(FM) Financial Management Lab Questions and Problems
.pdf
keyboard_arrow_up
School
British Columbia Institute of Technology *
*We aren’t endorsed by this school
Course
3510
Subject
Finance
Date
Jan 9, 2024
Type
Pages
18
Uploaded by ConstableRain6190
SUNEL
1-5
1-6
1-7
1-8
1-9
Mini
Case
b.
The
company
is
spending
$500
million
to
open
a
new
plant
and
expand
operations
in
China.
No
profits
will
be
produced
by
the
Chinese
operation
for
4
years,
so
earnings
will
be
depreéssed
during
this
period
versus
what
they
would
have
been
had
the
decision
not
been
made
to
expand
in
that
market.
Discuss
how
ESC’s
shareholders
might
view
each
of
these
actions,
and
how
the
actions
might
affect
the
share
price.
Edmund
Enterprises
recently
made
a
large
investment
to
upgrade
its
technology.
While
these
improvements
won't
have
much
of
an
impact
on
performance
in
the
short
run,
they
are
expected
to
reduce
future
costs
significantly.
What
impact
will
this
investment
have
on
Edmund
Enterprises’
earnings
per
share
this
year?
What
impact
might
this
investment
have
on
the
company’s
intrinsic
value
and
share
price?
Describe
the
different
ways
in
which
capital
can
be
transferred
from
suppliers
of
capital
to
those
who
are
demanding
capital.
What
are
financial
intermediaries,
and
what
economic
functions
do
they
perform?
Suppose
the
population
of
Area
Y
is
relatively
young
while
that
of
Area
O
is
relatively
old,
but
everything
else
about
the
two
areas
is
equal.
a.
Would
interest
rates
likely
be
the
same
or
different
in
the
two
areas?
Explain.
b.
Would
a
trend
toward
nationwide
branching
by
banks
and
trust
companies,
and
the
development
of
nationwide
diversified
financial
corporations,
affect
your
answer
to
part
a?
Suppose
a
new
government
was
elected
in
Ottawa
and
its
first
order
of
business
was
to
take
away
the
independence
of
the
Bank
of
Canada
and
to
force
the
BoC
to
greatly
expand
the
money
supply.
What
effect
would
this
have
on
the
level
of
interest
rates
immediately
after
the
announcement?
Is
an
initial
public
offering
an
example
of
a
primary
or
a
secondary
market
transaction?
Identify
and
briefly
compare
the
two
primary
stock
exchanges
in
Canada
today.
Assume
that
you
recently
graduated
and
have
just
reported
to
work
as
an
investment
advisor
at
the
brokerage
firm
of
Balik
and
Kiefer
Inc.
One
of
the
firm’s
clients
is
Sergei
Turganev,
a
professional
hockey
player
who
has
just
come
to
Canada
from
Russia.
Turganev
is
a
highly
ranked
hockey
player
who
would
like
to
start
a
company
to
produce
and
market
apparel
with
his
signature.
He
also
expects
to
invest
substantial
amounts
of
money
through
Balik
and
Kiefer.
Turganev
is
very
bright,
and
he
would
like
to
understand
in
general
terms
what
will
happen
to
his
money.
Your
boss
has
developed
the
following
set
of
questions
that
you
must
answer
to
explain
the
Canadian
financial
system
to
Turganev.
a.
Why
is
corporate
finance
important
to
all
managers?
b.
What
are
the
organizational
forms
a
company
might
have
as
it
evolves
from
a
start-up
to
a
major
corporation?
List
the
advantages
and
disadvantages
of
each
form.
¢.
How
do
corporations
go
public
and
continue
to
grow?
What
are
agency
problems?
What
is
corporate
governance?
d.
What
should
be
the
primary
objective
of
managers?
(1)
Do
firms
have
any
responsibilities
to
society
at
large?
(2)
Is
share
price
maximization
good
or
bad
for
society?
(3)
Should
firms
behave
ethically?
What
three
aspects
of
cash
flows
affect
the
value
of
any
investment?
What
are
free
cash
flows?
What
is
the
weighted
average
cost
of
capital?
How
do
free
cash
flows
and
the
weighted
average
cost
of
capital
interact
to
determine
a
firm's
value?
Who
are
the
providers
(savers)
and
users
(borrowers)
of
capital?
How
is
capital
trans-
ferred
between
savers
and
borrowers?
j
What
do
we
call
the
price
that
a
borrower
must
pay
for
debt
capital?
What
is
the
price
of
equity
capital?
What
are
the
four
most
fundamental
factors
that
affect
the
cost
of
money,
or
the
general
level
of
interest
rates,
in
the
economy?
F@
o
-
23
22
Chapter
1
An
Overview
of
Financial
Management
and
the
Financial
Environment
1A
1-2
1-3
[}
A
firm’s
fundamental,
or
intrinsic,
value
is
defined
by:
FCF,
FCE,
Value
=
+
e
=
T
wWacol
T
0%
WACQ)?
FCF,
FCE,
+t
1+
WACC)3
(
*
(
1
+
WACCO)®
Transfers
of
capital
between
borrowers
and
savers
take
place
(1)
by
direct
transfers
of
money
and
securities;
(2)
by
transfers
through
investment
banks,
which
act
as
middlemen;
and
(3)
by
transfers
through
financial
intermediaries,
which
create
new
securities.
Capital
is
allocated
through
the
price
system—a
price
must
be
paid
to
“rent”
money.
Lenders
charge
interest
on
funds
they
lend,
while
equity
investors
receive
dividends
and
capital
gains
in
return
for
letting
firms
use
their
money.
Four
fundamental
factors
affect
the
cost
of
money:
(1)
production
opportunities,
(2)
time
preferences
for
consumption,
(3)
risk,
and
(4)
inflation.
