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Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark 0.2 each) Is a decrease
- Classify the following changes in each of the accounts as either an outflowor an inflowof cash. (1 Mark 0.2 each)
- Is a decrease in land and buildings an inflow or an outflow of cash?
- Is an increase in accounts payable an inflow or an outflow of cash?
- Is a decrease in vehicles an inflow or an outflow of cash?
- Is an increase in accounts receivable an inflow or an outflow of cash?
- Is the payment of dividends an inflow or an outflow of cash?
- Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested,Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed here:
Island | Burger | Fink | Roland |
| |
Ratio | Electric Utility | Heaven | Software | Motors | |
Current ratio | 1.06 | 1.35 | 6.79 | 4.55 | |
Quick ratio | 0.92 | 0.87 | 5.23 | 3.73 | |
Debt ratio | 0.69 | 0.45 | 0.04 | 0.34 | |
Net profit margin | 6.25% | 14.33% | 28.46% | 8.43% |
Assuming that his uncle was a wise investor who assembled the portfolio with care,Robert finds the wide differences in these ratios confusing. Help him out.
- What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Selectall the answers that apply.) (0.25 Marks)
- The four companies are in very different industries.
- The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.
- Financial ratios from software companies are never very reliable.
- Caution must be exercised when comparing older to newer firms,e.g., utility company vs. software company.
- Why might the current and quick ratios for the electric utility and the fast-foodstock be so much lower than the same ratios for the other companies? (Selectall the answers that apply.) (0.25 Marks)
- Their inventory balances are going to be very close to zero because it is impossible to stockpile electricity and burgers.
- The explanation for the lower current and quick ratios most likely relates to poor management performance.
- Their accounts receivable balances are going to be much lower than for the other two companies.
- The explanation for the lower current and quick ratios most likely rests on the fact that these two industries operate primarily on a cash basis.
- Why might it be all right for the electric utility to carry a large amount of debt,but not the software company? (Selectall the answers that apply.) (0.25 Marks)
- A high level of debt can be maintained if the firm has a large,predictable, and steady cash flow.
- The software firm will have very uncertain and changing cash flow.
- Utilities tend to have steady cash flow requirements.
- The software industry is subject to greater competition resulting in more volatile cash flow.
- Why wouldn'tinvestors invest all of their money in software companies instead of in less profitable companies?(Focus on risk and return.) (Selectall the answers that apply.) (0.25 Marks)
- Software companies tend to carry large debt which represents senior claims on the companies'assets.
- Investors wouldn'tinvest all of their money in software companies because their average collection period is usually very high.
- By placing all of the money in one stock,the benefits of reduced risk associated with diversification are lost.
- Although the software industry has potentially high profits and investment return performance,it also has a large amount of uncertainty associated with the profits.
- You have $5,100to invest today at 11%interest compounded annually. Find how much you will have accumulated in the account at the end of:(0.5 Marks each)
(1)4years,
(2) 8years,and
(3)12years.
- Using the values below, answer the questions that follow:
Amount of annuity | Interest rate | Deposit period (years) |
|
$500 | 9% | 10 |
- Calculate the future value of the annuity,assuming that it is
- An ordinary annuity. (0.5 marks)
- An annuity due. (0.5 marks)
- Compare your findings in parts a(1)and a(2).All else being identical,which type of annuityordinary or annuity dueis preferable as an investment?Explain why. (0.5 Marks)
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