MANAGEMENT ACCOUNTING AND FINANCIAL MANAGEMENT (PORTFOLIO): Prepare very simple Budgeted Income Statement and Balance Sheet.

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IY418: MANAGEMENT ACCOUNTING AND FINANCIAL MANAGEMENT (PORTFOLIO)
Assignment Details:
This assignment makes up 50% of your overall final grade for the IY418 module.
It is a portfolio of work that you will complete with a final submission date in week 5.
You are required to submit a draft copy from week two.
You will receive feedback on your work from your tutor so that you can improve.
Scenario:
You have decided to start a new business, but the problem is that you don’t have enough funds to do so. This means that you only have very limited savings and your family and friends cannot provide you with the necessary funds either. You decided to consider external funding for your business idea as you think it is a very good business idea. You must write a Proposal Report about your business idea, your forecasted costs and budgets and how you intend to secure funding.
Report Structure
• Cover page with the name of your group • Table of contents • Executive Summary
Section 1
Business Idea (15%):
This section will introduce your business idea and should include a summary of the following key points. • What is your business idea? • What are the unique selling points of your product? • What type of business (legal type) are you looking to start, and what are the reasons for your option?
• What is the estimated general start-up cost? Provide a summary break-down of the key components. • Explain what kind of start-up costs will be incurred by the business. • What will the business capital structure be? (the combination of debt and equity). • If your business requires external funding, provide a summary of how much this funding requirement is. • Summarize the outline structure of your reports. E.g. this report is divided into 7 sections. Section 2 discusses the budgeted financial statements. Section 3 discusses the cash flow forecasts etc.
Section 2
Financial Statements (30%)
• What is ‘budgeting’? • Explain the purpose and importance of budgeting. • Define Budgeted Income Statement and Budgeted Balance Sheet. • Explain the purpose and importance of Budgeted Income Statement and Budgeted Balance Sheet. • Explain what your estimates are based on. • Prepare very simple Budgeted Income Statement and Balance Sheet.
Section 3
Cash-flow Forecast (40%) • What is a ‘cash flow forecast’ • What are the benefits and disadvantages of a cash flow forecast? • Identify cash inflows (money in) and cash outflows (money out) per year. • Prepare a cash flow forecast for 5 years and identify what your estimates are based on. • Explain any changes in cash inflows and cash outflows over the period of 5 years. • Analyse the closing cash balances per year. • Consider whether additional funding might be required in any of the years. • If yes, what funding would you consider and why? Alternatively, you may consider how the surplus of cash should be managed.
Section 4
Cost – Volume Profit Analysis (40%) • Explain ‘break-even analysis’ • What are the benefits and disadvantages of creating a break-even analysis? • Create a break-even analysis for your business – what can your business learn from the break-even analysis based on your estimated costs?
• Estimate the target profit for Year 1 (or Year 2) and calculate how many units must be sold to achieve this target profit. • What should be the sales revenue in order to achieve this target profit. • Explain ‘margin of safety’ Calculate the margin of safety for your business based on your target profit. • Discuss how changes in costs, volume and selling price may affect the profitability. Support the discussion with the relevant calculations
Section 5
Investment Appraisal (40%)
• Define investment appraisal and discuss its purpose and importance for the business. • Explain four investment appraisal techniques (Accounting Rate of Return, Payback Period, Net Present Value and Internal Rate of Return). • Consider the pros and cons of each technique. • Conduct the investment appraisal using the following techniques: Accounting Rate of Return, Payback Period and Net Present Value. • Identify and discuss the risks associated with the above investments.
Section 6
Sources of Finance (40%) • List and explain various internal and external sources of finance that are available to the business in general. • Choose 4 possible sources of finance that you might consider to fund your business idea. • Evaluate the pros and cons of each of these sources of finance. • Indicate what is your preferred source of finance from the range of possible funders and why. • You must indicate and explain the costs associated with this choice and justify why it is acceptable and the most advantageous for your plan. • Explain why the other sources of finance were not selected specifically to this proposal. • Explain what the impact on your business idea would be if you don’t get the necessary funding or if you have selected an inappropriate form of finance.
Section 7
Conclusion (15%):
• You must end the proposal with a conclusion in which you briefly summarize everything that you have said in your proposal.
• Emphasize the potential of your idea and express the hope that you will be given the funding. • You must convince your potential financier of the success of your idea. • Group Reflection: a reflective discussion of the project work as a group (including the challenges faced and how you tried to overcome them) and what you learnt from the group project.
Section 8
• The list of References (part of individual mark) List all the references you have used in-text throughout the report in alphabetical order. • Remember to use the Harvard referencing style