‘
There
are
many
different
types
of
financial
securities.
Primitive
securities
represent
claims
on
cash
flows,
such
as
stocks
and
bonds.
Derivatives
are
claims‘
on
other
traded
securities,
such
as
options.
Major
financial
institutions
include
commercial
banks,
trust
companies,
credit
unions,
pen-
sion
funds,
life
insurance
companies,
mutual
funds,
hedge
funds,
and
private
equity
funds.
One
result
of
ongoing
regulatory
changes
has
been
a
blurring
of
the
distinctions
between
the
different
financial
institutions.
The
trend
in
Canada
has
been
towards
firms
that
offer
a
wide
range
of
financial
services,
including
investment
banking,
brokerage
operations,
insurance,
and
commercial
banking.
There
are
many
different
types
of
financial
markets.
Each
market
serves
a
different
region
or
deals
with
a
different
type
of
security.
Physical
asset
markets,
also
called
tangible
or
real
asset
markets,
are
those
for
products
such
as
wheat,
autos,
and
real
estate.
Financial
asset
markets
are
for
primitive
securities
and
derivative
securities.
Spot
markets
and
futures
markets
are
terms
that
refer
to
whether
the
assets
are
bought
or
sold
for
“on-the-spot”
delivery
or
for
delivery
at
some
future
date.
Money
markets
are
the
markets
for
debt
securities
with
maturities
of
less
than
1
year.
Capital
markets
are
the
markets
for
long-term
debt
and
corporate
shares.
Primary
markets
are
the
markets
in
which
corporations
raise
new-
capital.
Secondary
markets
are
markets
in
which
existing,
already
outstanding
securities
are
traded
among
investors.
Questions
Define
each
of
the
following
terms;
.
P
e
o
ot
Proprietorship;
partnership;
corporation
Limited
partnership;
limited
liability
partnership;
professional
corporation
Shareholder
wealth
maximization
Money
market;
capital
market;
primary
market;
secondary
market
Private
markets;
public
markets;
derivatives
Investment
banker;
financial
intermediary
Mutual
fund;
money
market
fund
Production
opportunities;
time
preferences
for
consumption
Foreign
trade
deficit
What
are
the
three
principal
forms
of
business
organization?
What
are
the
advantages
and
disadvantages
of
each?
What
is
a
firm’s
fundamental,
or
intrinsic,
value?
What
might
cause
a
firm’s
intrinsic
value
to
be
different
than
its
actual
market
value?
The
president
of
Eastern
Semiconductor
Corporation
(ESC)
made
this
statement
in
the
com-
pany’s
annual
report:
“ESC’s
primary
goal
is
to
increase
the
value
of
our
common
share-
holders”
equity.”
Later
in
the
report,
the
following
announcements
were
made:
a.
The
company
contributed
$1.5
million
to
the
symphony
orchestra
in
Toronto,
Ontario,
its
headquarters’
city.
:
:
NEL
Questions
5
°
Operating
long-term
assets
are
the
long-term
assets
used
to
support
operations,
such
as
net
plant
and
equipment.
They
do
not
include
any
long-term
investments
that
pay
interest
or
dividends.
°
Total
net
operating
capital
(which
means
the
same
as
operating
capital
and
net
oper-
ating
assets)
is
the
sum
of
net
operating
working
capital
and
operating
long-term
assets.
It
is
the
total
amount
of
capital
needed
to
run
the
business.
e
INOPAT
is
net
operating
profit
after
taxes.
It
is
the
after-tax
profit
a
company
would
have
if
it
had
no
debt
and
no
investments
in
nonoperating
assets.
Because
it
excludes
the
effects
of
financial
decisions,
it
is
a
better
measure
of
operating
performance
than
is
net
income.
Free
cash
flow
(FCF)
is
the
amount
of
cash
flow
remaining
after
a
company
makes
the
asset
investments
necessary
to
support
operations.
In
other
words,
FCF
is
the
amount
of
cash
flow
available
for
distribution
to
investors,
so
the
value
of
a
company
is
directly
related
to
its
ability
to
generate
free
cash
flow.
FCF
is
defined
as
NOPAT
minus
the
net
investment
in
operating
capital.
:
©
Market
Value
Added
(MVA)
represents
the
difference
between
the
total
market
value
of
a
firm
and
the
total
amount
of
investor-supplied
capital.
If
the
market
values
of
debt
and
preferred
stock
equal
their
values
as
reported
on
the
financial
statements,
then
MVA
is
the
difference
between
the
market
value
of
a
firm’s
stock
and
the
amount
of
equity
its
shareholders
have
supplied.
°
Economic
Value
Added
(EVA)
is
the
difference
between
after-tax
operating
profit
and
the
total
dollar
cost
of
capital,
including
the
cost
of
equity
capital.
EVA
is
an
estimate
of
the
value
created
by
management
during
the
year,
and
it
differs
substantially
from
accounting
profit
because
no
charge
for
the
use
of
equity
capital
is
reflected
in
accounting
profit.
*
Interestincome
received
by
a
corporation
is
taxed
as
ordinary
income;
however,
common
stock
dividends
received
by
one
Canadian
corporation
from
another
are
excluded
from
taxable
income.
'
°
Because
interest
paid
by
a
corporation
is
a
deductible
expense
while
dividends
are
not,
our
tax
system
favours
debt
over
equity
financing.
¢
Ordinary
corporate
operating
losses
can
be
carried
back
to
each
of
the
preceding
3
years
and
forward
for
the
next
20
years
and
used
to
offset
taxable
income
in
those
years.
°
InCanada,
tax
rates
are
progressive—the
higher
one’s
income,
the
larger
the
percentage
paid
in
taxes.
e
Assefs
such
as
stocks,
bonds,
and
real
estate
are
defined
as
capital
assets.
