A colleague has suggested that your company should invest in The End Game Limited and that...

A colleague has suggested that your company should invest in The End Game Limited and that all you need to do to decide whether it is a good idea or not is to get a copy of their financial statements. They said that the only type of analysis required will be to use ratio analysis and that should provide you with all the answers.

Required

Looking at the information that is used in ratio analysis, coming from the financial statements and the notes, write a report to your colleague highlighting and discussing three limitations of using ratio analysis as your major analysis method.

(Total 8 marks)

(3 marks will be awarded for the style of the business report, the presentation of the content, and the use of Business English)

Expert Solution

Report on limitations of ratio analysis:

Ratio analysis is an important analytical tool for analysis of financial statements. However it has its own limitations. The following are the limitations of ratio analysis as analytical tool

· Ratio analysis is based on historical cost which is past information. Hence it does not help much in future prediction. It is post mortem analysis of the existing financial statements

· Ratio analysis may promote the management to do window dressing of its financial statement in order to show better results for the specified requirements. For example: Current ratio of 2 can be maintained by building inventory for meeting bank requirements to grant loan. Hence it promotes unethical behaviour to show better results.

· Ratio analysis does not consider the inflationary and seasonal effects. Inflation of costs is totally ignored in the ratio computation. It considers the 2 points in calculation of ratio the movement of which can be due to inflation. Seasonal effects of business are ignored in ratio and it may lead to false interpretation of numbers for seasonal businesses.

ekkarill92 answered 1 year ago

A company has unlimited funds to invest at its discount rate. The company should invest in...

A company has unlimited funds to invest at its discount rate. The company should invest in all projects having: A. A net present value less than zero B. A net present value greater than zero C. A net present value equal to zero D. Both B and C

Assume that in a business meeting your colleague says that price should always be lowered in...

Assume that in a business meeting your colleague says that price should always be lowered in order to increase total revenue. How would you respond, knowing that this business sells products that have different price elasticities?

Elon Musk has asked for your advice. Should he invest $1 billion into his SpaceX company...

Elon Musk has asked for your advice. Should he invest $1 billion into his SpaceX company to develop a Mission to Mars – or should he invest in a second giant battery factory in Nevada? For these two projects, which should he look at, NPV or IRR? In other words, generally speaking, what are their positives and negatives and which may be more relevant to his situation? Also, what is WACC and how should he think about it in terms...

1) One of your employees has suggested that your company develop a new product. You decide...

1) One of your employees has suggested that your company develop a new product. You decide to take a random sample of your customers and ask whether or not there is interest in the new product. The response is on a 1 to 5 scale with 1 indicating "definitely would not purchase"; 2, "probably would not purchase"; 3, "not sure"; 4, "probably would purchase"; and 5, "definitely would purchase." For an initial analysis, you will record the responses 1, 2,...

When a company has a limited resource, it should apply additional capacity of that resource to...

When a company has a limited resource, it should apply additional capacity of that resource to providing more units of the product or service that has the: Select one: a. highest contribution margin per unit of that limited resource. b. highest gross proﬁt. c. highest contribution margin. d. highest selling price. XYZ Company manufactures ultra sound equipment. Based on past experience, XYZ has found that total annual repair and maintenance cost can be represented by the following formula: total annual...

Flamingo, a limited liability company, has an accounting year end of 31 December. The accountant is...

Flamingo, a limited liability company, has an accounting year end of 31 December. The accountant is preparing the financial statements as at 31 December 2019 and requires your assistance. The following unadjusted trial balance has been extracted from the general ledger. account Dr Cr Plant & Equipment at cost 370,000 Plant & Equipment accumulated depreciation, 1 Jan 2019 30,000 Building at cost 110,000 Building accumulated depreciation, 1 Jan 2019 55,000 Prepaid rent 30,000 Bank balance 35,000 Revenues 915,000 Supplies 15,000...

Your company has an opportunity to invest in a project that is expected to result in...

Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000 the third year, $24,000 the fourth year, $28,000 the fifth year, and $34,000 the sixth year. The project would cost the firm $72,000. If the firm's cost of capital is 12%, what is the modified internal rate of return? 18.17% 20.10% 15.71% 13.51% 16.66% You are evaluating a potential investment in...

INFORMATION Hattingh Limited has the option to invest in machinery in Projects A and B but...

INFORMATION Hattingh Limited has the option to invest in machinery in Projects A and B but finance is only available to invest in one of them. You are provided with the following projected data: Project A Project B Initial cost 500 000 500 000 Year 1 120 000 150 000 Year 2 160 000 150 000 Year 3 170 000 150 000 Year 4 180 000 150 000 Year 5 150 000 150 000 Depreciation per year 90 0000 100...

Suppose you get a $2,000 holiday bonus at the end of the year. Should you invest...

Suppose you get a $2,000 holiday bonus at the end of the year. Should you invest in stocks, bonds, or put your money in the bank as savings? Explain all factors affecting your decision.

Your colleague in a financial institution says that she has been tracking the movements of the...

Your colleague in a financial institution says that she has been tracking the movements of the monthly returns of IBM and Yahoo stock returns. Using data on these returns over the last 10 years, she says that she has computed the COVARIANCE between these two returns series and found that it is 0.00038. Since this COVARIANCE is so low and close to zero, she says that there does not seem to be any linear association between the two return series....

Question