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Questions and Answers of
Finance
What is meant by the terms depreciation and accumulated depreciation?
What types of liabilities might show up on a venture’s balance sheet?
What does an income statement measure or track over time?
Define the term EBIT. How does EBIT differ from a firm’s net income or net profit?
What are the three internal operating schedules that most firms must prepare?
Briefly describe what is meant by a statement of cash flows.
What is meant by net cash build and net cash burn?
Describe the differences between variable expenses and fixed expenses.
What is a venture’s contribution profit margin?
Describe and illustrate how an EBDAT (survival) breakeven chart is constructed.
What is meant by breakeven drivers? Identify two important drivers affecting the amount of revenues needed for ventures to break even.
Describe three financial performance measures that D.light’s venture investors might use to examine whether D.light is measuring up financially as it achieves its “lives touched” goals.
The owners of a new venture have decided to organize as a corporation. The initial equity investment is valued at $100,000, reflecting contributions of the entrepreneur and her family and friends.
Assume you are starting a new business involving the manufacture and sale of a new product. Raw materials costs are $40 per product. Direct labor costs are expected to be $30 per product. You expect
Assume you have developed and tested a prototype electronic product and are about to start your new business. You purchase preprogrammed computer chips at $70 per unit. Other component costs include
This problem is a continuation of Problem 3. Assume you ramp up production to 1,000 units per month in April, May, and June. Sales are expected to be 800 units in April and 1,100 units in both May
During its first year of operations, the SubRay Corporation produced the following income statement results:Net sales ......... $300,000Cost of goods sold ..... −180,000Gross profit .........
Cindy and Robert (Rob) Castillo founded the Castillo Products Company in 2008. The company manufactures components for personal decision assistant products and for other handheld electronic products.
The Castillo Products Company described in Problem 6 had a very difficult operating year in 2009, resulting in a net loss of $65,000 on sales of $900,000. In 2010, sales jumped to $1,500,000, and a
Salza Technology Corporation increased its sales from $375,000 in 2009 to $450,000 in 2010 as shown in the firm’s income statements presented below. LeAnn Sands, chief executive officer and
LeAnn Sands wants to conduct revenue breakeven analyses of Salza Technology Corporation for 2010. Income statement information is shown in Problem 8. For 2010, the firm’s cost of goods sold is
LeAnn Sands has reason to believe that 2011 will be a replication of 2010 (see Problem 8) except that cost of goods sold is expected to be 65 percent of the estimated $450,000 in revenues. Other
In 2010, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larry's Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of
Define the term EVA and NOPAT and describe the meaning of NOPAT breakeven and NOPAT breakeven revenues.
Identify and explain the formula for finding the NOPAT breakeven revenues. Relate this to breakeven in terms of EBIT.
Refer to Problem 5 in the chapter involving the SubRay Corporation.A. Estimate the NOPAT breakeven amount in terms of revenues necessary for the SubRay Corporation to break even next year.B. Assume
Refer to Problems 9 and 10 in the chapter involving the Salza Technology CorporationA. Calculate Salza’s NOPAT breakeven in terms of NOPAT breakeven revenues for 2010.B. Calculate the NOPAT
Refer to the Mini Case at the end of the chapter involving Jen and Larry’s Frozen Yogurt Company.A. Calculate the dollar amount of NOPAT if Jen and Larry’s venture achieves the forecasted $1.2
Describe the types of financial ratios and other financial performance measures that are used during a venture’s successful life cycle. Who are the users of financial performance measures?
What are financial ratios and why are they useful?
What are the three types of comparisons that can be made when conducting ratio analyses?
What are the meanings of the terms “cash build” and “cash burn”? How do we calculate net cash burn rates?
How is the current ratio calculated and what does it measure? How does the quick ratio differ from the current ratio?
Describe how a firm’s net working capital (NWC) is measured and how the NWC-to-total-assets ratio is calculated. What does this ratio measure?
What is meant by a venture’s operating cycle? Also, describe the cash conversion cycle (C3).
What are the three components of the C3? How is each component calculated?
Briefly explain how changes in the conversion times of the components of the C3 can be interpreted.
What is the meaning of leverage ratios? What ratios are used for relating total debt to a venture’s assets and/or its equity?
What is the importance of the relationship between a venture’s current liabilities and its total debt?
Describe the two types of coverage ratios that are typically calculated when trying to assess a venture’s ability to meet its interest payments and other financing-related obligations.
What are four measures used to indicate how efficient the venture is in generating profits on its sales? Describe how each measure is calculated.
Identify and describe four efficiency/return ratios that combine data from both the income statement and the balance sheet.
Identify and describe the two components of the ROA model both in terms of what financial dimensions they measure and how they are calculated.
What are the three ratio components of the ROE model? How is each calculated and what financial dimensions do they measure?
Indicate some of the concerns or cautions that need to be considered when conducting ratio analysis.
You have been retained as a consultant for Ecosphere and tasked with assessing the financial viability of their commercial ventures. What types of financial ratios would you enlist in your report to
The Salza Technology Corporation successfully increased its "top line" sales from $375,000 in 2009 to $450,000 in 2010. Net income also increased as did the venture's total assets. You have been
Refer to the Salza Technology Corporation in Problem 1.A. Using average balance sheet account data, calculate the (a) Current ratio,(b) Quick ratio, (c) Total-debt-to-total-assets ratio, and (d) The
Bike-With-Us Corporation, a specialty bicycle parts replacement venture, was started last year by two former professional bicycle riders who had substantial competitive racing experience, including
Use the financial statement data for the Bike-With-Us Corporation provided in Problem 3 to make the following calculations:A. Calculate the operating return on assets.B. Determine the effective
Following are two years of income statements and balance sheets for the Munich Exports Corporation.A. Calculate the cash build, cash burn, and net cash burn or build for Munich Exports in 2010.B.