Prepare a critical overview of the work of the IASB and determine whether you feel that they are achieving their stated mission.

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“High-quality financial information is the lifeblood of capital markets”.
Critically explain your understanding of the meaning of the above statement. You are expected to prepare a critical overview of the work of the IASB and determine whether you feel that they are achieving their stated mission. You should use examples from their work programme to justify your argument(s).
Information regarding the assignment, that needs to be put into the writing.
1. Capital markets( stock and bond markets) are used by companies to raise funds.
2. For investors to have confidence that they will get their money back( hopefully with a profit when
buying shares) they need to have regular financial reports prepared to a high level of quality( i.e. to a
high standard).
3. For foreign investors, it is important for them that the company to whom they lend money or buy
shares has the same or similar financial reporting rules and standards as in their own country so that
they are easily understandable and seen to be credible.
4. The countries that have the most open borders are the strictest financial rules benefit more than
countries seem to be less “sure”.
5. Countries that are seen not to have robust reporting standards will receive less investment( local and
foreign) for their companies than those in 4). above.
6. Comment on the work of the IASB and the likelihood or not of them achieving their goal. Comment
on the impact even of large economies if they do not adopt IFRS.

Would Islamic finance reduce systemic risk?

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No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means –electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise –without permission in writing from the author.
M Minhat (2019) 1
ISLAMIC FINANCE
Current Issues in Finance
Readings
•Seminar
–Farooq, M. and Zaheer, S. (2015). Are Islamic banks more resilient during financial panics? Pacific Economic Review20, 101-124.
•Additional
–Minhat, M. and Dzolkarnaini, N., 2019. Digital assets, cryptoassetsand cryptocurrencies. The Malaysian Reserve,25 February.
–Minhat, M. and Dzolkarnaini, N., 2018. Islamic finance: risk sharing as sustainable risk management. Islamic Finance News, 15 (8) Feb. Also available at this link.
–Minhat, M. and Dzolkarnaini, N., 2018. Has the Islamic finance industry prospered with integrity? The Malaysian Reserve, 27 Aug.
–Minhat, M. and Dzolkarnaini, N., 2017. Corporate governance in the Islamic finance industry. Islamic Finance News, 14 (49) Dec. Also available at this link.
–MinhatM & Dzolkarnaini N., 2017. Which firms use Islamic financing? Economics Letters, 150, pp. 15-17. Available at: http://dx.doi.org/10.1016/j.econlet.2016.10.036
–Minhat, M. and Dzolkarnaini, N., 2016. Islamic corporate financing: does it promote profit and loss sharing? Business Ethics: A European Review, 25(4), pp. 482-497.
–Minhat, M. and Dzolkarnaini, N., 2016. Islamic Finance (Chapter 14) in Brigham, Ehrhardt, and Fox. Financial Management: Theory and Practice(EMEA Adaptation), Cengage Learning. M Minhat (2019) 3
Contents
•Islamic finance in the UK
•Profit-loss or return-risk sharing (PLS) theory
•The prevalence of non-PLS instruments
–Moral hazard-risk avoidance theory
–Camouflaged interest theory
–Camouflaged leverage theory
•Would Islamic finance reduce systemic risk?
M Minhat (2019) 4
Islamic finance in the UK
•The UK has been positioned as the leading Western country and Europe’s premier centre for Islamic finance (TheCityUK, 2015)
–The Islamic Finance Development Indicator (IFDI) for the UK was the highest amongst other Western countries
–Five licensed Islamic banks (e.g. Al Rayan), and over twenty banks offering Islamic financial services
–The first Western country to issue sukuk(i.e. £200 million ijara-based sukukwith five years to maturity)
–Emerged as a key global venue for sukukissuance, whereby a total of 57 sukuk, amounting to USD51 billion, have been listed on the London Stock Exchange (LSE)
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Islamic finance in the UK (cont’d)
•Islamic finance contributes to and aims to increase investment in the UK’s infrastructure development
