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Financial Options. Accounting for Financial Management. Analysis of Financial Statements. Financial Planning and Forecasting Financial Statements. Determining the Cost of Capital. Corporate Value and Value-Based Management. Capital Budgeting: Decision Criteria. Contact your Rep s. With the McGraw Hill eBook, students can access their digital textbook on the web or go offline via the ReadAnywhere app for phones or tablets.
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What are my shipping options? The estimated amount of time this product will be on the market is based on a number of factors, including faculty input to instructional design and the prior revision cycle and updates to academic research-which typically results in a revision cycle ranging from every two to four years for this product. Risk is the possibility that Colin Company will not make all of the interest and principal payments that are called for in the debt agreement.
The higher that an investor perceives the risk of non-payment to be, the more the investor should discount the cash flows. Thus, a higher risk of repayment is reflected in a higher discount rate. By using the higher discount rate, the amount that the investor is willing to pay for the bonds is lower. Book value is readily available and subjected to auditing procedures. The other key variables are future net income and cost of capital. Net income is generally considered easier to predict than future dividends or cash flows.
These points are advantages of the residual income valuation model. The cost of capital must be estimated in all of the valuation models. The primary limitation of the residual income model is that it requires predictions of earnings for the life of the firm. Simplifying assumptions are usually necessary.
However, Kampa has significantly higher total asset turnover ratios. As a result, Kampa generates a substantially higher return on total assets. The trends of both companies include evidence of growth in sales, total asset turnover, and return on total assets. However, Arbor's rates of improvement are better than Kampa's. These differences may result from the fact that Arbor is only 3 years old while Kampa is an older, more established company.
Arbor's operations are considerably smaller than Kampa's, but that will not persist many more years if both companies continue to grow at their current rates. To some extent, Kampa's higher total asset turnover ratios may result from the fact that its assets may have been purchased years earlier. If the turnover calculations had been based on current values, the differences might be less striking. The relative ages of the assets also may explain some of the difference in profit margins.
Assuming Arbor's assets are newer, they may require smaller maintenance expenses. Finally, Kampa successfully employed financial leverage in Its return on total assets is 8. In contrast, Arbor's return is only 5. Prior to that time, the company enjoyed increasing gross profit and net income. Sales grew steadily for the entire period of to However, beginning in , cost of goods sold and operating expenses increased dramatically relative to sales, resulting in a significant reduction in net income.
In net income was only At the same time that net income was declining, assets were increasing. This indicates that Cohorn was becoming less efficient in using its assets to generate income. Also, the short-term liquidity of the company continued to decline. Accounts receivable did not change significantly for the period of to , but cash steadily declined and merchandise inventory sharply increased, as did current liabilities.
Problem 25 minutes Yr. For example, net sales have steadily increased for this three-year period— almost doubling in Year 6—while gross profit dips in Year 5 but increases considerably in Year 6. Also, operating expenses are especially low in Year 5— this occurs at the same time when income taxes expense is low. Net Sales A continuation of these trends in both sales and cost of goods sold will limit future growth in net income. The growth in operating expenses is erratic— that is, it is Dividends paid on common stock: Retained earnings, Jan.
Retained earnings, Dec. Current ratio: Current assets Acid-test ratio: Cash, marketable sec. Book value per common share: Stockholders' equity Gross profit margin ratio: Gross margin Sales - Cost of sales Days to sell inventory: Inventories: Beginning of year Times interest earned: Income before taxes Common stock price-to-earnings ratio: Market value, at end of year Gross expenditures for plant and equipment: Plant and equipment at cost: End of year In terms of liquidity, both the current and acid-test ratios increase, while the days to sell inventory decreases by 4 days.
In addition, it appears that Lakeland is poised for additional earnings growth based on its increasing capital expenditures. The improved performance has not gone unnoticed by the stock market as the price-to-earnings ratio rose from Additional analysis is needed before determining an appropriate price for the proposed acquisition. The liquidity of the company appears reasonable. Current assets are 3. The company is selling its inventory in reasonable time 18 days. However, the collection period for receivables is a bit slow 42 days.