If
a
capital
asset
is
sold
for
more
than
its
cost,
the
profit
is
called
a
capital
gain.
If
the
asset
is
sold
for
a
loss,
it
is
called
a
capital
loss.
*
Adividend
tax
credit
can
be
used
to
reduce
the
taxes
that
individuals
have
to
pay
on
eligible
dividends
from
Canadian
corporations.
This
dividend
tax
credit
partly
offsets
the
double
taxation
effect
that
would
otherwise
occur.
Questions
2-1
Define
each
of
the
following
terms:
Annual
report;
balance
sheet;
income
statement
Common
shareholders’
equity,
or
net
worth;
retained
earnings
Statement
of
retained
earnings;
statement
of
cash
flows
Depreciation;
amortization;
EBITDA
Operating
current
assets;
operating
current
liabilities;
net
operating
working
capital;
total
net
operating
capital
Accounting
profit;
net
cash
flow;
NOPAT;
free
cash
flow
Market
Value
Added;
Economic
Value
Added
Progressive
tax;
taxable
income;
marginal
and
average
tax
rates
Capital
gain
or
loss;
tax
loss
carryback
and
carryforward
oo
o
Foorag
e
2-2
What
four
statements
are
contained
in
most
annual
reports?
2-3
If
a
“typical”
firm
reports
$20
million
of
retained
earnings
on
its
balance
sheet,
can
the
firm
definitely
pay
a
$20
million
cash
dividend?
2-4
What
is
operating
capital,
and
why
is
it
important?
52
Chapter
2
.-
Fivnunciol
Statgments,
Cash
Flow,
and
Taxes
2-5
.
2-6
2-7
CR-1
Net
Income,
Cash
Flow,
and
EVA
Easy
Problems
1-6
2-1
Personal
After-Tax
Yield
2-2
.
Income
Statement
2-3
Income
Statement
2-4
Net
Cash
Flow
2-5
Statement
of
Retained
Earnings
2-6
Cash
Flow
Statement
Intermediate
Problems
7-11
2-7
Personal
After-Tax
Return
‘Explain
the
difference
between
NOPAT
and
net
income.
Which
is
a
better
measure
of
the
performance
of
a
company’s
operations?
What
is
free
cash
flow?
Why
is
it
the
most
important
measure
of
cash
flow?
If
you
were
starting
a
business,
what
tax
considerations
might
cause
you
to
prefer
to
set
it
up
as
a
proprietorship
or
a
partnership
rather
than
as
a
corporation?
Concept
Review
Problem
Full
solutions
are
provided
at
www.nelson.com/brigham3ce.
Last
year
Custom
Furniture
had
$6,500,000
in
operating
income
(EBIT).
The
company
had
a
net
depreciation
expense
of
$1,000,000
and
an
interest
expense
of
$1,000,000;
its
corporate
tax
rate
was
30%.
The
company
has
$14,000,000
in
operating
current
assets
and
$4,000,000
in
operating
current
liabilities;
it
has
$15,000,000
in
net
plant
and
equipment.
It
estimates
that
it
has
an
after-tax
cost
of
capital
of
10%.
Assume
that
Custom
Furniture’s
only
noncash
item
was
depreciation.
What
was
the
company’s
net
income
for
the
year?
What
was
the
company’s
net
cash
flow?
What
was
the
company’s
net
operating
profit
after
taxes
(NOPAT)?
Calculate
net
operating
working
capital
and
total
net
operating
capital
for
the
current
year.
e.
If
total
net
operating
capital
in
the
previous
year
was
$24,000,000,
what
was
the
com-
pany’s
free
cash
flow
(FCF)
for
the
year?
f.
What
was
the
company’s
Economic
Value
Added
(EVA)?
e
oe
Problems
Answers
fo
odd-numbered
problems
appeor
in
Appendix
A,
Note:
By
the
time
this
book
is
published,
Parliament
may
have
changed
rates
and/or
other
.
provisions
of
current
tax
law—as
noted
in
the
chapter,
such
changes
occur
fairly often.
Work
all
problems
on
the
assumption
that
the
information
in
the
chapter
is
applicable.
An
investor recently
purchased
a
corporate
bond
which
yields
5%.
The
investor
is
in
the
30%
tax
bracket.
What
is
the
bond’s
after-tax
yield?
Little
Books
Inc.
recently
reported
$3.5
million
of
net
income.
Its
EBIT
was
$7
million,
and
its
tax
rate
was
30%.
What
was
its
interest
expense?
Pearson
Brothers
recently
reported
an
EBITDA
of
$7.5
million
and
net
income
of
$1.6
million.
It
had
$2.0
million
of
interest
expense,
and
its
corporate
tax
rate
was
30%.
What
was
its
charge
for
depreciation
and
amortization?
Kendall
Corners
Inc.
recently
reported
net
income
of
$3.1
million and
depreciation
of
$250,000.
What
was
its
net
cash
flow?
Assume
it
had
no
amortization
expense.
In
its
most
recent
financial
sfatements,
Newhouse
Inc.
reported
$50
million
of
net
income
and
$810
million
of
retained
earnings.
The
previous
retained
earnings
were
$780
million.
How
much
in
dividends
was
paid
to
shareholders
during
the
year?
Based
on
the
following
information,
what
are
Ever
Green'’s
cash
flows
from
operations?
The
company
reported
profits
of
$18,000
and
claimed
amortization
of
$4,000,
while
accounts
receivable
increased
by
$4,000,
inventories
decreased
by
$8,000,
and
accounts
payable
increased
by
$4,000.
Karen,
a
resident
of
Nova
Scotia,
has
$10,000
to
invest
for
one
year.
She
has
found
two
alternatives:
a
bond
that
will
provide
interest
income
at
year-end
of
$400,
and
a
common
stock
whose
price
is
$50
and
is
expected
to
increase
by
$2.00.
