Financial Analysis and Calculation of Ratios for Rio Tinto plc, ATMS Plc's Cost of Capital, and Inve

Task 1: Calculation of Ratios for Rio Tinto plc

Answer the following questions:

1.  Explain your understanding of the risk/return relationship and why it is so important in Financial Management.

2.  What are the 3 key decision areas for a Finance Manager? Give an example of each one in practice.

3.  What should be the primary objective of a commercial firm? How does this work in reality and what other objectives might be important for the company?

Answer the following questions:

1. Calculate the following ratios for Rio Tinto plc for the year ended 31st December 2019 (10 Marks in total- 1 mark per correct ratio)

1.  Return On Capital Employed

2.  Inventory Turnover (stock days)

3.  Debtor ratio (debtors’ days)

4.  Creditor ratio (creditor days)

5.  Current ratio

6.  Quick ratio

7.  Debt/equity ratio

8.  Interest cover

9.  Return on Equity

10. Price Earnings Ratio (P/E Ratio)

Additional Information

Share price at close of business on 31st December 2019 = 4,503 pence

£/$ exchange rate @ 31st December 2019 = $1.326

2. Using the 2019 ratios you calculated in question 1 and the 2020 ratios calculated in the session 2 topic 1 lecture write a brief report (500 words in total) which compares the performance of Rio Tinto plc across both years.

Your marks for this question will not be affected by any errors you may make in the calculations in question 1. If you have been unable to calculate any ratios in question 1 you can assume an answer for 2019 and write your report accordingly.

Answer the following questions:

1. It is November 2021 and ATMS Plc has the following capital structure:

• 5% redeemable bonds- Par value £100 (redeemable November 2025)
• 8% irredeemable bonds- Par value £100
• Ordinary shares- Nominal value 10p
• 7% Preference shares- Nominal Value £1

Market Values

• 5% redeemable bonds- £1,000,000 in total with each bond currently priced at £108
• 8% irredeemable bonds- £2,000,000 in total with each bond currently priced at £115
• Ordinary Shares- £4,000,000 in total with each share currently priced at 126p
• 7% preference shares- £500,000 in total with each share currently priced at 82p

Additional Information

• The total ordinary share dividend proposed but not paid is 5.5p with an established year on year growth rate of 8%
• ATMS Plc pays corporation tax at 20%

Calculate the individual cost of each of the 4 sources of capital and then the after tax

Weighted Average Cost of Capital (WACC) of ATMS Plc (15 marks)

2. DT plc has £20m of sales per year all of which are made on 60 days credit terms DT’s CFO is considering offering a 10% discount for early payment (within 20 days)

It is forecast that 40% of DT’s customers will take the discount and the remaining 60% will continue to pay in 60 days.

The short-term borrowing interest rate is 15%

Calculate whether the proposed discount will result in a net saving or cost for DT plc(5 marks)

Answer the following questions:

Bonsall Plc are a manufacturing company who produce components for high performance motorcycles. The product research team have been working on a new lightweight handlebar which they are now proposing to launch. The production and sales teams have supplied the following data to you- Bonsall’s Finance Manager.

A new machine will be required to produce the handlebar at a cost of £150,000 payable immediately.

After 5 years the sales team forecast that the product will become obsolete and hence the handlebar will be withdrawn from sale. At this point the original machine will be sold for an expected scrap value of £5,000

Bonsall use a discount rate of 10% to appraise new investments. For an investment to be authorised it must meet or exceed the following targets:

1. NPV- positive at 10% discount rate

2. IRR- 15%

3. Undiscounted Payback- 3yrs or less

Using the information above for the new project calculate:

• The undiscounted payback

• The Net Present Value and

• The Internal Rate of Return

Considering your answers state whether the project is acceptable.