Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 26, Problem 15P
Use the financial statements supplied on the next page for International Motor Corporation (IMC) to answer the following questions.
- a. Calculate the cash conversion cycle for IMC for both 2015 and 2016. What change has occurred, if any? All else being equal, how does this change affect IMC’s need for cash?
- b. IMC’s suppliers offer terms of Net 30. Does it appear that IMC is doing a good job of
managing its accounts payable?
| International Motor Corporation | ||
| Income Statement (in $ million) for the Years Ending December 31 | ||
| 2015 | 2016 | |
| Sales | $ 60,000 | $ 75,000 |
| Cost of goods sold | 52,000 | 61,000 |
| Gross profit | $ 8,000 | $ 14,000 |
| Selling and general and administrative expenses | 6,000 | 8,000 |
| Operating profit | $ 2,000 | $ 6,000 |
| Interest expense | 1,400 | 1,300 |
| Earnings before tax | $ 600 | $ 4,700 |
| Taxes | 300 | 2,350 |
| Earnings after tax | $ 300 | $ 2,350 |
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Use the financial statements supplied below for International Motor Corporation(IMC) to answer the following questions.
Calculate the cash conversion cycle for IMC for both 2015 and 2016. What change has occurred, if any? All else being equal, how does this change affect IMC’s need for cash?
IMC’s suppliers offer terms of Net 30. Does it appear that IMC is doing a good job of managing its accounts payable?
Andrew Potter is comparing the cash- flow- generating ability of Microsoft with that of Apple Inc. He collects information from the companies’ annual reports and prepares the following table.
Cash Flow from Operating Activities
as a Percentage of Total Net Revenue
2017 (%) 2016 (%) 2015 (%)
Microsoft 43.9 39.1 31.7
Apple Inc. 27.7 30.5 34.8
As a Percentage of Average Total Assets
2017 (%) 2016 (%) 2015 (%)
Microsoft 18.2 18.1 17.1
Apple Inc. 18.2 21.5 31.1
What is Potter likely to conclude about the relative cash- flow- generating ability of these two companies?
Refer to the financial statements and related disclosure notes of The Kroger Company for the fiscal year endingJanuary 30, 2016. You can locate the report online from “investor relations” at www.kroger.com.Notice that Kroger’s net income has increased over the three years reported. To supplement their analysis ofprofitability, many analysts like to look at “free cash flow.” A popular way to measure this metric is “structuralfree cash flow” (or as Warren Buffett calls it, “owner’s earnings”), which is calculated as net income from operations, plus depreciation and amortization, minus capital expenditures.Required:Determine free cash flows for Kroger in each of the three years reported. Compare that amount with net incomeeach year. What pattern do you detect?
Chapter 26 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 26.1 - What is the firms cash cycle? How does it differ...Ch. 26.1 - How does working capital impact a firms value?Ch. 26.2 - Prob. 1CCCh. 26.2 - Prob. 2CCCh. 26.3 - Prob. 1CCCh. 26.3 - Prob. 2CCCh. 26.4 - What is accounts payable days outstanding?Ch. 26.4 - What are the costs of stretching accounts payable?Ch. 26.5 - What are the benefits and costs of holding...Ch. 26.5 - Prob. 2CC
Ch. 26.6 - Prob. 1CCCh. 26.6 - Prob. 2CCCh. 26 - Prob. 1PCh. 26 - Prob. 2PCh. 26 - Aberdeen Outboard Motors is contemplating building...Ch. 26 - Prob. 4PCh. 26 - Prob. 5PCh. 26 - Prob. 6PCh. 26 - The Fast Reader Company supplies bulletin board...Ch. 26 - Prob. 8PCh. 26 - Prob. 9PCh. 26 - Prob. 10PCh. 26 - The Mighty Power Tool Company has the following...Ch. 26 - What is meant by stretching the accounts payable?Ch. 26 - Prob. 13PCh. 26 - Your firm purchases goods from its supplier on...Ch. 26 - Use the financial statements supplied on the next...Ch. 26 - Prob. 16PCh. 26 - Which of the following short-term securities would...
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