Questions and Answers of Practical Finance

Go back to problem 6. For the sake of simplicity let’s assume that the entire manufacturing overhead cost is fixed. This assumption is quite reasonable—at least in the short-term—given that
If sales in year 2 were $$43$ million and in year 7 $$98$ million, what has been the average annual sales increase in five years?
Firm F produces five products: A, B, C, D, and E. Relevant data for all five products are as follows (figures in millions of dollars).There are no cross-selling effects (i.e., sales of one product do
If the discount rate in exercise Automato Inc. in section 12.2.1 had been 18 percent, the resulting NPV would have been $$10,000.$ Given that the cost of the study made by the consulting firm was
For each project in the previous question, rank the projects according to their NPV as a function of the discount rate.Previous questionConsider the following mutually exclusive projects:Amounts are
In the AgroChem example in section 13.5.1 we have assumed that a discount rate of 20 percent is applicable throughout the investment’s duration. Now, assume that if the company delays its decision
Repeat the VMI example in section 14.2.3 assuming this time that the tax rate to be paid by Linner and the supplier is not zero, but 20 percent. Linner Inc. The COO of Linner Inc. has proposed a VMI
Calculate annual straight-line depreciation expense for a machine having a $$135,000$ acquisition cost, $$15,000$ estimated scrap value, and a six-year estimated life.
A machine has been depreciated on a straight-line basis for four years, assuming a six-year life and a 10 percent salvage value. Last year’s depreciation adds up to $$80,000.$ If the machine is
A machine was acquired three years ago at $$850,000.$ Its life was estimated at five years, and its residual value after five years at $$50,000$ .a. What is its current book value?b. If the
During his stay in Switzerland in 2017, when he was about to finish his MBA, Sanjay Menon had the idea of starting a new business back home in India. At several European airports, he had seen some
Aida and Maria decided to start selling food and drinks on a street next to the university campus. Read the facts described below, and then answer the questions provided.1. On September 1st, using
A firm owns and operates a ferry that transports passengers, their motor vehicles, and goods between the mainland and an island. The ferry service is the main business of the firm. Given the
Prepare the 2018 seven-item statement of cash flows for the Vending Machines exercise (number 16) in the previous chapter.Vending Machines exercise 16During his stay in Switzerland in 2017, when he
Prepare the seven-item statement of cash flows for the Aida and Maria exercise from chapter 6 (number 17) between September 1 and December 31.Exercise 17Aida and Maria decided to start selling food
Given the following balance sheets for a company:and knowing that: (a) the firm didn’t pay dividends, (b) it didn’t sell any fixed assets in 2018, and (c)minimum cash is six in both years:a.
Starting at $$3$ million, a firm’s net fixed assets has increased by 20 percent for three consecutive years. If depreciation has been $$250,000$ every year, how much has the firm invested in
Give conditions under which FFO and CGO are identical during a period.
Give conditions under which FFO may be negative during a period.
Read a bit about Zara’s manufacturing and distribution model (Wikipedia will do). Why was Zara’s business model so successful?
Which are the two fundamental decisions associated with inventory valuation of a manufacturing firm? What are the key questions they answer?
Which are the main cost types in inventory valuation for manufacturing companies? What are the criteria for their classification?
In financial reporting of inventory for a manufacturing company, which of the following statements is true or false? Please explain.a. Both fixed and variable manufacturing overhead costs are
Under what conditions may a lithium-ion battery pack for electric vehicles be considered as raw material, work in progress, or a finished good?
The following data relate to the manufacturing activities of MilTech company during November: 1. Sales $400,000 2. Purchases $60,7003. Expenses include:• Light and power for manufacturing:
CardioMed Inc. is a manufacturer of wearable heart monitoring products that automatically detect, record, and transmit abnormal heart rhythms for up to thirty days. In one accounting period the firm
Continuing problem 6, CardioMed’s cost accountants have identified cost totals for the period’s production support activities and other overhead. The table below provides this information, along
What is the underlying accounting principle of absorption costing? What is the major weakness of this method?
In the Smart Widgets Inc. example in section 8.2.2 what would be the company’s net operating profit had the firm produced 8,000 instead of 5,000 units? How does this compare with the current
Given the following data for retailer ABC in a given period:If the firm sold sixty units during the period, calculate the cost of goods sold using FIFO, LIFO, and weighted-average cost flow
For a firm operating in an economy facing inflation, which of the following is true or false regarding its inventory cost flow assumption? Please explain briefly.a. Cost of goods sold is more
Given the following financial statements for a retailer firm:Inventories have been evaluated under LIFO assumption. Under FIFO, inventories would be eighty and sixty higher in 2018 and 2017,
For the company AFC in section 8. 4, compute the values of RM, WIP, and FG inventory at the end of the period, as well as the cost of goods sold and gross profit for the period, assuming (a) a FIFO
After the holiday season, at the end of its annual reporting period, a toy manufacturer estimates that some of the toys it holds with a historical cost of $700,000 are unsaleable. Which entries, if
Indicate which category (profitability, liquidity, financial leverage) the following ratios belong to.a. Return on equityb. Cash/Assetsc. Debt/Equityd. Return on assetse. Current ratiof. Assets/Equity
Describe two uses of ratios.
