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.
2. Norton Co., a U.S. corporation, sold inventory on December 1, 2011, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: For what amount should Sales be credited on December 1? A. $5,500.
At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of note payable, and $250,000 of accruals. The after tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year. AFN = (Ao*/S0)∆S - (Lo*/S0)∆S - (M)(S1)(1 –POR) = $1,000,000 – $1,000,000 – 0.05($6,000,000)(1 – 0.7) = (0.6)($1,000,000) - (0.1)($1,000,000) - (0.05)($6,000,000)(0.3) = $600,000 - $100,000 - $90,000 = $410,000 Chapter 13: Corporate Valuation, Value-Based Management, and Corporate Governance Problem 13-2: Value of Operations of Constant Growth Firm. EMC Corporation has never paid a dividend.
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
Week 10 Problems 1. Given the following information: Total assets $100,000 Debt (12% interest rate) $80,000 Equity $20,000 Variable costs of production $14 per unit Fixed cost of production $27,000 Units Sold 12,300 Sales price $19.75 per unit What happens to operating income and net income if output is increased by 10 percent? Verify your answer. Revenue: $19.75*(12,300) = $242,925 Expenses: $14*(12,300) = $172,200 Operating Income: $242,925-$172,200 = $70,725 Net Income: $72,725- (.12*$80,000) = $63,125 With 10% increase in revenue: Revenue: $19.75*(13,530) = $267,217.50 Expenses: $14*(13,530) = $189,420 Operating Income: $267,217.50- $189,420 =$77,797.50 Net Income: $77,797.50 - (.12*$80,000) =$38,197.50 Operating Income rose from $70,725 to $77,797.50 for a 91% increase. Net income dropped from $63,125 to $38,197.50 which cuts losses by $24,927.50.
Generally, free cash flow is cash flows provided by operating activities less cash flows used by investing activities for the purchases of plant, property and equipment and the repayment of long-term debt. If there is cash left over, it is “free” to be distributed to the owners of the entity or reinvested in the business. Over time, the entity that generates the highest free cash flow will be the most successfully financial company in terms of return on the owners’ investments. There are generally a number of differences between cash provided by operating activities and net income. The most obvious differences are that net income is presented on an accrual basis and that net income includes non-cash expense and income items.
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.
June’s sales are expected to be $100,000, and July’s sales are expected to be $150,000. Cash disbursements for the month of July are expected to be: a. $105,000 b. $107,000 c. $77,000 d.
Part (b) Calculate the seasonal forecast of sales for February of Year 3. Part (c) Which forecast do you think is most accurate and why? 11. Question : (TCO 6) Davis Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project A Project B Initial Investment $800,000 $650,000 Annual Net Income $50,000 45,000 Annual Cash Inflow $220,000 $200,000 Salvage Value $0 $0 Estimated Useful Life 5 years 4 years The company requires a 10% rate of return on all new investments.
.Which of the following statements is NOT correct? èThe corporate valuation model discounts free cash flows by the required return on equity. 2. Which of the following statements is correct?) If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.