Look forward to the day when you will have accumulated $5,000, and assume that you have decided to invest that hard-earned money in the common stock of a publicly owned corporation. Required: What data about that company will you be most interested in? How will you arrange those data so they are most meaningful to you? What information about the company will you want on a weekly basis, on a quarterly basis, and on an annual basis? How will you decide whether to sell, hold, or buy some more of the firm's stock?
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Exercise 11-5 (Static) Identify information used in an investment decision
Look forward to the day when you will have accumulated $5,000, and assume that you have decided to invest that hard-earned money in the common stock of a publicly owned corporation.
Required:
- What data about that company will you be most interested in?
- How will you arrange those data so they are most meaningful to you?
- What information about the company will you want on a weekly basis, on a quarterly basis, and on an annual basis?
- How will you decide whether to sell, hold, or buy some more of the firm's stock?
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- MANAGING CURRENT ASSETS Dan Barnes, financial manager of Ski Equipment Inc. (SKI), is excited, but apprehensive. The companys founder recently sold his 51% controlling block of stock to Kent Koren, who is a big fan of EVA (Economic Value Added). EVA is found by taking the after-tax operating profit and subtracting the dollar cost of all the capital the firm uses: EVA = EBIT(1 T) Annual dollar cost of capital = EBIT(1 T) (WACC Capital employed If EVA is positive, the firm is creating value. On the other hand, if EVA is negative, the firm is not covering its cost of capital and stockholders value is being eroded. Koren rewards managers handsomely if they create value, but those whose operations produce negative EVAs are soon looking for work. Koren frequently points out that if a company can generate its current level of sales with fewer assets, it will need less capital. That would, other things held constant, lower capital costs and increase EVA. Shortly after he took control, Koren met with SKIs senior executives to tell them his plans for the company. First, he presented some EVA data that convinced everyone that SKI had not been creating value in recent years. He then stated, in no uncertain terms, that this situation must change. He noted that SKIs designs of skis, boots, and clothing are acclaimed throughout the industry but that other aspects of the company must be seriously amiss. Either costs are too high, prices are too low, or the company employs too much capital; and he expects SKIs managers to identify and correct the problem. Barnes has long believed that SKIs working capital situation should be studiedthe company may have the optimal amounts of cash, securities, receivables, and inventories, but it may also have too much or too little of these items. In the past, the production manager resisted Barness efforts to question his holdings of raw materials inventories; the marketing manager resisted questions about finished goods; the sales staff resisted questions about credit policy (which affects accounts receivable); and the treasurer did not want to talk about her cash and securities balances. Korens speech made it clear that such resistance would no longer be tolerated. Barnes also knows that decisions about working capital cannot be made in a vacuum. For example, if inventories could be lowered without adversely affecting operations, less capital would be required, the dollar cost of capital would decline, and EVA would increase. However, lower raw materials inventories might lead to production slowdowns and higher costs, while lower finished goods inventories might lead to the loss of profitable sales. So before inventories are changed, it will be necessary to study operating as well as financial effects. The situation is the same with regard to cash and receivables. a. Barnes plans to use the ratios in Table IC 16.1 as the starting point for discussions with SKIs operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and the way changes would interact to affect profits and EVA. Based on the data in Table IC 16.1, does SKI seem to be following a relaxed, moderate, or restricted current assets investment policy? b. How can we distinguish between a relaxed but rational current assets investment policy and a situation where a firm has a large amount of current assets due to inefficiency? Does SKIs current assets investment policy seem appropriate? Explain. c. SKI tries to match the maturity of its assets and liabilities. Describe how SKI could adopt a more aggressive or a more conservative financing policy. d. Assume that SKIs payables deferral period is 30 days. Now calculate the firms cash conversion cycle estimating the inventory conversion period as 365/Inventory turnover. e. What might SKI do to reduce its cash and securities without harming operations? In an attempt to better understand SKIs cash position, Barnes developed a cash budget. Data for the first 2 months of the year are shown in Table IC 16.2. (Note that Barness preliminary cash budget does not account for interest income or interest expense.) He has the figures for the other months, but they are not shown in Table IC 16.2. f. In his preliminary cash budget, Barnes has assumed that all sales are collected and thus that SKI has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting sense? (Hint: Bad debts affect collections but not purchases.) g. Barness