The capital structure and solvency of the company also appears reasonable. This debt total would seem to be on the high end of the acceptable range. This is a positive sign for long-term solvency and for long- term growth. Profit margins appear relatively strong as well. The strong profit margins reflect healthy asset utilization.
The company is turning over its inventory 30 times per year and turning over receivables 7 times per year. The market measures reflect these relatively strong operating results. The price to earnings ratio of The lack of dividends for this company is not surprising given the growth rate that the company is achieving. Problem —continued b. The liquidity of the company is strong. The company has a current ratio that is strong 3. The near cash assets are also strong acid-test ratio of 2. The size of the acid-test ratio coupled with the receivables collection period That relationship warrants some additional investigation.
Nevertheless, Best appear to be adequately liquid. Best also appears strong in terms of solvency and capital structure. The company approximates average industry levels of debt and interest coverage. Likewise, the company is slightly above industry averages in terms of return on assets and return on equity. The asset utilization ratios reflect reasonably healthy operations.
The company is turning over inventory slightly above the industry average and utilizing its fixed assets efficiently relative to industry norms. Again, the accounts receivable turnover warrants investigation. The company is turning over receivables significantly slower than industry averages. The market measures reflect a healthy market capitalization for the company. The following ratios deviate from industry norms and warrant some investigation: Acid-test ratio, collection period, accounts receivable turnover, working capital turnover.
These are all related to accounts receivable. Specifically, accounts receivable is higher than normal for the industry. One possible explanation is that the company offers looser collection terms than the industry. Another possibility is that the company extends credit to less creditworthy customers.
It could also be random variation but this is unlikely given the magnitude of the difference. Also, the times interest earned ratio is interesting. While it is near industry norms, it is low considering the following. One would expect this to be higher than the industry average because the company has lower than average debt and higher than average earnings.
One possible explanation for this relationship is that the company paid down debt late in the year. Thus, the debt ratios look lower at year-end than they were most of the year. Another possibility is that the company has higher priced debt than industry average. Problem 30 minutes a. Case 35 minutes a. NIKE incurred income taxes at 2. Reebok has a higher percent of total assets in the form of inventory at Short-term credit risk analysis: Datatech and Sigma have equal current ratios and equal acid-test ratios.
However, Datatech both turns its merchandise and collects its accounts receivable more rapidly than does Sigma. On this basis, Datatech probably is the better short-term credit risk. Although the companies pay the same dividend, Sigma's price- earnings ratio is lower. All of these factors suggest that Sigma's stock is likely the better investment. Although the current ratio improved over the three-year period, the acid- test ratio declined and accounts receivable and merchandise inventory turned more slowly.
These conditions indicate that an increasing portion of the current assets consisted of accounts receivable and inventories from which current debts could not be paid. The decreasing turnover of accounts receivable indicates the company is collecting its debt more slowly. Sales are increasing and accounts receivable are turning more slowly. Either of these trends would produce an increase in accounts receivable, even if the other remained unchanged.
Probably yes. Since there is nothing to indicate the contrary, cost of goods sold is probably increasing in proportion to sales. Consequently, with sales increasing, cost of goods sold increasing in proportion, and merchandise turning more slowly, the amount of merchandise in the inventory must be increasing.
The ratio of sales to plant assets increased from 3. However, the return on total assets declined from Whether these results are derived from a more efficient use of assets depends on a comparison with other companies and on the expectations of the individual doing the evaluation. The dollar amount of selling expenses increased in and decreased sharply in Case 75 minutes a. Planning activities. A company exists to implement specific goals and objectives.
A company's goals and objectives are captured in a business plan, describing the company's purpose, its strategy, and its tactics for activities. A business plan assists managers in focusing their efforts and identifying expected opportunities and obstacles.
Because of their magnitude, and their potential to determine success or failure of a venture, companies take care in acquiring and managing their financial resources.
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