–This includes financing for The Shard, Battersea Power Station regeneration, London Gateway, the Olympic Village, the redevelopment of Chelsea Barracks, and over 6,500 homes in the North West and the Midlands (TheCityUK, 2015)
•The UK government established an Islamic Finance task force in March 2013 to work towards raising London’s profile as a centre for Islamic finance
•All-Party ParliamentaryGroup on Islamic Finance (APPGIF) was also established to give the Islamic finance industry a voice in Parliament
M Minhat (2019) 6
All-Party ParliamentaryGroup on Islamic Finance (APPGIF)
•To address issues as they arise such as Sukukissuances, inclusivity, regulation and taxation whilst positioning the UK as the European hub of Islamic financial services, and also to play a wider role in promoting ethical finance.
•Held its inaugural stakeholder meeting in November 2017.
•The latest meeting was in March 2019. It was attended by stakeholders from Edinburgh Napier University.
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Co-chair of APPGIF, Lord Sheikh, with stakeholders at a meeting held at the UK’s House of Lords
Profit and loss sharing (PLS) theory
•Islamic finance promotes profit-loss sharing (or risk-return sharing)
•Islamic finance permits equity financing that is consistent with fair dealings and promotes risk-sharing and consistent with Shariah(Islamic law)
•Fixed return (e.g. interest-based) debt financing is prohibited because it discourages risk-sharing
•It is predicted (or believed) that:
–a proper and widespread implementation of PLS will create a fair and stable financial system
–the interest-based credit-led financial system has fuelled systemic risk; ‘risk-shifting’ is not sustainable because default is contagious in the web of interconnectedness
M Minhat (2019) 8
Prohibition of riba
•Ribarefers to ‘exploitative addition’
–any additionto, or an increase of, a thing (money or goods or other form of instruments) over and above its original size or amount lent, in which involved an exploitationof the economically weak by a strong and resourceful entities
•Examples of riba:
–fixed return e.g. interest on debt (borrowing/lending)
–premium over spot price due to deferred payment
–excessive/unfair or unjustifiable profit in trading
•Trading is permitted but ribais prohibited
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Why interest on debt is prohibited?
•Interest on debt financing is prohibited because:
–money is viewed as medium of exchange, therefore, not to be traded
–money does not create a surplus value by itself
–income or return to be derived from real effort or activity rather than mere exposure to credit risk
•No free lunch, except in the case of genuine gift or donation (e.g. zakat received)
M Minhat (2019) 10
Musharakah
•Promotes ‘partnerships’ between stakeholders
–firm’s shareholders, managers with ownership stakes and other suppliers of financial capital
–each partner/counterparty (rabbul-mal) contributes financial capital and can choose to contribute human capital (i.e., management skill/expertise) to actively manage the underlying investment activities
•Profits are shared according to pre-determined ratios, and losses are shared according to capital contributions
•Musharakahis apreferred Islamic financing instrument because it is consistent with the Islamic concept of fairness (Ayub, 2007)
•Key difference between musharakahand conventional equity financing: equities are more liquid
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Musharakahpartners
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Musharakahentity
Banks
Other financiers
Managers with financial capital
$Equity
Moral hazard-risk avoidance theory
•Practical issues associated with musharakahfinancing from conventional lens
–Agency problem: suppliers of financial capital (i.e., non-managing partners) will expose to greater asymmetric information environment and potential moral hazard of the managing partners (Ayub, 2007)
–Risk aversion: not economically feasible for non-managing partners (e.g., banks and bond investors) to actively engage in managing or monitoring the underlying activities because they conventionally require returns lower than those demanded by equity investors. Return on debt is always set to be lower than the return on equity (Modigliani and Miller, 1958)
•The popularity of non-PLS instruments (e.g., murabahah)
