It is standard practice for companies to discount future cash flows at a predetermined discount rate to determine whether or not the company will be profitable. However, using performance compared to hurdle rates would be somewhat challenging in that managers would have an incentive to underestimate a project’s true cost of capital in order to consistently beat their estimates. 2. What is the weighted average cost of capital for Marriott Corporation as a whole? What type of investments would you value using this WACC?
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.
We are assuming the cost savings would be utilized in their respective companies. Also, for the onetime cost for the merger, we are discounting it at a rate which is the average of WACCs of both the companies. By doing this we are ensuring that, i) The cash flows are discounted at the rate at which they are going to be invested. ii) The two entities have different betas, which means we should use different WACCs for the cost savings from each of them. iii) For the onetime costs we do not have enough data to calculate the company wise expenses so, we discount it at a rate that seems reasonable.
Activity based costing furthers the effort of correctly assigning costs to our products. Using multiple cost pools and finding out their cost drivers we can more accurately price our products. This will help us to determine why our competitors can sell the pumps so cheaply and why our 12 ½ % increase in the price of the flow controllers did not meet with a decrease in demand. Below is a chart of the proposed activity based costing system. It includes the indirect cost pools, the cost-allocation base, the cost objects (our products), and the direct costs: Engineering $100,000 Maintenance $30,000 Depreciation $270,000 Packaging/ Shipping $60,000 Receiving and handling $220,000 Exhibit 1 30 Transactions 10,800 Machine Hours 10,800 Machine Hours 129 Transactions each 100% work orders $1,705.43 per 20% valves $2.78 per hour $25 per hour $2,000 per Transaction 30% pumps transaction 50% flow controllers Indirect Costs Direct Costs Set-up Labor Direct Labor Direct Materials Exhibit 1 shows the different cost pools, the direct costs, and their cost drivers.
But its payout ratio was unsustainable. Hence, the optimal way is to reduce its shares outstanding with a stock repurchase. by repurchasing shares, the company could adjust its unbalanced capital structure, and even raise debt to finance its purchase. It also will send a signal to the market that the share may currently be undervalued, and thus boost the share price. If the share is fairly priced, market could also interpret the repurchase behavior as a positive signal that the board has confidence in the company’s future performance.
The company should explore ways to reduce its need for working capital financing. They should see if there are ways of improving their supply chain efficiency and forecasting so that they can reduce their inventory levels. They should look to negotiate with suppliers to reduce the rate they are paying for inventory. Pacific Grove should also see if they can extend the length of their accounts payable. Even if they have to pay a slight price premium, if the rate (APR) is less than what the banks are charging them in interest, it could help to both save money and reduce their capital needs.
Liquidity ratios measure short-term ability of a company to pay obligations ant to meet unexpected needs for cash. Profitability Ratios Measure the income or operating success of a company for a given period of time. Solvency ratios measure the ability of the company to survive over a long period of time. Ratios provide clues to underlying conditions that may not be apparent from individual financial statement. All of the ratios would be helpful to internal users because this would provide the company with the knowledge of if they would be approved for a loan that is needed or how much the company lost or gained as well as if the company looks as though it will be able to survive over a long period of time.
It is strictly based on the production cost. The benefit of cost based pricing is that it is simple. You simply take your cost and add a percentage, or mark up to your product. Also if cost increase it is easy to adjust pricing. However, this can also have a negative effect, because as cost increase so must the price to maintain the same profit margin.
SUPERIOR MANUFACTURING CO. Answering the questions at hand: Based on the 2004 P & L, is Water’s decision to keep product 103 the right one? Water’s decision is correct. If the company were to discontinue production of 103, they would have an overall loss of $4,933,000. While they would no longer incur variable expenses, they would have to pay fixed expenses regardless by reallocating them among 101 and 102. This would decrease the profit margin of 101 and 102.
Deciding on cost effectiveness would depend on the timing of the organization; but the benefits will outweigh the costs. * Results: The first question, would this process be perceived as a valid assessment procedure? The results of the questionnaire clearly indicated that the assessment center was preferred to the other selection and development techniques. Would it be cost effective? Full scale implementation of the assessment center would be dependent on reducing the costs to a point where it becomes competitive with existing testing procedures, such as development and administration of written tests and convening of oral boards.