Assignment:
1 A firm has accounts receivable of $50 million and sales of $250 million per year. What is the collection period in days?
2 A member of your management team says he has reduced the collection period from 73 days to 50 days. Did this hurt or help the company?
3 High technology industries like biotechnology and software companies always have higher ROIC's and ROE's than "low" technology firms like retail clothing, restaurants and theaters because they are, after all, high technology ?
4 The following are "discovery skills":
(A) Risk management
(B) Project management
(C) Experimenting
(D) Porter's 5 forces
(E) Hedging
5 Strategy, as we discussed it, is most about (circle all that apply):
(A) Choosing what to focus on
(B) Integrating the activities of the firm
(C) Determining the optimal debt-to-equity ratio of the firm
(D) Determining how to finance a new project
(E) Hedging
6 Net income of an industry can be expected to be LOWER if the following are true (circle all that apply) :
(A) The power of suppliers is low
(B) The power of customers is high
(C) There are low barriers to entry
(D) Substitutes are not a threat
7 A reason why a firm should take on debt is to (circle all that apply) :
(A) Borrowing money always makes sense
(B) The interest rate on debt is lower than the expected return on projects you are financing
(C) It is always good to finance by a mixture of debt and equity
(D) None of the above
8 What exists between industries in a value chain (circle all that apply) ?
(A) Bond markets
(B) Markets for initial public offerings
(C) Equity markets
(D) Markets setting the price of a product supplied to the next Industry in the chain
9 If you are run a manufacturing plant that buys rare earth metals to make semiconductors. Are you long or short rare earth metals ?
(A) Long
(B) Short
(C) Both
(D) Neither
10 If you are long something, in order to hedge what should you do ?
(A) Go long something else
(B) Go short something else
11 Your company is considering purchasing another company for $10 million. The present value of the cash flow from the company is projected by your staff to be $9 million. You believe you can even further improve the profitability of the company buy reducing the annual costs of the company by $1 million per year for the next 10 years. You have alternative investments available to you that earn 10% returns. What is the NPV of this purchase?
12 The balance sheet of a firm is (in millions of $):
Cash 75 Short term debt 135
A/R 300 A/P 230
Inventories 150 Accrued expenses 50
Prepaid expenses 35 Long term debt 100
Net Fixed Assets 565 Owner's equity 610
1125 1125
The income statement is (in millions of $):
Sales 1600
Cost of goods sold -1160
Sales and depreciations expense -200
Depreciation -55
Earnings before interest and taxes (EBIT) 185
Net interest expense -45
Earnings before tax (EBT) 140
Income tax expense -40
Earnings after tax (EAT) 100
Dividends 50
Retained earnings 5
First, restructure the balance sheet into a managerial balance sheet. Then answer the questions that follow. (Hint: treat prepaid expenses like A/R and accrued expenses like A/P)
(A) Looking at your managerial balance sheet, what WCR do you calculate?
(B) Looking at the managerial balance sheet, do you calculate that the Invested Capital (which is equal to the Capital Employed) is $845 million?
(C) Looking at the combined debt (short and long term), what average interest rate is the firm paying on debt?
(D) Calculate the firms ROIC before taxes
(E) What is the firm's ROE?
(F) What is the firms operating profit margin?
(G) What is the firm's capital turnover?
(H) What is the firm's financial structure ratio?
(I) What is the firm's financial cost ratio?
(J) What is the firm's financial leverage multiplier?
(K) What is the firms tax effect ratio?
(L) What is the self-sustainable growth rate?
(M) If the firm has 50 million shares outstanding that are each worth $30, what is the firm's P/E ratio?
(N) If the firm's WACC is 6% and it can borrow money at 2% and It has projects it can do that are projected to return 8% should it
do those projects assuming they are feasible and it wants to raise the ROE?
13 A company has an accounts receivable of $75 million, accounts payable of $100 million and inventory of $50 million. Its annual revenue is
$200 million.
(A) What is the working capital ?
(B) How many times does it turn over its inventory per year ?
14 All of Southwest airlines competitors adopt the same jet engine maintenance programs as part of their strategy to improve. Do you expect the overall profitability of the industry to improve?
15 Apple's new strategy is to focus on producing iPhones that are made with a black case. Do you think this strategy is likely to be distinctive and can improves its profit?