Ignoring
risk
and
other
factors,
how
much
money
will
Karen
have
after
taxes
from
each
investment?
Use
Tables
2-8
and
2-9
and
assume
that
Karen
has
taxable
income
of
$65,000.
’
NEL
%,.
L
ol
2-8
Cash
Flows
2-9
Cash
Flows
2-10
tncome
and
Cash
Flow
Analysis
2-11
Free
Cash
Flow
Challenging
Problems
12-17
.
NEL
2-12
Free
Cash
Flow
Problems
Companies
X
and
Y
are
very
similar.
Both
have
sales
of
$5,000,000,
and
COGS
are
65%
of
sales.
Both
companies
have
operating
expense
of
$700,000
and
are
taxed
at
26%.
However,
X
and
Y
will
be
claiming
$60,000
and
$120,000
each
respectively
in
depreciation
expense.
Calculate
‘each
company’s
net
cash
flow,
and
explain
specifically
the
difference
in
the
cash
flows.
The
Moore
Corporation
has
operating
income
(EBIT)
of
$750,000.
The
company’s
deprecia-
tion
expense
is
$200,000.
Moore
is
100%
equity
financed,
and
it
faces
a
40%
tax
rate.
What
is
the
company’s
net
income?
What
is
its
net
cash
flow?
The
Berndt
Corporation
expects
to
have
sales
of
$20
million.
Costs
other
than
depreciation
are
expected
to
be
75%
of
sales,
and
depreciation
is
expected
to
be
$2.5
million.
All
sales
rev-
enwes
will
be
collected
in
cash,
and
costs
other
than
depreciation
must
be
paid
for
during
the
year.
Berndt's
tax
rate
is
30%.
Berndt
has
no
debt.
a.
Setup
an
income
statement.
What
is
Berndt’s
expected
net
cash
flow?
b.
Suppose
that
Berndt's
depreciation
expenses
doubled. No
changes
in
operations
occurred.
What
would
happen
to
reported
profit
and
to
net
cash
flow?
c.
Now
suppose
that
Berndt's
depreciation
was
reduced
by
50%.
How
would
profit
and
net
cash
flow
be
affected?
'
d.
If
this
were
your
company,
would
you
prefer
your
depreciation
expense
to
be
doubled
or
halved?
Why?
Financial
information
on
Marine
Tech
Corporation
is
presented
below.
During
the
year,
Marine
Tech
made
a
net
investment
in
operating
capital
of
$30
million.
If
the
company’s
share
price
is
$22,
it
has
10
million
shares
outstanding,
and
its
tax
rate
is
30%,
does
Marine
Tech have
sufficient
free
cash
flow
to
repurchase
10%
of
its
shares?
Marine
Tech
Corporation
Income
Statement
($
™M)
Sales
‘
$320
Operating
costs
‘
220
Depreciation
20
EBIT
'
80
Interest
expense
10
Earnings
before
tax
70
Tax
(30%)
21
Earnings
after
tax
$
49
Using
Rhodes
Corporation’s
financial
statements
(shown
below),
answer
the
following
questions.
What
is
the net
operating
profit
after
taxes
(NOPAT)
for
20157
What
are
the
amounts
of
net
operating
working
capital
for
both
years?
What
are
the
amounts
of
total
net
operating
capital
for
both
years?
What
is
the
free
cash
flow
for
20157
'
What
is
the
ROIC
for
20157
How
much
of
the
FCF
did
Rhodes
use
for
each
of
the
following
purposes:
after-tax
interest,
net
debt
repayments,
dividends,
net
stock
repurchases,
and
net
purchases
of
short-term
investments?
(Hint:
Remember
that
a
net
use
can
be
negative.)
RS
R
O
Rhodes
Corporation:
Income
Statements
for
Year
Ending
December
31
(Millions
of
Dollars)
2015
2014
Sales
’
$11,000
$10,000
Operating
costs
excluding
depreciation
9,360
8,500
Depreciation
and
amortization
380
360
Earnings
before
interest
and
taxes
1,260
1,140
Less
interest
120
100
Pre-tax
income
.
1,140
1,040
Taxes
(40%)
'
456
416
Net
income
available
to
common
shareholders
$
684
$
624
Common
dividends
$
220
$
200
53
Questions
81
do not
appear
on
the
balance
sheet.
At
the
same
time,
the
liability
associated
with
the
lease
obligation
may
not
be
shown
as
debt.
Therefore,
leasing
can
artificially
improve
both
the
turnover
and
the
debt
ratios.
7.
It
is
difficult
to
generalize
about
whether
a
particular
ratio
is
“good”
or
“bad.”
For
example,
a
high
current
ratio
may
indicate
a
strong
liquidity
position,
which
is
good,
or
excess
cash,
which
is
bad
(because
excess
cash
in
the
bank
is
a
nonearning
asset).
Similarly,
a
high
fixed
assets
turnover
ratio
may
denote
either
that
a
firm
uses
its
assets
efficiently
or
that
it
is
undercapitalized
and
cannot
afford
to
buy
enough
assets.
In
summary,
conducting
ratio
analysis
in
a
mechanical,
unthinking
manner
is
dan-
gerous,
but
when
ratio
analysis
is
used
intelligently
and
with
good
judgment,
it
can
provide
useful
insights
into
a
firm’s
operations
and
identify
the
right
questions
to
ask.
1.
List
three
types
of
users
of
ratio
andlysis.
Would
the
different
users
emphasize
the
same
or
different
types
of
ratios?
2.
List
several
potential
problems
with
ratio
analysis.
Summary
The
main
purpose
of
this
chapter
was
to
discuss
techniques
used
by
investors
and
managers
to
analyze
financial
statements.
