MGT201 GDB No 1 Solution 2020-VU-Financial Management

 MGT 201 GDB No 1 Solution 2020-VU-Autumn Semester-Financial Management-Fall 2020

MGT201 GDB No 1 Solution 2020-VU-Financial Management related to Autumn fall 2020 is presented by digilearnerspoint and afaqnewsfourm.

Financial Management –MGT201

GDB#No1                  Total Marks: 05

Date of Opening: 03^rd December 2020

Closing Date:            08^th of December 2020

Question Title

Financial Forecasting and Financial Planning

Question Statement

Forecasting is the essence of financial matters and prominent characteristics of a finance manager. Accuracy, along with the validity of the forecasting method is getting attention from the financial press. Suppose you are working in the finance department of a well-reputed organization. Management of the company has given you two alternative projects and assigned you a task to select the better one on the basis of Expected Estimated Earnings.

Following the information has been provided about two projects by the management.

Requirements

1.   Calculate expected estimated retained earnings for both projects

2.   Based on the calculations, which project you will suggest, and why?

 Solution

Part#01

Expected Retained Earnings for Project A

We know that

Expected Retained Earning = Estimated Sales X Profit Margin X Plow back Ratio (Retention Ratio)

Retention Ratio= 1- Dividend Payout Ratio

Here Divident Payout ratio = Dividend/Net Income =960,000/2,400,000=0.4

Thus

Rention Rate: 1- 0.4 = 0.6

Hence

Expected Retained Earning = 8,700,000*0.25*0.6

Expected Retained Earning = Rs1,305,000

Expected Retained Earnings for Project B

Dividend Payout ratio = Dividend/Net Income= 1,000,000/2,500,000=0.4

Retention rate or plow back ratio = 1-0.04=0.6

Expected Retained Earnings = Estimated Sales X Profit Margin X Plow back Ratio (Retention Ratio)

Expected Retained Earnings = 7,800,000*0.30*0.6

Expected Retained Earnings =Rs1,404,000

 

Part2

Decision

On the basis of calculation, I will pick up the project B.

Why?

Because the expected retained earnings of Project B is greater than Project A. In notational form, it can be represented as

Project B(Expected Retained Earnings) > Project A(Expected Retained Earnings )

Rs1,404,000 > Rs1,305,000

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