The organization should primarily focus on the incremental cash flow because the incremental cash flow holds a marginal benefit from the project. Depreciation is considered to be an expense item which means that the greater the depreciation, the larger the expense will be to the organization. Therefore, if Caledonia was looking at the project from an accounting profit view, the profit would be much lower than that of the free cash flow. 2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?
A firm’s value depends on the positive net income generated in the past. True False A firm’s value depends on the firm’s ability to generate positive cash flows now and in the future True False When determining the value of a firm, which of the following statements is true? • Inversters are risk neutral. Other things equal they prefer to pay more stocks that are less risky and have uncertain cash flows • Investers love risk. Other things equal they prefer to pay more for stocks that are more risky and have uncertain cash flows.
Caledonia Products Integrative Problem Shaneal Gaither, Nicolle Istre, Tara Shulfer, Laura Curry FIN/370 October 8, 2012 Instructor: Chrissy Helbling 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? Caledonia should focus on free cash flow rather than accounting profits. The reason being is because with free cash flow that money coming in can be immediately reinvested into different projects or areas of the firm to start earning higher revenue. By focusing on the incremental cash flows Caledonia can analyze and determine the benefits and the costs to any project.
The ROE for Sepracor is 33.07%, which means that 33.07 cents of assets are created for each dollar that was originally invested. It measures how Sepracor is using its money. The higher the return on equity, the more funds available to be invested in improving business operations without having to invest more capital. Debt to asset ratio measures the company’s solvency, and the higher the ratio, the lower the borrowing capacity for the company. I would make an investment in the company’s 5% convertible bonds.
(0.5 points) Lesson 2 (3.0 points) 1. What is investing? (0.5 points) 2. What is financial risk? (0.5 points) 3.
Which method would lead to the best decision when a competitor is submitting a lower bid for your product? The absorption cost method will show the profitability and will provide the best references concerning how much money the company will make as compared to the bidder who has the lowest bid. Absorption costing will be more useful to companies that do not sell all of its products manufactured during a certain period. By using absorption costing the cost of the product, is not going to be shown until the time that
Inventory turnover 56,534,254 / 8,517,203 = 6.6 * Profitability ratios 5. Asset turnover $56,534,254 / 34,825,498 = 1.6 times 6. Profit margin $2,430,872 / 56,534,254 = 4.3 7. Return on assets $2,430,872 / 34,825,498 = 6.9 8. Return on common stockholders’ equity $29,946,992 - (2430872-15801332) / 200,000 = 82.9% * Solvency ratios 9.
(0.5 points) Simple interest is gained only on the principal amount of an account. What is compound interest? (0.5 points) Compound interest is interest that is added to the principal in the account, so that the interest you receive starts to generate its own interest. What is the time value of money? (0.5 points) The time value of money is the assumption that money is worth more the sooner it is received.
Profit Maximization is the process that a firm uses to establish where the best output and price levels are, in order to maximize its return. There are two primary methods that can be used to establish profit maximization. One method is the Marginal Revenue minus the Marginal Cost (MR-MC) method. When utilizing this method economists assume that profit would be at its highest when MR and MC are equal, which denotes that for every item made MP=MR-MC. When / if MR is higher than MC then MP would result in a profit for Company A.
CAGR: Operating income, % Operating income (EBIT) measures a company's earning power from ongoing operations and it largely used by investor because it excludes the effects of different capital structures and tax rates used in different companies. EBIT is "capital structure neutral" and is therefore a more appropriate way of comparing the earnings of different companies than net income