–a rational response to risk-averse financiers’ contracting environment in the presence of severe agency problem or moral hazard (Aggarwal and Yousef, 2000)
M Minhat (2019) 13
Murabahah
•‘Cost-plus sale’ trading contract whereby, at least in theory, counterparties to the contract bargain on a margin of profit over known cost (or principal amount) of an underlying item
•Similar to conventional debt, the payment of the principal plus agreed mark-up is made on a deferred basis as in murabahah-mu’ajjal
•Murabahah-mu’ajjalwith long-term maturity is known as al-bai-bithamanajil(BBA)
•A financier such as an Islamic bank will finance a specific investment or purchase intended by aconsumer
•The financier’s exposure to the consumer’s default risk is minimised if the underlying asset or investment is also viewed as a collateral
M Minhat (2019) 14
Al-Bai-BithamanAjil(BBA)
•This shows BBA from theoretical perspective: assumes no legal requirement for the bank’s consumer to enter into Sales & Purchase contract with the property developer
•A financier buys the underlying property and sell it to the consumer at a cost plus mark-up for a deferred payment
Islamic Bank
Consumer
Property developer
Cost
Cost + mark-up (deferred)
Tangible underlying (e.g., property)
M Minhat (2019) 15
Tangible underlying (e.g., property)
BBA -Example
•On date 0:
–The consumer has commissioned the property developer to build a property
–The developer needs £2.7m today from the consumer to finance the construction
–Therefore, the consumer enters into a BBA contract with the Islamic Bank:
•Islamic Bank disburses £2.7m on spot to the developer
•The consumer agrees to buy forward the property at £2.7m plus 10% mark up (£270k) which is to be paid on date T M Minhat (2019) 16
BBA -Example (cont’d)
•On date T (long term):
–The consumer buys the property from Islamic Bank and pay £2.97m
–The title deeds is transferred from Islamic Bank to the consumer
M Minhat (2019) 17
Murabahahas practised
M Minhat (2019) 18
Islamic bank purchased the property from the consumer and sell it back at a much higher price (mark up contains interest?)
Camouflaged interest theory
•A financier’s mark-upin BBA can be justified for the:
–Liabilities associated with ownership of the underlying until resale (e.g., consumer’s inability to fulfil buying obligation)
–After resale risk in case the underlying itemis defective whereby consumer may claim for loss from the financier as a seller
•However, murabahahas practised is often viewed as “back-door” ribaor “disguised interest” and, hence, not Sharia-compliant (Khan, 2010)
–A mark-up or profit charged by an Islamic financier tends to mimic the interest rate charged by conventional financiers on identical conventional debt
–According to the IFRS, profit earned by a bank under murabahahcould be viewed as being akin to interest, and therefore would be accounted for as interest revenue (ACCA, 2012)
–Absence of genuine trading?
•Practical or economic issues associated with musharakahpaved way to ‘abuse’ murabahah?
M Minhat (2019) 19
Global use (or abuse?) of murabahah
•Empirical evidence of murabahah’spopularity amongst Islamic banks:
–Murabahahbank financing around the World (2006): Al RajhiBank (42%, ), Kuwait Finance House (62.7%), Dubai Islamic Bank (55.6%) and Bank Islam Malaysia (89.7%); Ijarahbank financing of Al RajhiBank (57.5%) [Khan, 2010]
–Islamic bank financing around the World (1995):): Murabahah(45.1%) and ijarah(10.7%), musharakah(16.3%) and mudarabah(6.5% ) [Aggarwal and Yousef, 2000]
–Islamic bank financing in Malaysia (2004): Murabahah-mu’ajjal(56.9%) and Ijarah(24%), musharakah(0.4%) and mudarabah(0.1%) [Chong and Liu, 2009]
M Minhat (2019) 20
Sukuk
•Scientific evidences gathered from Islamic banks by studies shown on the previous slide did not incorporate non-bank Islamic financing such as sukuk
•Since bank financing is not the only means of corporate or government financing, the evidence gathered did not fully capture the extent of Islamic financial instruments (IFIs) used by borrowing entities, especially since growing of sukukissuance in later years (Wilson, 2008)
•According to the Central Bank of Malaysia, by the end of 2007, Malaysiaproduced the world’s largest sukukmarket, accounting for 68.9% of the world’s Islamic bonds (Rating Agency Malaysia, 2009)
