Which of the following statements is CORRECT? a. Dividends paid reduce the net income that is reported on a company’s income statement. b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
Case Synthesis 2 : Carter Manufacturing Case Background Due to cash flow problems, Carter has a debt to its bondholders. The market value of bonds dropped to $30 million ($50 million at par). It is agreed that all the bonds are exchanged into preference share with market value of $30 million. The auditor argues that the difference is an extraordinary gain from troubled debt restructuring. However, as Carter is facing bankruptcy, the accountant of Carter cannot accept to report $20 million as a gain.
This combined with the inadequate amount of working capital added to their woes. How did they respond? Coleco was borrowing as much as they could but at a 9.5% interest rate. This was only compounded by the multiple million dollar credit agreements that were set to expire in the first half of the year in 1988. This led to Coleco shareholders increasing the number of authorized preferred shares from 300,000 to 12 million.
I found that the present value of the proved developed and undeveloped reserves is worth $482 million, which isn’t a sufficient amount to attain the loan from the bank as it is less than $600 million. More precisely, it is 62% of proved reserved. Overall, this amount of debt financing is not consistent with the discussion at the end of the case material. Q2: The value of the MW Acquisition (Real option approach) In this case, I treated proved developed reserves as the company’s assets and other reserves (undeveloped, probable and possible) as real options. In addition, I have also added the value of other opportunities $25m to the valuation, since it was not taken into consideration in the separate projections.
After reviewing Harnischfeger, we believe that at the time of the case it would be a risky investment. Looking in its past history of declining stock prices of a loss $7.65 per share in 1982 and 3.42 in 1983 we can see the natural economic trend of an expansion in the 70’s and contractions in the past years. Harnischfeger had several problems leading to a decline of sales in the 1980’s. They relied on debt to provide for the expansion in the 70’s, but they could not foresee declining sales and high interest payments that led to poor profit performance ($77 million). With this loss Harnischfeger defaulted on certain covenants on its loans.
The accounts receivable turnover decreased from 135.4 in 1984 to 53.9 in 1987 while the age of accounts receivable increased from 2.7 days in 1984 to 6.8 days in 1987 indicate that Crazy Eddie had some problems on realizing accounts receivable. In terms of cash and short-term investments, the cash and restricted cash account for 44.8 percent in 1985 and 3.2 percent in 1987. This change was related to the short-term investments, a drastically increase occurred from zero to 41.4 percent in 1987. This might resulted from the big explosion of opening branches. The convertible subordinated debentures increased
Wilkerson Company’s business is manufacturing of valves, pumps and flow controllers. Due to a high competition on the market the company had to lower the prices. The pre-tax margin dropped to less than 3% and gross margin fell below 30%. The company is using simple cost accounting system that cannot provide correct analyses of the company’s profit structure. With this system direct material and labor costs are standard prices.
Further analysis was conducted to get to the core of the problem the management is facing and consequently, provide recommendations on how to go about these issues. Issues: * Low and declining Profits: During the first quarter of 1991, there was profit loss of ($ 174,000) which declined even further in the second quarter to ($121,000) (Exhibit 1). Reasons may include: * Due to high turnaround times (TAT) * Calculate by management to be 8.2 days * Causes agents to refer clients to other companies * Causes congestion and increased accumulation of policies * Due to reduced number of renewals (low renewal rates) because of increased volumes of late renewals * Due to focus on new policies only * Due to late policies * Late RERUNs amount to 99.67% of total late requests processed in 1991 which means it has a big impact on total late requests processed. * Poor performance and efficiency * Processing issues: * wrong prioritization of policies * Emphasis on RUNs and RAPs and less on RAINs and RERUNS (although RAPs and RERUNs amount to 38.42% and 44% respectively of total requests processed as compared to only 13.33% RUNs and 9.64% RAINs. * uneven workload distribution and uneven
The Home Depot Company wants to expand their business in a global arrange. Actually, this situation is not able to happening every year; therefore, I considered it as a extraordinary item. 2. As we know from the fiscal 2007, the value of treasury stock was negative $16,383 million, but when it comes in the fiscal the value of treasury stock was negative $314 million, which means The Home Depot Company may sell their treasury stock for some money, the factor is that the sales of Home Depot Company decreased $13,488 million, therefore, they need money to run the company, so they sell some of the treasury stock for some money. This is the second extraordinary item.
When KKR exercised due diligence of RJR Reynolds, they could not figure out “other uses of cash” in the statements obtained. “The initial projections they had obtained from RJR Nabisco was a heading ‘other uses of cash.’ Beside it was a row of figures stretching out ten years, each year ranging from 300 to 500 million dollars. Was it cash flowing in or out? Should he add it? Subtract it?