your $1,000,000 retirement fund starting 30 days after you
turn 60?

Formula:
PV
a
= CF/r 1- [1/ (1 + r)
n
]

Where PV
a
= Present Value Annuity
CF = Cash Flow
r = Interest rate per period
n = Total number of payments or periods

PV
a =
$1,000,000
r = 9% annually 12 months
= 0.75%
n = 20 years 12 months
= 240 periods

$1,000,000 = CF/0.0075 1- [1/ (1 + 0.0075)
240
]
$1,000,000 = CF/0.0075 0.8336
CF = ($1,000,000/0.8336) 0.0075
= $8,997.26