The
key
concepts
covered
are
listed
below.
e
Liquidity
ratios
show
the
relationship
of
a
firm’s
current
assets
to
its
current
liabilities,
and
thus
its
ability
to
meet
maturing
debts.
Two
commonly
used
liquidity
ratios
are
the
current
ratio
and
the
quick,
or
acid
test,
ratio.
o
Asset
management
ratios
measure
how
effectively
a
firm
is
managing
its
assets.
These
ratios
include
inventory
turnover,
days
sales
outstanding,
average
payable
period,
fixed
assets
turnover,
and
total
assets
turnover.
e
Debt
management
ratios
reveal
(1)
the
extent
to
which
the
firm
is
financed
with
debt
and
(2)
its
likelihood
of
defaulting
on
its
debt
obligations.
They
include
the
debt
ratio,
debt-to-equity
ratio,
times-interest-earned
ratio,
and
EBITDA
coverage
ratio.
e
Profitability
ratios
show
the
combined
effects
of
liquidity,
asset
management,
and
debt
management
policies
on
operating
results.
They
include
the
net
profit
margin,
the
basic
earning
power
ratio,
the
return
on
total
assets,
and
the
return
on
common
equity.
e
Market
value
ratios
relate
the
firm’s
stock
price
to
its
earnings,
cash
flow,
and
book
value
per
share,
thus
giving
managerrent
an
indication
of
what
investors
think
of
the
company’s
past
performance
and
future
prospects.
These
include
the
price/earnings
ratio,
price/cash
flow
ratio,
and
the
market/book
ratio.
e
Trend
analysis,
where
one
plots
a
ratio
over
time,
is
important,
because
it
reveals
whether
the
firm’s
condition
has
been
improving
or
deteriorating
over
time.
¢
The
DuPont
equation
is
designed
to
show
how
the
profit
margin
on
sales,
the
assets
turnover
ratio,
and
the
use
of
debt
interact
to
determine
the
rate
of
return
on
equity.
The
firm’s
management
can
use
the
DuPont
system
to
analyze
ways
of
improving
performance.
e
Benchmarking
is
the
process
of
comparing
a
particular
company
with
a
group
of
sim-
ilax,
successful
companies.
T
e
Ratio
analysis
has
limitations,
but
used with
care
and
judgment,
it
can
be
very
helpful.
Questions
3-1
Define
each
of
the
following
térms:
a.
Liquidity
ratios:
current
ratio;
quick,
or
acid
test,
ratio
b.
Asset
management
ratios:
inventory
turnover
ratio;
days
sales
outstanding
(DSO);
average
payables
period;
fixed
assets
turnover
ratio;
total
assets
turnover
ratio
NEL
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Questions
Part IV.
Havel Robotics Company (a U.S-based firm) is considering establishing a subsidiary in China to
assemble industrial robots. If Havel makes the investment, it will operate the plant for four years and then
sell the building and equipment to Chinese investors.
Havel will be allowed to repatriate 100% of cash flow from operations as dividend each year and
terminal value to the United States. The China withholding tax is 10% on dividend and 0 on terminal
value. Neither the dividends nor the terminal value will be subject to U.S. income tax.
The initial investment would be $1,500,000 (building and equipment, $800,000, and working capital,
$700,000). Building and equipment will be depreciated over four years on a straight-line basis (no salvage
value).
Havel estimates operating profit for each year as follows:
Year 1
RMB 3,600,000
Year 2
RMB 3,800,000
Year 3
Pre-tax operating profit
RMB 4,000,000
The terminal value of the investment at the end of four years is estimated to be RMB…
arrow_forward
Research Problem 1. Jerry Jeff Keen, the CFO of Boots Unlimited, a Texas corporation, has come to you
regarding a potential restructuring of business operations. Boots has long manufactured its western boots
in plants in Texas and Oklahoma. Recently, Boots has explored the possibility of setting up a manufacturing
subsidiary in Ireland, where manufacturing profits are taxed at 12.5%. Jerry Jeff sees this as a great idea,
given that the alternative is to continue all manufacturing in the United States, where profits are taxed at
21%.
Boots plans to continue all of the cutting, sizing, and hand tooling of leather in its U.S. plants. This material
will be shipped to Ireland for final assembly, with the finished product shipped to retail outlets all over
Europe and Asia.
Your initial concern is whether the income generated by the Irish subsidiary will be considered foreign base
company income. Address this issue in a research memo, along with any planning suggestions.
arrow_forward
QUESTION ONE
Vision Ltd, a company based in the United States is considering investing in a
manufacturing plant in Ghana. The construction cost is estimated at 9 billion Ghanian
Cedi. The company estimates the useful life of the project to be 3 years and before tax
earnings expected during the first and second year are 3 billion Ghanian Cedi and 2
bilion Ghanian Cedi in the third year. The earnings are to be remitted back to the
in the United States at the end of each year.. At thé end of the third year, Vision Ltd
expects to sell the plant for 5 billion Ghanian Cedi to the Ghanian Government. The
company has a required rate of return of 17% p.a. The current exchange rate (spot rate)
is $ 1/Cedi 8.7 and Cedi is expected to depreciate by 5% per year.
parent
The Ghana Government will impose a 20% tax rate on income. In addition, it will
impose a 10% withholding tax to any funds remitted by the subsidiary to the parent. The
US government will allow a tax credit on taxes paid in Ghana;…
arrow_forward
QUESTION 4
Berjaya Mining Bhd (BMB) is one of the main producers of tin in Malaysia. On 1 August 2020, it had 10 tons of tin inventory, carried at cost of RM35,100 per ton and planned to sell the tin inventory on 30 September 2020. As the mining industry had been experiencing a decline due to falling demand and low prices, BMB decided to hedge the risk of decreased tin prices. On 1 August 2020, it entered into a forward contract to sell 10 tons of tin at a price of RM65,150 per ton. The maturity of the forward contract was 30 September 2020. On 30 September 2020, BMB settled the forward contract and sold 10 tons of tin inventory at the price of RM64,900 per ton.
