Integrative Case 1 Merit Enterprise Corp. Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of directors. Merit’s business had been brisk for the past 2 years, and the company’s CEO was pushing for a dramatic expansion of Merit’s production capacity. Executing the CEO’s plans would require $4 billion in new capital in addition to $2 billion in excess cash built up by the firm. Sara’s immediate task was to brief the board on options for raising the needed $4 billion. Unlike most companies its size, Merit had maintained its status as a private company, financing its grow1h by reinvesting profits and, when necessary, borrowing from banks. Whether Merit could follow that same strategy to raise the $4 billion necessary to expand at the pace envisioned by the firm’s CEO was uncertain, although it seemed unlikely to Sara. She had identified the following two options for the board to consider. Option 1: Merit could approach JPMorgan Chase, a bank that had served Merit well for many years with seasonal credit lines as well as medium-term loans. Lehn believed that JPMorgan was unlikely to make a $4 billion loan to Merit on its own, but it could probably gather a group of banks together to make a loan of this magnitude. However, the banks would undoubtedly demand that Merit limit further borrowing and provide JPMorgan with periodic financial disclosures so that it could monitor Merit’s financial condition as Merit expanded its operations. Option 2: Merit could convert to public ownership, issuing stock to the public in the primary market. With Merit’s excellent financial performance in recent years, Sara thought that its stock could command a high price in the market and that many investors would want to participate in any stock offering that Merit conducted. Becoming a public company would also allow Merit, for the first time, to offer employees compensation in the form of stock or stock options, thereby creating stronger incentives for employees to help the firm succeed. Sara also knew, however, that public companies faced extensive disclosure requirements and other regulations that Merit had never had to confront as a private firm. Furthermore, with stock trading in the secondary market, who knew what kind of individuals or institutions might wind up holding a large chunk of Merit stock? To Do a. Discuss the pros and cons of option 1, and prioritize your thoughts. What are the most positive aspects of this option, and what are the biggest drawbacks? b. Do the same for option 2. c. Which option do you think Sara should recommend to the board, and why?

Question 6 You are the finance manager of Adventure Tourist Ltd. The following data is available for the company as of 31 June 2021: Current assets of $253,950 Current liabilities $178,700 Total assets $795,500 Equity $405,890 Required: The company’s Management Board required you to evaluate the efficiency of daily cash flows in and out of business operating activities. What job are you doing to complete the task? (referring to one out of 3 important questions of corporate finance for your answer) Calculate non-current assets, non-current liabilities and build a balance sheet for the company? Calculate the return on assets (ROA) of the company given that return on equity (ROE) is 35%? Adventure Tourist Ltd. has net credit sales of $1,476,000. Calculate the accounts receivable turnover of the company, given average accounts receivable is $128,500?

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 February

5. You are trying to estimate the free cash flow to the firm for Wadhwa Inc. and are looking at its most recent financial filings: the annual report for the last fiscal year and its most recent quarterly report for the first three quarters of the current year. Estimate the free cash flow to the firm over the most recent twelve months.

Question 34 Harlan Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Harlan Mining Co. for 2022 and 2021 are provided below. BALANCE SHEETS 12/31/22 12/31/21 Cash $408,000 $ 192,000 Accounts receivable 360,000 216,000 Inventory 384,000 480,000 Property, plant and equipment 608,000 960,000 Less accumulated depreciation (320,000) (304,000) 288,000 656,000 $1,440,000 $1,544,000 Accounts payable $ 176,000 $ 96,000 Income taxes payable 352,000 392,000 Bonds payable 360,000 600,000 Common stock 216,000 216,000 Retained earnings 336,000 240,000 $1,440,000 $1,544,000 INCOME STATEMENT For the Year Ended December 31, 2022 Sales revenue $8,400,000 Cost of sales 7,152,000 Gross profit 1,248,000 Selling expenses $600,000…

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?

Question 3 You have been asked to value Best Bank, a publicly traded bank that generated $100 million in net income in the most recent year on a regulatory capital base of $1billion (you can assume that this is also the book value of equity) with one billion shares outstanding. Over the next three years, you expect net income to grow 10% a year and regulatory capital (and book equity) to increase 5% a year. a) Estimate the FCFE each year for the next three years. b) At the end of year 3, you expect the bank to be in stable growth, growing 3% a year, while maintaining the return on equity it generated in year 3. If the cost of equity is 8%, estimate the value of equity at the end of year 3 c) What is the intrinsic value of the equity per share?

