C09.V.5.1 Principles of Finance
Assignment 04,
Financial Statements and Investment Rules
Part A
- What is the Net Working Capital for 2012?
Answer : 8,752 - 6,862 = 1,890
The Net Working Capital for 2012 is $1,890.
- What is it for 2011?
Answer : 10,083 - 6,486 = 3,597
The Net Working Capital for 2011 is $3,597.
- What is the Change in Net Working Capital (NWC)?
Answer : 1,890 - 3,597 = (1,707)
The change in Net Working Capital is ($1,707).
- Assuming the Operating Cash Flows (OCF) are $7,155 and the Net Capital Spending (NCS) is $2,372 what is the Cash Flow from Assets?
Answer : Operating Cash Flow 7,155
- Capital Spending (2,372)
Additions to NWC 1,707
Cash Flow From Assets 6,490
Part B
Answer :
1. FV = PMT × = $3,000 × = $116,140.50.
2. Fifteen years later, FV = PV × (1 + r)n = $116,140.50 × (1.095)15 = $453,101.48.
3. Because there are annuities due, the solution is to multiply each answer by (1 + r).
At the end of 17 years, $116,140.50 × (1.095) = $127,173.85
4. At the age of 55 after 15 years later, 453,101.48 × (1.095) = $496,146.12.
Part C
The correlation coefficient is a statistical measurement of the co-movement between two variables which ranges from +1 to -1. It shows a quantitative measure of some type of correlation and dependence. In Positive correlation, the value increases or decreases in tandem or two different asset returns move in the same direction. In Negative correlation, the value of one increases as the value of other decreases or two different asset returns move in different directions over time. The correlation coefficient of +1 of two assets will go in the same direction. They are perfectly positively correlated and have the same magnitude. The correlation coefficient of -1 of two assets will go in the opposite direction. They are perfectly negative correlated and have same magnitude. Correlation having lesser degrees are expressed as non-zero decimals. A coefficient of zero shows that there is no distinguishable relationship between movement of the variables. Diversification is the expanding of wealth over a number of different investment opportunities so as to get rid of risk. When a investor think to invest in the stock market, diversification means to choose a different types of stocks from different companies across a variety of companies. When a investor think to invest in bonds, diversification means to choose a different types of bonds like state, corporate, federal bonds and municipal. In this modern-day there is a proverb, "Diversify your investments". For example, there is a saying, "Don't put all your eggs in one basket". If eggs are money for investment and baskets are investment opportunities, it means investors should put their money into different assets, so that if one goes down, another one remain intact. It prevents from loss.
Investment means the process of invest money in a business for profit. Every investors wants to maximize their profit and minimize their risk. Before investing money in a business an investor follows two rules of investment. 1. If two investments have the same expected return and different levels of risk, the investment with the lower risk is preferred. 2. If two investments have the same level of risk and different expected returns, the investment with the higher expected return is preferred. An investor prefers his investment with both higher expected return and lower level of risk over another asset. An investor do not want to invest his money where there is a lot of risk and lower expected returns. They always want to be secure from these type of risk. Every investors want to choose their investments that will provide increasing amount of their income and growth to meet their financial goals. It is very important to do research in a company where you are going to invest your money. It is also necessary to choose investment types and choices before you invest your money. Nobody wants to invest money in a company where there is a lot of risk or the company is not going on profit. As I have mentioned above investors always wants to maximize their profit and minimize their risk. This is the rule of every investors when they wants to invest money in any business. No one wants to lose their money. There are two types of risk investment High or Low-Risk Investment. High risk investment means where there is a higher percentage of chance of loss of money and low risk investment means where there is a small chance of loss of money. Investors must be very careful while taking a step of investing money in a right company. Most of the companies with a high risk and low expected returns has a higher chance to go in loss. That's why investors prefers companies to invest their money where there is low risk and high expected returns.
References
Raymond M. Brooks (2012). Financial Management: Core Concepts (2nd Ed.). New Jersey: Pearson.
Eugene F. Brigham & Joel F. Houston (2011). Fundamentals of Financial Management (7th Ed.). Ohio: South-Western College Publication.
Sheridan Titman, John D. Martin & Arthur J. Keown (2010). Financial Management: Principles and Applications (11th Ed.). New Jersey: Prentice Hall.