The prices of tin during the hedging period were as follows:
Date
Spot price per ton
Forward price per ton maturing on 30 September 2020
1 August 2020
RM66,400
RM65,150
31 August 2020
RM64,200
RM63,940
30 September 2020
RM64,900
RM64,900
REQUIRED:…
arrow_forward
⦁ Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 200,000 shares of stock at $30 per share. What is the amount of economic investment that has resulted from BBQ’s actions? How much purely financial investment took place?
arrow_forward
what do i put here: Less: TCEC Business Limit reduction (negative)
Jansen Inc. is a large Canadian controlled private corporation (CCPC).
Gross revenues for 2023 totaled $3500000, with 40 percent of this amount generated in Ontario, 30 percent in Alberta, and the remainder coming from outside of Canada. The revenues were earned in a country where Jansen has a permanent establishment. Wages and salaries for this period totaled $1000000. 60% of the wages were paid in Ontario and 15 % of the wages were paid in Alberta, with the remainder paid outside of Canada.
Taxable income for the 2023 tax year was determined to be $1500000, with all but $145000 of this total consisting of Canadian active business income. The $145000 is foreign business income. The foreign jurisdiction withheld $21750 in tax, remitting the remaining $123250 to Jansen.
Jansen is associated with several other companies. The…
arrow_forward
Q1.
Zeal Corporation is thinking about the dropping of its product Z. Sales of the product total Rs.400,000 per year; variable expenses total Rs. 270,000 per year. Fixed expenses charged to the product total Rs. 150,000 per year. The company estimates that Rs. 70,000 of these fixed expenses are not avoidable even if the product is dropped. If Product Z is dropped, what will be the net increase or decrease in profit of the company?
arrow_forward
QUESTION 11
Your company Mazengwa Ltd is planning to invest in Malaysia in order to increase shareholder value. It has to choose one of the following mutually exclusive projects.
Year
Cash Flow (R)
Cash Flow (S)
$100 000l
$45 000
1
$14 500
$36 400
$17 200
$15 880
$20 000
$12 000
$138 600
$17 100
.Using the Net Present Value (NPV) technique, which project would you invest in if your required rate of return is 12%6?
For the toolbar, press ALT+F10 (PC).or ALT+FN+F10 (Mac).
BIU S
10pt
Paragraph
Arial
Save All Answers
Close Window
Save All Answers to save oli answers.
Click Save and Submit to save and submit. Cli
DELL
27°C AQI 66
arrow_forward
Question 1
XYZ Ltd has spent £100,000 on research and development of a new product, expected to
have a short economic life of two years only. The product development manager has
recommended this production opportunity for consideration at the company's board. She
believes that the new product perfectly fits the firm's strategic plan. The new product has
already attracted the strong interest of a rival business, and if XYZ Ltd decides not to go
ahead with production, it can sell the patent rights to the competitor for £160,000.
The marketing manager has suggested that annual revenues will depend on whether the
demand for the new product is weak or strong, forecasting the following levels of annual
demand and the independent probability of each level of demand for the two years of the
project's life:
Year 1
Year 2
Probability
Sales (units)
350,000
Probability
Sales (units)
450,000
0.2
0.3
350,000
200,000
90,000
0.3
300,000
100,000
90,000
0.3
0.3
0.2
0.2
0.2
Manufacture of the new product…
arrow_forward
i need the answer quickly
arrow_forward
None
arrow_forward
Solve this problem
arrow_forward
What is the 'UNLEVERED PROFIT AFTER TAX' in the year 2019?
Rs. 0.41 million
Rs. 0.51 million
Rs. 0.91 million
Rs. 3.80 million
arrow_forward
See attached. 13
arrow_forward
QUESTION 2
Awen Ltd is a manufacturer of machine tools and is at present
contemplating an issue of GH¢2,000,000 10% debenture
stock (2020) in order to assist the remodelling of its present
production facilities. Some shareholders are reluctant to
approve additional long-term debt due to the fact that the
machine tools industry is subject to wide-ranging fluctuations
in sales and profits.
A group of shareholders have approached you and asked you
to comment on the performance of Awen Ltd as compared
with industrial averages and to make recommendations as to
whether they should approve the proposed additional long-
term debt.
Abbreviated financial statements and typical ratios for firms
in the machine tools industry are as follows:
Awen Ltd
Statement of Comprehensive Income for the year ended 31/12
2004
GH¢000
2005
GH¢000
23,500
16,000
7,500
(2,000)
(3,000)
Sales
20,500
14,000
6,500
(1,900)
(2,600)
Cost of Sales
Gross profit
Selling expenses
Administrative expenses
Operating profit…
arrow_forward
F4.
Sonic Corporation imports materials from a Nigerian supplier. Assume that it is 2020 and Sonic Corporation is worried that the Nigerian supplier may enter into a long-term contract with Chinese customer to sell all of their output to the Chinese customers, hence cutting off Sonic Corporation's supply. In the event of such a contract with the Chinese customers, Sonic Corporation will face much higher costs for its raw materials causing its operating profits to decline substantially and its marginal tax rate to fall from its current level of 25% down to 10%. An insurance firm has agreed to write a trade insurance policy that will pay Sonic Corporation $3,700,000 in the event of the Nigerian supply of materials being cut off. The chance of the Nigerian supply being cut off is estimated to be 30%, with a beta of -1.50. The risk-free rate of interest is 3% and the return on the market is estimated to be 10%. What is Sonic's NPV for purchasing this policy? (Hint: you need to determine…
arrow_forward
QUESTION 5.