cash budget for the entire year, although not given here, is based heavily on his forecast for monthly sales. Sales are expected to be extremely low between May and September but then increase dramatically in the fall and winter. November is typically the firms best month, when SKI ships equipment to retailers for the holiday season. Interestingly, Barness forecasted cash budget indicates that the companys cash holdings will exceed the targeted cash balance every month except October and November, when shipments will be high but collections will not be coming in until later. Based on the ratios in Table IC 16.1, does it appear that SKIs target cash balance is appropriate? In addition to possibly lowering the target cash balance, what actions might SKI take to better improve its cash management policies and how might that affect its EVA? h. Is there any reason to think that SKI may be holding too much inventory? If so, how would that affect EVA and ROE? i. If the company reduces its inventory without adversely affecting sales, what effect should this have on the companys cash position (1) in the short run and (2) in the long run? Explain in terms of the cash budget and the balance sheet. j. Barnes knows that SKI sells on the same credit terms as other firms in the industry. Use the ratios presented in Table IC 16.1 to explain whether SKIs customers pay more or less promptly than those of its competitors. If there are differences, does that suggest that SKI should restrict or relax its credit policy? What four variables make up a firms credit policy, and in what direction should each be changed by SKI? k. Does SKI face any risks if it restricts its credit policy? Explain. l. If the company reduces its DSO without seriously affecting sales, what effect will this have on its cash position (1) in the short run and (2) in the long run? Answer in terms of the cash budget and the balance sheet. What effect should this have on EVA in the long run? m. Assume that SKI buys on terms of 1 10, net 30, but that it can get away with paying on the 40th day if it chooses not to take discounts. Also, assume that it purchases 3 million of components per year, net of discounts. How much free trade credit can the company get, how much costly trade credit can it get, and what is the percentage cost of the costly credit? Should SKI take discounts? Why or why not? n. Suppose SKI decided to raise an additional 100,000 as a 1-year loan from its bank, for which it was quoted a rate of 8%. What is the effective annual cost rate assuming simple interest and add-on interest on a 12-month installment loan? Table IC 16.1 Selected Ratios: SKI and Industry Average SKI Industry Current 1.75 2.25 Debt/Assets 58.76% 50.00% Turnover of cash and securities 16.67 22.22 Days sales outstanding (365-day basis) 45.63 32.00 Inventory turnover 4.82 7.00 Fixed assets turnover 11.35 12.00 Total assets turnover 2.08 3.00 Profit margin 2.07% 3.50% Return on equity (ROE) 10.45% 21.00% TABLE IC 16.2 Skis Cash Budget for January and FebruaryReturn on assets ExxonMobil Corporation (XOM) explores, produces, and distributes oil and natural gas. The Coca-Cola Company (KO) produces and distributes soft drink beverages, including Coke. Wal-Mart Stores, Inc.., (WMT) operates retail stores and supermarkets. The following data (in millions) were taken from recent financial statements of each company: Compute the return on assets for each company using the preceding data, and rank the companies’ return on assets from highest to lowest. Round the return on assets to one decimal place.Begin with the partial model in the file Ch02 P21 Build a Model.xlsx on the textbooks Web site. a. Using the financial statements shown here for Lan Chen Technologies, calculate net operating working capital, total net operating capital, net operating profit after taxes, free cash flow, and return on invested capital for 2020. The federal-plus-state tax rate is 25%. b. Assume there were 15 million shares outstanding at the end of 2019, the year-end closing stock price was 65 per share, and the after-tax cost of capital was 10%. Calculate EVA and MVA for 2020. Lan Chen Technologies: Income Statements for Year Ending December 31 (Millions of Dollars) Lan Chen Technologies: December 31 Balance Sheets (Thousands of Dollars)
- Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Required: Note: Round all answers to two decimal places. 1. Compute the following for each year: (a) return on assets, (b) return on stockholders equity, (c) earnings per share, (d) price-earnings ratio, (e) dividend yield, and (f ) dividend payout ratio. 2. CONCEPTUAL CONNECTION Based on the analysis in Requirement 1, would you invest in the common stock of Kepler?Identify information used in an investment decision Look forward to the daywhen you will have accumulated $5,000, and assume that you have decided to investthat hard-earned money in the common stock of a publicly owned corporation. Whatdata about that company will you be most interested in, and how will you arrangethose data so they are most meaningful to you? What information about the company will you want on a weekly basis, on a quarterly basis, and on an annual basis?How will you decide whether to sell, hold, or buy some more of the firm’s stock?Identifying why companies invest and classifying investments Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations. Requirements 1. What are some reasons why Garden Haven may choose to invest in debt or equity securities? 2. What type of classification would Garden Haven’s investment fall within— short-term or long-term? Why?