•The UK has emerged as a key global venue for sukukissuance, whereby a total of 57 sukuk, amounting to USD51 billion, have been listed on the London Stock Exchange (TheCityUK, 2015)
•The first sukukissued in the UK was ijara-based sukuk
M Minhat (2019) 21
Sukuk
•Basic IFIs as musharakah, murabahahand ijarahhave been utilised to form various complex sukukstructures
•There are at least ten types of sukukrecognised by theAccounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
•In theory, sukukcan be viewed as PLS instruments
–AAOIFI defines sukuk(derived from the word “sakk,” the singular form of sukuk), as a certificate, stating that, “investment sukukare certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity” (para 2, AAOIFI, 2008).
M Minhat (2019) 22
SukukAl-Ijarahtransactions
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23
Originator
(As Seller)
Originator
(As Lessee)
Originator
(“Potential obligation to repurchase underlying”)
Issuer SPV
(As issuer and Trustee)
Investors
(in the capital market)
Originator
(As Put option seller)
1
2
3
4
5
6
7
8
10
9
11
12
Description
M Minhat (2019) 24
No.
Transactions
1
Sukukissued to the market by theissuingentity (SPV)
2
Sukukinvestorsinvest the amount required
3
Originator sells to SPV the underlying asset to be financed through sukuk
4
SPV buysthe underlying asset
5
Originator sells a put option to SPV (i.e., right to sell the underlying assets at anexercise price in the future, defined as during the duration or upon the expiry of the sukukcontract)
6
SPVbuys the put option from the originator
7
Originator leases back the underlyingasset from SPV
8
Originator pays rental/leaseto SPV on regular basis
9
SPV distributesthe rental/lease payment to sukukholders
10
SPV exercises the put option, hence selling the underlying backto the originator
11
Originatoris obliged to pay the exercise price when buying the underlying back from the SPV
12
The proceed from sellingthe underlying asset is distributed to sukukholders
Sukukas practised
•In reality, the PLS feature introduced in sukukmay not materialise whilst its arrangement tends to mimic the arrangement of conventional bonds:
–Some sukuksseem to provide sukukinvestors a put option (i.e., right to sell the underlying assets) which could give rise to an obligation for the originator to repurchase the underlying asset upon either default payment or maturity (Jobst, 2007) [i.e. investors do not share risk]
–Such a ‘repurchase undertaking’ by the originator exposes it to an obligation to pay back the agreed exercise price of the underlying [i.e., redemption of a bond in conventional sense]
M Minhat (2019) 25
Sukukas practised (cont’d)
•In some cases, the ownership of the underlying assets were not normally even transferred from the originator to the financiers (i.e., sukukinvestors), which raised the question of who actually exposed to the risk associated with the underlying asset
–This means sukukinvestors have no recourse to sukukunderlying assets in the event of the originator’s default [e.g., Investment Dar (Kuwaiti’s firm)]
•The guaranteed nature of return from investing in sukukis contrary to PLS because sukukinvestors do not share the downside potential of the underlying assets
•It was reported that 85 per cent of sukukhad breached sharia principles (Oakley, 2008)
M Minhat (2019) 26
Case study -example
•Nakheelsukukwas issued in 2006, listed on the Dubai International Financial Exchange and expired in December 2009. The sukukwas issued via a special purpose vehicle, NakheelDevelopment Limited, to finance a property development project (i.e., Dubai Waterfront) of NakheelHoldings. A fixed return on the certificates was calculated on the basis of 6.345 per cent per annum to be paid semi-annually on 14 June and 14 December. The bursting of Dubai’s real estate bubble in 2008, coupled with the global recession and financial market crisis contributed to the inability of the underlying project financed by Nakheelsukukto generate the expected income (IMF, 2010). Despite the underlying project’s failure to generate income, NakheelHolding used liquidity from other sources to honour returns to Nakheel’ssukukholders. Later, when Nakheel’sliquidity worsened, outright default was prevented through a bailout by Abu Dhabi’s government, and all the sukukholders were paid out. This case clearly illustrates that sukukinvestors did not share the downside potential of the underlying projects, which is more consistent with conventional bonds than with PLS theory.