Happy Printers Ltd is evaluating four mutually exclusive projects which are competing for the same investment capital. The company’s main objective is maximising shareholder value.
Some analysis has been performed and you have been given the results by your manager who is not familiar with investment appraisal techniques.
Project
A
B
C
D
Payback Period
4 years
5 years
3 years
3 years
Accounting Rate of Return
6%
7%
7%
5%
Net Present Value
£16,320
£(16,100)
£16,100
£15,900
Internal Rate of Return
9%
8%
9%
7%
Initial Outlay Required
£50,000
£35,000
£45,000
£60,000
Required
a) Recommend which one of the projects should be undertaken explaining why you have chosen that one.
b) Discuss the limitation of the investment appraisal techniques used for the benefit of your manager including reference to academic sources to support your explanations.
arrow_forward
q7
arrow_forward
QUESTION 4
The directors of Raga Limited are considering a new business opportunity.
This involves the purchase of machinery costing Rs 600,000.
Units produced by the machine are expected to have a cash inflow of Rs 50 each and the
costs of production are expected to be Rs 31.10 per unit. There is also a fixed cost which
are expected to be Rs 120,000 per annum excluding depreciation.
The machinery is expected to lose its value evenly over four years and then be scrapped.
The directors expect to produce and sell 20,000 units each year.
Raga Limited has a cost of capital of 10%.
REQUIRED:
Year
(b) Calculate the annual profit.
1
2
3
4
Discount
Rate -10%
0.909
(a) Calculate the net cash flow for each year.
0.826
0.751
0.683
(c) Calculate the payback period for the machinery.
(d) Using the answer in part (a) calculate the Net Present Value (NPV).
(e) Using the answer in part (b) calculate ARR.
(f) Based on the above advice Raga Limited if he should invest in the machinery using
valid…
arrow_forward
Help me answer problem 6 and 7 thank you
arrow_forward
Question 2 :
ABC CO. is considering replacing a production line with a new, more productive one. You are given the information that follows.
The existing production line currently generates $100,000 profit per year and could be sold today for $40,000.
The new proposed production line would generate profits of $150,000 per year
The new proposed production line requires an initial investment $80,000.
The company is seeking your advice regarding whether to replace the production line or keep the existing one.
Required:
Based on the Marginal analysis concept, what would you recommend?
State the reasons why focusing on profit only should not be the optimal goal for companies.
arrow_forward
1: Mars Technologies is considering setting up a plant in a foreign country. The plant will have an estimated useful life of 4 years and the estimated costs of setting it up are $20 million. The company’s CFO has estimated the following cash flows associated with the new plant: Year 1 = $5.8 million Year 2 = $7.9 million Year 3 = $8.6 million Year 4 = $10.5 million The company is concerned about its current exports to the foreign country, which are expected to be reduced by $1,200,000 for each of the 4 years. Given that the company’s required rate of return is 12%, what is the NPV of the project? Q#2: Jupiter Inc.’s directors are considering expanding their operations in foreign markets. They estimate that the cost of expansion is approximately $42 million. The company’s CFO has estimated that new foreign operations will generate the following cash flows: Year 1 = $2,120,000 Year 2 = $2,838,000 Year 3 = $3,480,000 Year 4 = $4,570,000 Year 5 onward, the cash flow stream is going to…
arrow_forward
M6
arrow_forward
An American company decide to invest $ 250 m in Jordan the current EX is 0.75$/J the project start in 3 months for 6 months
3 month Rate j=2%. $=3%
9 month. Rate j=4%. $=5%
12 month. Rate j=6%. $=7%
Answer the following question
1. Which currency depreciate / appreciate
2. How many swop point
3. What is the American company loss/profit in the Jordanian market
arrow_forward
Do not give answer in image
arrow_forward
Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all
of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of
carburetor to Troy Engines, Limited, for a cost of $30 per unit. To evaluate this offer, Troy Engines, Limited, has gathered the
following information relating to its own cost of producing the carburetor internally:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead, traceable
Fixed manufacturing overhead, allocated
Total cost
$34
*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
Required 1 Required 2
Per
Unit
Required 3
Required:
1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what
would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier?
2.…
arrow_forward
Answer only question 4
arrow_forward
Don't use AI
arrow_forward
Havel Robotics Company (a U.S-based firm) is considering establishing a
subsidiary in China to assemble industrial robots on January 1, Year 1. If
Havel makes the investment, it will operate the plant for one year and
then sell the building and equipment to Chinese investors.
1. The initial investment would be $1,000.
2. Havel will repatriate 100% of the estimated net operating cash
flows as dividend which is ¥3,000. The terminal value is ¥6,000.
The China withholding tax is 10% on dividends and the terminal
value. Neither the dividends nor the terminal value will be subject to
U.S. income tax.
3. Havel uses a 16% discount rate. The present value factor is 0.862
for the end of Year 1.
4. The exchange rate between the RMB and the US$ is expected to be
¥6.7=$1 on Jan. 1, Year 1 and ¥ 6.8 =$1 on Dec. 31. Year 1.
What is the net present value of the investment from a parent company
perspective?