- Question 1 You are a newly employed finance manager for Finance Adventure Ltd. The following data is available for the company as of 31 June 2020: Current assets of $293,950 Current liabilities $68,700 Total assets $765,600 Equity $305,890 Required: a) The company’s Management Board required you to evaluate two alternative options of debt funding and equity funding for a new project. What is the job are you doing to complete the task? (referring to one out of 3 important questions of corporate finance for your answer) b) Calculate non-current assets, non-current liabilities and build a balance sheet for the company? c) Calculate the return on assets (ROA) of the company given that return on equity (ROE) is 35%? d) What is the price earnings ratio (PE) of the company, given total number of outstanding ordinary shares is 57,000 and market price of each share is $22?Problem 19: Laiho Industries’s 2017 and 2018 balance sheets (in thousands of dollars are shown). Please show all work, INCLUDING FORMULAS AND HOW YOU GOT EACH PIECE OF THE FORMULA. If using EXCEL, please show where you got any numbers from. For example, for letter E. e. Assume the firm’s after-tax cost of capital is 10.5%. What is the firm’s 2018 EVA? EVA= EBIT(1-T)-(Total invested capital x After-tax percentage cost of capital) How did you find the total invested capital. I posted this questions numerous times, and it seems that for the last couple questions people are using informatiojn from 2017 and not 2018. Please USE CORRECT INFORMATION. Please also explain why you are using the calculations that you have used. a. Sales for 2018 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was 40%, and Laiho pays 40% of its net income as dividends. Given this information,…Question 3 KejoraJLand has total earnings last year of RM5,500,000 but expect total earnings to increase to RM5,750,000 this year because of a booming in the housing industry. There are currently 1,000,000 shares of common stock outstanding. The company has RM4,000,000 worth of investments to undertake this year. The company finances 30 percent of its investments with debt and 70 percent with equity capital. The company paid RM2.80 per share dividend last year. 1) If the company follows a pure residual dividend policy, how large a dividend will shareholder receive this year? 2) If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year? 3)If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year?
- Question A .Consider the following firms: Net Income this Year Stock price at beginning of year Stock price at end of year Firm A $ 10,000,000 $ 20 $ 10 Firm B $ 8,000,000 $ 10 $ 20 a) The manager of firm A is doing a better job than B b) The manager of firm B is doing a better job than A c) Neither manager is doing a good job d) Both managers are doing a good job Full explain this question and text typing work only We should answer our question within 2 hours takes more time then we will reduce Rating Dont ignore this line4. You are a member of the finance staff of Orange Ltd, whose share are listed on London Stock Exchange. You have been asked to derive a weighted average cost of capital (WACC) for use in assessing a major investment in a training facility. The business’s financial statement as at 31 December 2021 shows that it has the following long-term financial capital structure: Redeemable Debt: 5,000 redeemable debts of £100 each with 12% coupon rate Preference Shares: 46,000 shares with 9% dividend rate and a par value of £10 Ordinary shares: 0.5 million shares of £1 each On 31 December 2021, the 12% redeemable debt is traded at £114 (ex-interest). It will be redeemable at par on 31 December 2022. Interest on the debt is payable annually on 31 December. On 31 December 2021, the market price of the company’s 9% preference shares is £13.5 (cum-dividend). On 31 December 2021, the ordinary shares are quoted at £1.21 each. The ordinary shareholders will receive a 7p annual dividend per share very…Question: Financial decisions often place heavier emphasis on one type of financial statement over the others. Consider each of the following hypothetical situations independently. An investor is considering purchasing common stock of the 24/7 Fitness The investor plans to hold the investment for at least 3 years. Xerox is considering extending credit to a new customer. The terms of the credit would require the customer to pay within 60 days of receipt of goods. The president of American Airlines is trying to determine whether the company is generating enough cash to increase the amount of dividends paid to investors in this and future years, and still have enough cash to buy new flight equipment as it is needed. PNC Bank is considering extending a loan to a small company. The company would be required to make interest payments at the end of each year for 5 years, and to repay the loan at the end of the fifth year. Instructions In each of the situations above, state whether the…
