However, the company must be careful because a too big of a ratio can eventually lead to bankruptcy (Investopedia). The inventory turnover ratio for Nestlé is lower than Hershey’s because Nestlé either has lower sales or excess inventory. The total asset turnover for Hershey’s is also higher; this means that it is more efficient in using its assets in generating sales. As a result of a higher total asset turnover, the gross profit margin is lower than Nestlé’s (Investopedia). The return on assets and return on equity ratios are also better for Hershey’s because the company is making more money on less investment then Nestlé.
As a result of the increase of cost of goods sold, income before taxes declines and Walgreen’s pays less income tax than if they were to use the first-in, first-out method. Traditionally, companies using LIFO are valued more highly than those who use FIFO during periods of rising prices. Walgreen’s also offers analysts the LIFO Reserve, which is the difference between what the inventory is using LIFO as opposed to if FIFO was used. As of 2007 and 2008, Walgreen’s inventories would have been greater by $1,067 million $969 million respectively using a FIFO accounting method. Walgreen’s primary competitor, CVS, uses a combination of three inventory methods for each of their different business segments.
The largest 60 projects earn higher revenue, however, they produce more salaries expenses and overhead allocated. The smallest 60 projects, on the other hand, have less revenue with less salaries expenses and overhead allocated. Therefore these projects finally end up with same net income. They are equally profitable. Question 2: There is a direct relationship between project Size and project profitability.
Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $65 Year 3 = $100 • 3.17 years • 2.6 years • 2.88 years • 3.43 years Want help? Click to download FIN 370 7. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects? • Cash flows have a greater present value than accounting profits.
Low income tax payments are why one-third of U.S. companies use LIFO (Harrison, Horgren, & Thomas, 2010). LIFO also gives the company the most realistic net income figure because the recent costs of inventory are expensed. FIFO would use the oldest costs of inventory which is not a realistic measure of the inventory expense. The ending inventory under LIFO would be lower, due to the highest prices being expensed. If the company wants to lower its income at the end of the accounting period, they would buy more inventory and the cost of that inventory could be used for cost of goods sold.
Cost of Goods Sold for the 10oz.Soft and Silky shaving gel ($.29) is significantly less than its competitors Gillette and S.C. Johnson (See Appendix C-Pricing) 4. Though Soft and Silky will still be about $.13 higher than its closest competitor (See appendix C, pricing) this may help them to maintain their premium branding. 5. The gross margin for the 10 oz. aerosol can is the highest of the three alternatives.
Q1) Cohen calculated the WACC to be 8.4%, which we don’t agree. The reasons are as follows: Single/Multiple cost of capital: We think a single cost of capital is sufficient because divisions of Nike have similar risk profiles. Weights: We don’t agree with Cohen’s calculation of book value weights. The weights should be calculated with market value of debt and equity because cost of capital shows how much the investors are willing to pay at present, i.e. at market value.
The WACC lets you see how much interest the company has to pay for every dollar it finances. The WACC of a firm increases at the Beta and rate of return on equity increases. A decrease in WACC indicates a decrease in valuation and a higher risk. When the capital structure changes, the WACC will change in a U shape pattern. Debt is considered less risky than equity, so equity cost is usually higher than the cost of debt.
d) minimize operational costs and maximize firm efficiency. e) maintain steady growth in both sales and net earnings. 4. Accounting concepts for a firm to create value it must: a) have a greater cash inflow from its stockholders than its outflow to them. b) create more cash flow than it uses.
The Hertz Corporation – Leveraged Buy Out Key Inferences and Conclusions: 1. Hertz was attractive as a leverage buyout candidate, having: • Relatively low existing debt loads with assets available to further leverage; • A multi-year history of stable and recurring cash flows; • Hard assets (Rental Fleet and Equipment) that may be used as collateral for lower cost secured debt; • The potential for new management to make operational or other improvements to the firm to boost cash flows; • Market conditions (9/11) that depress the valuation or stock price. 2. CD&R had the following advantages if this deal went through • The use of debt increases (leverages) the financial return to the private equity sponsor. The total return of an asset to its owners, all else being equal and within strict restrictive assumptions, is unaffected by the structure of its financing.