Does annual ROE quantify value creation for shareholders during the year?
What is the optimal value for inventory turns?
If sales were $13 million last year, and sales are expected to grow 23 percent for four consecutive years, what is the level of expected sales in year 4?
What is the most likely impact on ROA of the following events?a. Open three new regional warehousesb. Change from own fleet of trucks to leasing contractsc. Start paying suppliers fifteen days
Should a current ratio lower than one be a point of concern for management? If so, explain under which circumstances. If not, explain why.
Given the financial statements of a firm, is it true that RONA is never smaller than ROA? If so, explain why. If not, under which circumstances?
Calculate NOPAT knowing that: EBITDA = 800, depreciation = 200, tax rate = 25%.
Does a negative OWC imply negative CCC? If so, why? If not, under which conditions?
How would table 9.7 change if sales decrease by 10 percent in each of the four scenarios considered? Table 9.7 Impact of operational and financial leverage on net profit. Scenario #1 (base case) #2
Can a firm with negative ROE pay dividends to their shareholders?
What is GMROI mainly useful for?
Can ROE be smaller than RONA? If yes, under which conditions? If not, why not?
Show that, when demand increases by x percent, other things equal, inventory increases by 100. +100 -1) (1)% 1% and DB ratio is 100 X ( 1+ + 100 - 1)
For a company that pays cash to its suppliers, what is the relationship between the two ratios that measure financial leverage?
Find last year’s balance sheet and income statement of Amazon on the internet, and calculate the following ratios.a. ROEb. RONAc. Current ratiod. CCCe. NOPATf. GMROI g. Sales growth h. Financial
Match the following companies with their corresponding balance sheets and financial ratios.6 In doing the exercise, consider the operating and competitive characteristics of the industry and their
Given the financial statements of an American retailer provided below, calculate:a. Cash-to-cash cycleb. Inventory turnsc. Return on equityd. Return on net assetse. Financial leveragef. GMROI Sales
Prepare the income statement for scenario #2 in table 9.7 when sales decrease by 10 percent with respect to scenario #1. By how much does net profit decrease? Table 9.7 Impact of operational and
Why is the analysis of a firm’s historical performance necessary before constructing pro forma financial statements?
Roughly speaking, if a firm’s sales is forecast to increase 30 percent:a. By how much will accounts receivable increase?b. By how much will DSO increase?
Calculate an expression for sustainable sales growth rate when leverage is constant as measured by D/E and pay-out ratio is p (that is, for each dollar of net profit, p dollars are paid as dividends,
Tables 9.1, 9.3, and 9.5 in the previous chapter present Inditex’s financial statements for years 2015 and 2016. Use the information in these tables to answer the following questions:a. What is
Are the following statements true or false? Please explain briefly.a. Financial forecasting helps management anticipate differences between actual and sustainable growth rates and develop contingency
The management of Green Staples Inc., a wholesale distributor of office supplies on the East Coast of the United States, is in the process of developing the firm’s financial plans for year 2019.
Continuing problem 6, use the financial statements and the following list of assumptions to construct the firm’s pro forma financial statements for 2019.a. What is Green Staples’s projected
Continuing problem 7, now assume that the bank is not willing to extend short-term debt by more than $200,000. What policy changes would you recommend to Green Staples so that it can meet its growth
Give two examples of each of the following cost categories.a. Variableb. Fixedc. Semivariabled. Semifixed
A supplier sells an item at $200 per unit, but offers a 10 percent discount per each unit exceeding 1,000 (i.e., the 1,000-th unit costs $200, the 1,001-th costs $180).a. Plot the total cost for the
Are gross margin and contribution margin the same concept? If so, why? If not, what is the difference?
Are the following statements true or false?a. COGS is made only of variable costs.b. SGA is made only of fixed costs.c. A firm fixed costs appear only above EBITDA in the income statement.d. The
At 50,000 units, a company loses $45,000. If it produced 10,000 additional units, it would do $13,000 better. Assuming the firm’s costs are either variable or fixed (i.e., no semifixed costs):a.