M Minhat (2019) 27
Camouflaged leverage theory
•Sukukis viewed as a less obvious method of increasing corporate leverage or ‘camouflaged debt’ especially for firms with less ability to access conventional bond markets
•Godlewski, Turk-Arissand Weill (2013)
–The presence of a strong demand for sukukfrom Islamic financial institutions, coupled with the limited supply of sukuk, signifies supply shortages that could make this instrument easier to sell as compared to conventional bonds
–Therefore, financially weak firms that are no longer able to issue conventional bonds might still have access to sukukfinancing, and less efficient market may be expected to overvalue sukuk
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Is Islamic financing ‘abused’ by risky firms?
•Minhat& Dzolkarnaini(2016):
–Less profitable and/or highly levered firms (i.e., risky firms) are more likely to resort to Islamic financing.
–PLS instruments are negligibly used amongst corporate firms
–The economic significance of murabahahas an alternative to PLS is indisputable. 30% of IFIs used by sample firms was in the form of murabahahfinancing.
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IFIs in corporate financing
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Islamic financial instruments (IFIs)
MYR billion
%
Musharakah
4.1
7
Murabahah(including BBA)
17.6
30
Ijarah
5.8
10
Islamic term notes and commercial papers
5.9
10
Unclassified sukuk*
21.3
36
Others
4.0
7
Total
58.7
100
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Would Islamic finance reduce systemic risk?
•“Such a crisis would not have occurred under an Islamic financial system—due to the fact that most, if not all, of the factors that have caused or contributed to the development and spread of the crisis are not allowed under the rules and guidance of Shariah. The current global financial crisis is largely seen as a real test of the resilience of the Islamic financial services industry and its ability to present itself as a more reliable alternative to the conventional financial system” (Kayedand Hassan, 2011)
•Do we have empirical evidence?
•If IFIs substantially similar to interest-based instruments, and are abused by firms to camouflage (increasing) leverage, would this not creating another form of credit bubble?
M Minhat (2019) 33
What about cryptoassetsand cryptocurrencies?
•Scholarly views about the permissibility of the above mentioned assets are rather mixed
•Arguments against the use of these assets are based on the prohibition of gharar
–Ghararis excessive level of uncertainty (or information asymmetry) caused by lack of clarity in transaction
–Maysir(gambling) is an extreme form of gharar
•Islamic finance promotes real productive effort (trading) rather than pure reliance on chance (speculating) to generate income
•Read further: Minhatand Dzolkarnaini (2019)
M Minhat (2019) 34
References
•Association of Chartered Certified Accountants (ACCA) (2012) Global alignment: bringing consistency to reporting of Islamic finance through IFRS.
•Ayub, M., 2007. Understanding Islamic Finance. John Wiley & Sons: England.
•Chong, B. S. and Liu, M., 2009. Islamic banking: interest-free or interest-based?, Pasific-Basin Finance Journal, 17, 125-144.
•Financial Times, 17 June 2008. Sukukmarket: clarification of rules does market a favour.
•Financial Times, 26 May, 2014. By the Book.
•Godlewski, C. J., Turk-Ariss, R. and Weill, L. (2013). Sukukvs. conventional bonds: a stock market perspective. Journal of Comparative Economics 41, 745-761
•Kayed, R. N. and Hassan, M. K. (2011). The global financial crisis and Islamic finance. Thunderbird International Business Review 53, 551-564.
•Khan, F. (2010). How Islamic is Islamic banking. Journal of Economic Behavior& Organization 76, 805-820.
•Oakley, D (2008) Sukukmarket: clarification of rules does market a favour. Financial Times, 17 June.
•Presley, J.R., Sessions, J.G., 1994. Islamic economics: the emergence of a new paradigm, The Economic Journal, 104, 584–596.
•Rating Agency Malaysia (2009). The truth about sukuk. Jan 1.
•TheCityUK(2015) The UK: leading Western Centre for Islamic Finance, November.
•Warde, I. (2000). Islamic finance in the global economy. Edinburgh University Press.
M Minhat (2019) 35

