FIN 101 SEU Decrease in Land and BLDGs an Inflow or Outflow of Cash Case Study
Question Description
Assignment Question(s): (Marks 5)
- Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark 0.2 each)
- 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:
- What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.) (0.25 Marks)
- You have $5,100 to 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)
- Using the values below, answer the questions that follow:
- 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?
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.
- 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-food stock be so much lower than the same ratios for the other companies? (Select all 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’t investors invest all of their money in software companies instead of in less profitable companies?(Focus on risk and return.) (Select all the answers that apply.) (0.25 Marks)
- Software companies tend to carry large debt which represents senior claims on the companies’ assets.
- Investors wouldn’t invest 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.
(1)4years,
(2) 8years, and
(3)12 years.
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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