Single Mixers manufactures and sells a single model of kitchen mixer at $800 per unit. The firm’s sales and cost figures (in thousands of dollars) for January–April 2020 are as follows:a. Using
Firm F manufactures and sells two products: A and B. (Exercise courtesy of Prof. María Jesús Grandes from IESE Business School.) Parameters for both products are as follows:Note that fixed costs
Which statement is true regarding which criterion matters when making a decision?a. Only net margin matters, contribution doesn’t.b. Only contribution matters, net margin doesn’t.c. Either net
Consulting-On-the-Go is a consulting firm that sells three types of projects: simple, long, complex.Average price at which these projects are sold to clients is $180,000, $300,000, and $350,000.Each
A project requiring an initial outlay of $2,200,000 at t = 0 is expected to provide the following array of annual cash flows starting at t = 2: $400,000, $600,000, $800,000, $1,000,000. Using a
An experimental plant investment plan to generate electricity based on kryptonite requires investing $100 million at t = 0 and is expected to generate positive cash flows of $12 million for 25
Show that the NPV of a perpetuity of f dollars per year (that is, obtaining a cash flow of f dollars at the end of years 1, 2, 3, … for ever) is f/r, where r is the discount rate.
An investment of c dollars generates an annual return of r. If the generated returns become part of the investment:a. How many dollars will be available after n years?b. How many years are needed to
Given two investments, A and B, with identical expected NPV, but different IRR—say IRRA > IRRB, which project should be chosen in accordance with an economic criterion? Are there any circumstances
Consider the following mutually exclusive projects:Amounts are expressed in thousands of dollars and correspond to the cash flows expected to occur at the end of each period. Period 0 is today,
Consider the following expected cash flows from a project:a. What is the IRR of the project?b. Plot the NPV of the project as a function of the discount rate. 5,950 Period Cash flows 0 -3,740 1 0723
Consider the following expected cash flows from a project:a. What is the IRR of each project?b. If the discount rate is 10 percent, explain why the best project is not the one with the highest IRR.
Consider the following expected cash flows from a project:a. Calculate NPV if discount rate is 10 percent.b. Give the reason why you got precisely that result. Period 0 1 2 Project C -320 32 352
Consider the following expected cash flows from these projects:a. What is the NPV of each project if discount rate is 10 percent?b. Note that the cash flows from project D are the sum of the cash
Consider the following expected cash flows from these projects:a. What is the NPV of each project if discount rate is 10 percent?b. What is the IRR of each project?c. Which project/s should be
A firm has a capital budget of $$111,000$ and is considering three potential independent projects:Project A requires investing $$44,400$ today and yields $$15,840$ per year for five consecutive
If a new project is undertaken, the following items of the balance sheet are expected to change due to the project as follows (thousands of dollars):For instance, in year 3 accounts receivable are
Siddharth Srivastava, cofounder of Zip Delivery, a B2B bike delivery marketplace in India, is considering investing in a new promotion program to accelerate sales in a particular region.The current
You are negotiating with a customer the sale of some equipment whose worth today is $6m. The customer offers to pay 10 percent cash today and make five identical payments x, in the next five years.
Given a discount rate of 20 percent, calculate the NPV of the following stream of cash flows starting today: −800, 600, 500.
Consider a situation where you have $$847$ in your pocket that you can invest at a rate of 20 percent. You are required to make a payment of $$600$ at time t = 1 and another $$500$ at t = 2.
For a discount rate of 10 percent, consider the following two mutually exclusive projects (Adapted from Higgins 2012):Building a steel bridge with initial cost $$200,000,$ annual maintenance
(Adapted from Higgins 2012) Consider the expected cash flows of projects A and B:a. Find the NPV and IRR of each project.b. What conclusions can you draw in light of the results you obtained? Period
Repeat the Clean Energy Ltd. exercise when the discount rate is subject to variability, assuming that it comes from a triangular distribution, with parameter values: 0.08 (minimum), 1.00 (most
A company is considering investing in a factory that will have the explicit right to produce a particular product forever. Under current prices, the cash flows generated from product sales
A company is considering investing $100 million in a new production facility for launching one of its established products in a new market. Historically, within one year the company knows with
Revisiting the SoundPro example in section 13.5.3:a. Show that the value of the option to expand increases in the volatility of future cash flows. To do so, consider the cases that the high demand
Referring to the example in section 13.5.4, calculate the expected sales and capacity utilization for the cases of (a) dedicated capacity investment and (b) flexible capacity investment. 13.5.4
Four project cash flows result in four NPV distributions whose mean and standard deviations are given.Which of the four projects should be selected in order to:a. Maximize the mean of the NPV
Define operating working capital.
Other things being equal, is it better that OWC is large or small?
Discuss the pros and cons of paying suppliers late.
Firm A operates in a B2B industry. Firm B operates in a business to consumer (B2C) industry.Which firm is likely to have lower accounts receivable as a percentage of its sales?

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