What Does the Company’s Asset Turnover Ratio Mean?.

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In order to effectively analyse the data shown in the appendix, it is essential to identify and understand a few aspects. The characteristics of the industry, in this case the aerospace and defence sector, are important (Masson, 2018). Also, the different strategies that the firm implements to differentiate itself from its competitors (Masson, 2018). Firms in the same sector tend to have similar capital structures and fixed assets investments. So, their ratios should be very much the same (Kenton, 2019). If there are major discrepancies in the ratio results, it could mean that a company is either underperforming compared to its competition, or it is generating greater profit than them (Kenton, 2019).

Profitability analysis for Rolls Royce Group and BAE System plc :

In the year 2017, Rolls Royce group made a profit of 2.4% based on the ROCE ratio, which is a very low profit margin (Corporate Finance Institute, 2019). Especially for an expanding industry (Lineberger, 2019). The following year, the profit margin plummeted to -6.83%. On the other hand, BAE systems seems to be making considerably better. With 9.2%  return on capital employed in 2017, reaching 10.4% in 2018. This is a positive sign that the profit margin of the company is improving , with them making average profit (Corporate Finance Institute, 2019).

Moreover, their gross profit margin, has improved slightly. In 2018, it was estimated to be 8.71%. Nevertheless, it is still too low for it to be considered average. Furthermore, the Rolls Royce group gross profit margin decreased from 16.42% in 2017, to 7.62% a year later. Which was to be expected since the cost of sales increased by 2 millions. This could mean that the company is going through financial distress which can be attributed to many reasons. One of which is how efficient a company is with the use of its assets. For the Rolls Royce group their asset turnover ratio is less than 1 for both years. Meaning, that the company is not generating enough profit from its asset. It could be due to depreciation. However, a company of this size and in this particular industry with asset turnover less than 1 is a big concern (Merritt, 2019).  Whereas BAE system generated asset turnover above 1 for the last two years. For the year 2017 it was 1.12, and even though it decreased to 1.09, it is still a higher figure than Rolls Royce.

 

Bibliography:

 

Kenton, W. (2019). How Ratio Analysis Works. [online] Investopedia. Available at: https://www.investopedia.com/terms/r/ratioanalysis.asp [Accessed 5 Dec. 2019].

 

Lineberger, R. (2019). 2019 global aerospace and defense industry outlook. [online] Www2.deloitte.com. Available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-mfg-2019-global-a-and-d-sector-outlook.pdf [Accessed 7 Dec. 2019].

 

Masson, D. (2018). 6 Steps to an Effective Financial Statement Analysis. [online] Afponline.org. Available at: https://www.afponline.org/ideas-inspiration/topics/articles/Details/6-steps-to-an-effective-financial-statement-analysis [Accessed 5 Dec. 2019].

