Q3. One day, the CEO of your firm talks to you that he wants to reduce the amount of current assets because he feels that these assets generate little return to the company. Suppose you are the CFO of the company, how would you respond to CEO's comment?-

Q3. One day, the CEO of your firm talks to you that he wants to reduce the amount of current assets because he feels that these assets generate little return to the company. Suppose you are the CFO of the company, how would you respond to CEO's comment?-

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 1MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing....

See similar textbooks

Similar questions

If a firm has a current ratio less than 2.0 and a quick ratio less than 1.0, will the company eventually go bankrupt and out of business? Explain your answer.
Which one of the following actions by a financial manager creates an agency problem? Lowering selling prices that will result in increased firm value Agreeing to expand the company at the expense of stockholders' value Borrowing money when doing so creates value for the firm Agreeing to pay management bonuses based on the market value of the firm's stock
Consider the dilemma you might someday face if you are the CFO of a company that is struggling to satisfy investors, creditors, stockholders, and internal company managers. All of these financial statement users are clamoring for higher profits and more net assets (also known as equity). If at some point, you suddenly found yourself not meeting the internal and external earnings and equity targets that these parties expect, you would probably search for some way to make the financial statements look better. What if your boss, the CEO, suggested that maybe you should make just one simple journal entry to record all the goods that your company is holding on consignment, as if that significant amount of goods were owned by your company? She might say that this action on your part would fix a lot of problems at once, since adding the consigned goods to merchandise inventory would simultaneously increase net assets on the balance sheet and increase net income on the income statement (since it would decrease cost of goods sold). How would you respond to this request? Write a memo, detailing your willingness or not to embrace this suggestion, giving reasons behind your decision. Remember to exercise diplomacy, even if you must dissent from the opinion of a supervisor. Note that the challenge of the assignment is to keep your integrity intact while also keeping your job, if possible.
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Now assume that Firms L and U are both subject to a 25% corporate tax rate. Using the data given in part b, repeat the analysis called for in parts b(1) and b(2) using assumptions from the MM model with taxes.
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: d. Suppose that Firms U and L have the same input values as in Part c except for debt of 980,000. Also, both firms have total net operating capital of 2,000,000 and both firms are expected to grow at a constant rate of 7%. (Assume that the EBIT in part c is expected at t = 1.) Use the compressed adjusted present value (APV) model to estimate the value of U and L. Also estimate the levered cost of equity and the weighted average cost of capital.
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Who were Modigliani and Miller (MM), and what assumptions are embedded in the MM and Miller models?
Consider the dilemma you might someday face if you are the chief financial officer of a company that is struggling to maintain a positive cash flow, despite the fact that the company is reporting a substantial positive net income. Maybe the problem is so severe that there is often insufficient cash to pay ordinary business expenses, like utilities, salaries, and payments to suppliers. Assume that you have been asked to communicate to your board of directors about your companys year, in retrospect, as well as your vision for the companys future. Write a memo that expresses your insights about past experience and present prospects for the company. Note that the challenge of the assignment is to keep your integrity intact, while putting a positive spin on the situation, as much as is reasonably possible. How can you envision the situation turning into a success story?
Which of the following is an example of “cookie jar” accounting? a) A company creates cash reserves in profitable years so the money can be used to offset poor earnings in bad years to give the impression that the company is consistently achieving earnings goals and meeting investor expectations. b)A company intentionally misapplies GAAP and, if caught, argues that the earnings effect is “immaterial” and the error is not worth correcting. c)A company takes a one-time charge against income in order to reduce assets, which results in lower expenses in the future. d) A company recognizes revenues before it is appropriate to do so.
When a company reports financial numbers thatare lower than expected, generallya. the company’s stock value will increase.b. the company’s stock value will decrease.c. the company will restate its earnings amount.d. the stockholders’ will immediately ask for anaudit.e. the corporate officers will resign and newofficers will be appointed.
Which of the following statements is true? a. High liquidity means a company is short on cash and may be unable to pay its debts.b. When a company decides to go public through an IPO, it is typically targeting to sell its shares to only a handful of shareholders. c. If the company has a higher than expected extremely high profit this year, equity holders will benefit more than debt holders as debtholders are the residual claimers for the cash flows of the company.d. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.e. Equity holders expect to receive dividends and the firm is always legally obligated to pay them.
4) Why do loss-making companies still pay a dividend?A) The tax benefits exceed the loss incurred in paying the dividend.B) Managers want to signal that the decline in earnings is temporary and that positive earnings are expected in the future.C) Managers realise that reduced dividends will result in lower staff motivation.D) Managers want to signal that the decline in earnings is permanent and shareholders should take their profits.
Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. Required: 1. How can a company manage earnings by changing its depreciation method? Is this an effective technique to manage earnings? 2. How can a company manage earnings by changing the estimated useful lives of depreciable assets? Is this an effective technique to manage earnings? 3. Using a fictitious example and numbers you make up, describe in your own words how asset impairment losses could be used to manage earnings. How might that benefit the company?