$27
O $5,982
O $141
$191
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you
Related Questions
- Part IV. Havel Robotics Company (a U.S-based firm) is considering establishing a subsidiary in China to assemble industrial robots. If Havel makes the investment, it will operate the plant for four years and then sell the building and equipment to Chinese investors. Havel will be allowed to repatriate 100% of cash flow from operations as dividend each year and terminal value to the United States. The China withholding tax is 10% on dividend and 0 on terminal value. Neither the dividends nor the terminal value will be subject to U.S. income tax. The initial investment would be $1,500,000 (building and equipment, $800,000, and working capital, $700,000). Building and equipment will be depreciated over four years on a straight-line basis (no salvage value). Havel estimates operating profit for each year as follows: Year 1 RMB 3,600,000 Year 2 RMB 3,800,000 Year 3 Pre-tax operating profit RMB 4,000,000 The terminal value of the investment at the end of four years is estimated to be RMB…arrow_forwardResearch Problem 1. Jerry Jeff Keen, the CFO of Boots Unlimited, a Texas corporation, has come to you regarding a potential restructuring of business operations. Boots has long manufactured its western boots in plants in Texas and Oklahoma. Recently, Boots has explored the possibility of setting up a manufacturing subsidiary in Ireland, where manufacturing profits are taxed at 12.5%. Jerry Jeff sees this as a great idea, given that the alternative is to continue all manufacturing in the United States, where profits are taxed at 21%. Boots plans to continue all of the cutting, sizing, and hand tooling of leather in its U.S. plants. This material will be shipped to Ireland for final assembly, with the finished product shipped to retail outlets all over Europe and Asia. Your initial concern is whether the income generated by the Irish subsidiary will be considered foreign base company income. Address this issue in a research memo, along with any planning suggestions.arrow_forwardQUESTION ONE Vision Ltd, a company based in the United States is considering investing in a manufacturing plant in Ghana. The construction cost is estimated at 9 billion Ghanian Cedi. The company estimates the useful life of the project to be 3 years and before tax earnings expected during the first and second year are 3 billion Ghanian Cedi and 2 bilion Ghanian Cedi in the third year. The earnings are to be remitted back to the in the United States at the end of each year.. At thé end of the third year, Vision Ltd expects to sell the plant for 5 billion Ghanian Cedi to the Ghanian Government. The company has a required rate of return of 17% p.a. The current exchange rate (spot rate) is $ 1/Cedi 8.7 and Cedi is expected to depreciate by 5% per year. parent The Ghana Government will impose a 20% tax rate on income. In addition, it will impose a 10% withholding tax to any funds remitted by the subsidiary to the parent. The US government will allow a tax credit on taxes paid in Ghana;…arrow_forward
- QUESTION 4 Berjaya Mining Bhd (BMB) is one of the main producers of tin in Malaysia. On 1 August 2020, it had 10 tons of tin inventory, carried at cost of RM35,100 per ton and planned to sell the tin inventory on 30 September 2020. As the mining industry had been experiencing a decline due to falling demand and low prices, BMB decided to hedge the risk of decreased tin prices. On 1 August 2020, it entered into a forward contract to sell 10 tons of tin at a price of RM65,150 per ton. The maturity of the forward contract was 30 September 2020. On 30 September 2020, BMB settled the forward contract and sold 10 tons of tin inventory at the price of RM64,900 per ton. The prices of tin during the hedging period were as follows: Date Spot price per ton Forward price per ton maturing on 30 September 2020 1 August 2020 RM66,400 RM65,150 31 August 2020 RM64,200 RM63,940 30 September 2020 RM64,900 RM64,900 REQUIRED:…arrow_forward⦁ Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 200,000 shares of stock at $30 per share. What is the amount of economic investment that has resulted from BBQ’s actions? How much purely financial investment took place?arrow_forwardwhat do i put here: Less: TCEC Business Limit reduction (negative) Jansen Inc. is a large Canadian controlled private corporation (CCPC). Gross revenues for 2023 totaled $3500000, with 40 percent of this amount generated in Ontario, 30 percent in Alberta, and the remainder coming from outside of Canada. The revenues were earned in a country where Jansen has a permanent establishment. Wages and salaries for this period totaled $1000000. 60% of the wages were paid in Ontario and 15 % of the wages were paid in Alberta, with the remainder paid outside of Canada. Taxable income for the 2023 tax year was determined to be $1500000, with all but $145000 of this total consisting of Canadian active business income. The $145000 is foreign business income. The foreign jurisdiction withheld $21750 in tax, remitting the remaining $123250 to Jansen. Jansen is associated with several other companies. The…arrow_forward
- Q1. Zeal Corporation is thinking about the dropping of its product Z. Sales of the product total Rs.400,000 per year; variable expenses total Rs. 270,000 per year. Fixed expenses charged to the product total Rs. 150,000 per year. The company estimates that Rs. 70,000 of these fixed expenses are not avoidable even if the product is dropped. If Product Z is dropped, what will be the net increase or decrease in profit of the company?arrow_forwardQUESTION 11 Your company Mazengwa Ltd is planning to invest in Malaysia in order to increase shareholder value. It has to choose one of the following mutually exclusive projects. Year Cash Flow (R) Cash Flow (S) $100 000l $45 000 1 $14 500 $36 400 $17 200 $15 880 $20 000 $12 000 $138 600 $17 100 .Using the Net Present Value (NPV) technique, which project would you invest in if your required rate of return is 12%6? For the toolbar, press ALT+F10 (PC).or ALT+FN+F10 (Mac). BIU S 10pt Paragraph Arial Save All Answers Close Window Save All Answers to save oli answers. Click Save and Submit to save and submit. Cli DELL 27°C AQI 66arrow_forwardQuestion 1 XYZ Ltd has spent £100,000 on research and development of a new product, expected to have a short economic life of two years only. The product development manager has recommended this production opportunity for consideration at the company's board. She believes that the new product perfectly fits the firm's strategic plan. The new product has already attracted the strong interest of a rival business, and if XYZ Ltd decides not to go ahead with production, it can sell the patent rights to the competitor for £160,000. The marketing manager has suggested that annual revenues will depend on whether the demand for the new product is weak or strong, forecasting the following levels of annual demand and the independent probability of each level of demand for the two years of the project's life: Year 1 Year 2 Probability Sales (units) 350,000 Probability Sales (units) 450,000 0.2 0.3 350,000 200,000 90,000 0.3 300,000 100,000 90,000 0.3 0.3 0.2 0.2 0.2 Manufacture of the new product…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you