Question 1: Using Financial Ratios to Improve Working Capital Accounts. Bobs accountant found ways that ABC company could generate more cash by improving two areas, Average Collection period and ABC’s inventory turnover. With the following information, calculate how much cash ABC company could generate within the next six months if she were able to improve her average collection period to 25 days and the inventory turnover to 5 times.Revenue: 1,750,000, Cost of Sales 1,200,000, Trade Receivables 192,000, Inventories 250,000 Question 2: Calculating ROA Using the Dupont Financial System. The following Accounts are included in Marks financial statements:Cash $15,000, Revenue 2,200,000, Current assets $400,000, Prepaid expenses $43,500 Non-current assets $1,500,000, Trade receivables $157,000, Depreciation/amortization $25,000, Cost of sales $1,700,000, Distribution costs $165,000

QUESTION 1: Pleasant Place Plc is contemplating as to whether to invest in the Hotel or Tourism business. The Chairman of the Company has approached you this morning for assistance on the tax implications with respect to the two businesses for his final decision.The projected results of the two companies are likely to be the same in the first year.The companies’ projected income and expenditure for year 1 is as follows:ABS LTD (HOTEL) CDS LTD (TOURISM)GHC GHCGross Profit 1,000,000 1,000,000Expenditure 670,000 670,000Additional Relevant Information:A building to be bought on 1 March of Year 1 for GHC 400,000 has been granted full year’s depreciation at the rate of 20% and the same amount has been added to the projected cost above.Required:As a postgraduate student in taxation at the Accra Business School, write a briefing note to advise the Chairman on what business to invest in, with the necessary appendix. QUESTION 2: Tax planning is the act of arranging one’s tax affairs in ways that…

Problem 1 (40%)Follows Panther Corp. Financial Report. presented in thousands of $ (.000) (the statement on image below)a. How is Panther Corp's liquidity position in 2008?b. Has the management of Panther Corp managed the company's assets to generate income properly and efficiently?c. What are the factors driving the increased profitability of Panther corp?d. Can you explain the significant increase in dividends for 2008? Problem 2 (20%) MNM Corp. Having Outstanding Sales Days at 40 days, MNM's Annual Sales are $ 8,400,000. What is the Accounts Receivable balance? Assume 1 year 365 days. Problem 3 (20%) Jazz Juzs has total assets of $ 10 billion, $ 1 billion current liabilities, and $ 3 billion of long-term debt and $ 6 billion of common stock. Jazz Juzs has 800 million shares of common stock outstanding and a share price of $ 32 per share. What is Jas Juzs market / book ratio? Problem 4 (20%) Kabul Mining's current year sales of $ 6 million, ROE of 12%, total assets turnover ratio of…

Question A Blossom Corporation reported EBITDA of $7,299,875 and net income of 3,789,692.44 last year. The company also had $1,155,390 in interest expense, $1,023,279 in depreciation and amortization expense, and an average corporate tax rate of 26 percent. What was the firm's cash flow to investors from operating activity during the year? 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 line. .

1 5.This year, a company has £30 million in cash from operations (CFO), £6 million in after-tax interest expense that it treats as cash from financing (CFF), £2 million in interest received from other companies' bonds that it previously purchased, which it treats as cash from investing (CFI), and £15 million in capital expenditures. Under IFRS, the company's free cash flow to the firm (FCFF) is closest to £________ million :[enter a value only]

accounting 2. An entrepreneur has purchased an asset for $180,000 which will produce a cash inflow of $350,000 two years from today. He plans to issue 1000 shares of common stock of which he would keep 100 for himself and sell 900 shares to the general public. His business, which consists entirely of this one asset, will cease to exist after two years. The market rate of interest is 20% and the future cash inflow to the firm is guaranteed. At what price per share should the entrepreneur sell the common stock? Please explain your reasoning.

Videos

Want to see the full answer?

Chapter 2 Solutions

Additional Business Textbook Solutions