Cash Connection: Are Its Payday Lender Strategy and Its Business Model Ethical

1064 Words Nov 11th, 2012 5 Pages
SOLUTIONS TO CASE STUDIES CHAPTER 13

Case Study 13.1 Telstra opts for David Thodey as replacement for Sol Trujillo

1. Why would the Telstra board appoint an internal candidate to the position of chief executive, rather than an external candidate?

This question is a good opportunity for students to reflect on what constitutes ‘expertise’. On the surface of the facts, David Thodey may seem like an unusual choice given that his proposed management changes are unknown. However, when the facts are considered in more detail, his selection might be more understandable given that he is likely to move quickly to end the acrimonious relationship that has developed between the company and the government. The
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There is far less discretion as to the timing of disclosures under the cash flow model. Adoption of cash flow can distort earnings and reduce the capacity of management to smooth income. Arguably however, accrual accounting may allow investors to form unbiased or more informed judgements about the long-term prospects of a company, or accrual-accounting-based information cues may be better predictors of future cash flows than current cash flows. The debt-to-equity ratio provides a different perspective that is still linked to cash flows. It considers the total level of debt compared to the total level of finance provided by equity and allows for an evaluation of the ability of the firm to service its level of debt. 2. What do the analysts mean by the term ‘nasty surprise’?

A ‘nasty surprise’ is reported earnings or some other accounting measure that have not been anticipated (or fully anticipated) and have the potential to adversely affect the future cash flows or other aspects of the operations of a firm. 3. Why does the market so readily interpret a cash-flow problem as a sign that a company’s financial position might be deteriorating but was apparently prepared to focus on debt-to-equity ratios for a number of years?

The literature indicates that the market is not ‘fooled’ by the debt-to-equity ratios – that the market adjusts in order to provide a measure of actual value. Markets can still be wrong

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