 

Merritt, C. (2019). What Does the Company’s Asset Turnover Ratio Mean?. [online] Smallbusiness.chron.com. Available at: https://smallbusiness.chron.com/companys-asset-turnover-ratio-mean-60811.html [Accessed 6 Dec. 2019].

 

Corporate Finance Institute. (2019). Profit Margin – Guide, Examples, How to Calculate Profit Margins. [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/profit-margin/ [Accessed 4 Dec. 2019].

 

How can International Tractor Motors use the Binomial Distribution to approximate tractor sales in similar countries?

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International Tractor Motors (ITM) had recently undertaken an ad campaign aimed at agricultural owners in a certain country in Asia. The ad campaign was devoted to promoting the new IT-8 large specialty tractor. Four sales associates were assigned to sell in different medium to large farms throughout the country for many days. One associate was assigned to the northern part of the country. Another was assigned to the southern part. The other two were assigned to the west and east, respectively. Because of regulations, a sales associate can sell at most one IT-8 tractor per day and only one such tractor per farm, too. A sales associate was successful if he/she sold a tractor during the day. Thus, ITM can sell at most 4 tractors (4 total sales) per day in this country.

Download the file titled Tractor Successes. It contains a scatter plot of the number of successes versus frequency. To compare the results to the Binomial Distribution, complete the following:
Explain why this tractor sales scenario can be a binomial experiment.
Using the Tractor Successes scatter plot, construct a frequency distribution for the number of successes.
Compute the mean number of successes. The formula for the mean is as follows: LaTeX: \frac{\sum{(x⋅f)}}{\sum f}∑ ( x ⋅ f ) ∑ f
The terms x represent the total number of successes (0, 1, 2, 3, 4) and f is the corresponding frequency (number of days where x successes occurred).

Explain what the numerical result means.

From the frequency distribution, construct the corresponding relative frequency distribution.
Explain why the relative frequency distribution table is a probability distribution.

Then, use Excel to create a scatter plot of the probability distribution:

Select the two columns of the probability distribution. Click on INSERT, and then go to the Charts area and select Scatter. Then choose the first Scatter chart (the one without lines connecting).

Using the frequency distribution, what is the tractor sales success average? In part 3, note that the numerator in the formula for the mean is the total number of successes. The total number of trials is the denominator of the formula for the mean multiplied by 4. What does this average mean?
The Binomial Distribution is uniquely determined by n, the number of trials, and p, the probability of “success” on each trial. Using Excel, construct the Binomial Probability Distribution for four trials, n, and probability of success, p, as the tractor sales success average in part 5. Here is an explanation of the BINOM.DIST function in Excel: https://support.office.com/en-ie/article/BINOM-DIST-function-c5ae37b6-f39c-4be2-94c2-509a1480770c?ui=en-US&rs=en-IE&ad=I (Links to an external site.)
For example, In Excel

=BINOM.DIST(7,15,0.7, FALSE)

represents the probability of 7 successes out of 15 (n) trials. The 0.7 is the probability of success, p.

Using the above value of n=4 with probability of success, p, as the tractor sales success average in part 5, what is the probability of at least two successes?

Using the formula for the mean of the Binomial Distribution, what is the mean number of successes in part 6 above?
In Excel, create a scatter plot for the Binomial Distribution. The instructions for creating a scatter plot are in part 4 above.
Use the results above to compare the probability distribution of tractor sales successes and the Binomial Distribution. Compare the means in parts 4 and 6, too.
If the probability distribution of tractor sales successes and the Binomial Distribution differ, explain why that is so.

Do you think the Binomial Distribution is a good model for the tractor sales success scenario? Why or why not?
How can International Tractor Motors use the Binomial Distribution to approximate tractor sales in similar countries?
In what other scenarios can International Tractor Motors use the Binomial Distribution? Explain.
21:07
Submit your Excel file in addition to your report.

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