Two years of financial statement data for the Munich Export Corporation are shown in Problem 5.A. Calculate the inventory-to-sale, sale-to-cash, and purchase-to-payment conversion periods for Munich
The Castillo Products Company was started in 2008. The company manufactures components for personal digital assistant (PDA) products and for other handheld electronic products. A difficult operating
Castillo Products Company, described in Problem 7, improved its operations from a net loss in 2009 to a net profit in 2010. While the founders, Cindy and Rob Castillo, are happy about these
Use the financial statement data for Castillo Products presented in Problem 7.A. Calculate the net profit margin in 2009 and 2010 and the sales-to-total-assets ratio using year-end data for each of
Safety-First, Inc., makes portable ladders that can be used to exit second-floor levels of homes in the event of fire. Each ladder consists of fire resistant rope and high-strength plastic steps. A
Return to the financial statement data provided in Problem 10 for Safety-First, Inc.A. Calculate the net profit margin, the sales-to-total-assets ratio, and the equity multiplier for both 2009 and
Make use of the financial statement data provided in Problem 10 for Safety-First, Inc.A. Calculate the operating profit margins and the NOPAT margins in 2009 and 2010 for Safety-First, Inc. What
Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2007. Sales during the first full year (2008) of operation reached $1.3 million. Sales increased by 15 percent in 2009 and
Provide a description of the financing cash implications associated with a venture’s need for additional funds.
What is meant by a cash budget? Describe how a cash budget is prepared.
The PDC Company was described earlier in this chapter. Refer to the PDC Companys projected monthly operating schedules in Table. PDCs sales are projected to be $80,000 in September 2011.A. Prepare
Why is it usually easier to forecast sales for seasoned firms in contrast with early-stage ventures?
Explain how projected economic scenarios can be used to help forecast a firm’s sales growth rate.
Identify and describe the four-step process typically used to forecast sales for seasoned firms.
What are the three steps typically used to forecast sales for early-stage ventures?
Describe the general relationship between the life cycle stage and the ability to accurately forecast sales for a firm.
How do venture investors adjust for the belief that entrepreneurs tend to be overly optimistic in their sales forecasts?
What is meant by a sustainable sales growth rate?
Identify and describe the two equations that can be used to estimate a firm’s sustainable growth rate.
Describe the basic additional funds needed (AFN) equation.
List the major sources of funds typically available to ventures that have successfully entered into their rapid-growth life cycle stage.
Explain how the AFN equation can be used to forecast the amount of funds that will be needed over a several-year period.
What is the percent-of-sales forecasting method?
After forecasting sales, describe how the income statement is projected.
Describe how balance sheets are projected once a sales forecast has been made.
From the Headlines—Chipotle: Describe how cash budgets and projected financial statements could be used in estimating how far $360 million could take Chipotle after its first 14 restaurants.
The PDC Company was described earlier in this chapter. Refer to the PDC Company’s projected monthly operating schedules in Table 6.2. PDC’s sales are projected to be $80,000 in September 2011.A.
Rework Problem 1 based on the assumption that, because of an unexpected order, PDC’s sales are forecasted to be $160,000 for September 2011.
Rework Problem 2 based on the assumption that, because of an unexpected order, PDC’s sales are forecasted to be $160,000 for September 2011.
Petal Providers Corporation opens and operates “mega” floral stores in the United States. The idea behind the superstore concept is to model the U.S. floral industry after its European
Petal Providers Corporation, described in Problem 5, is interested in estimating its sustainable sales growth rate. Last year, revenues were $1 million; net profit was $50,000; investment in assets
Petal Providers Corporation, described in Problem 5, is interested in estimating its additional financing needed to support a rapid increase in sales next year. Last year, revenues were $1 million;
Following are two years of income statements and balance sheets for the Munich Exports Corporation.A. Munich has a target dividend payout of 40 percent of net income. Based on the 2010 financial
Artero Corporation is a traditional toy products retailer that recently started an Internet-based subsidiary that sells toys online. A markup is added on goods the company purchases from
Short-term financial planning for the PDC Company was described earlier in this chapter. Refer to the PDC Company’s projected monthly operating schedules in Table 6.2. PDC’s monthly sales for the
Artero Corporation, discussed in Problem 9, is a retailer of toy products. The firm’s management team recently extended the monthly sales forecasts that were prepared for the last three months of
Artero Corporation, discussed in Problems 9 and 11, is a retailer of toy products. This is a continuation of Problem 11. The firm’s management team recently extended the monthly sales forecasts
The Pharma Biotech Corporation spent several years working on developing a DHA product that can be used to provide a fatty-acid supplement to a variety of food products. DHA stands for
Describe how the costs of debt and equity differ from the perspective of accounting measures.
How do private and public financial markets differ?
Briefly describe venture debt capital and venture equity capital.
What is an interest rate? What is default risk?
What is a meant by a nominal interest rate? Describe a risk-free interest rate and a real rate of interest.
Define inflation. What is meant by an inflation premium?
Define the term default risk premium.
What is meant by a prime rate?
What is a liquidity risk premium? What is a maturity risk premium?
What is meant by the term structure of interest rates? What is a yield curve?
Explain the meaning of investment risk of loss and describe how risk can be defined relative to an average value.
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