09 Jul . Steven has just won a significant amount of money from the state lottery. He has decided to use the funds to create an investment portfolio containing stocks from different industries. Steven has learned financial ratio analysis is a tool that he can use to help make his investment decisions. Some of the companies and ratios are:
Machinery
Current Ratio 0.9 1.4 7.1 3.9
Quick Ratio 0.8 0.9 5.2 2.8
Debt Ratio 71% 50% 0% 36%
Net Profit Margin 6.50% 13.20% 26.90% 9%
a. What are the difficulties in comparing the ratios of these companies to one another?
b. Why are the liquidity ratios for the utility and fast food companies so much different from the software and machinery manufacturing company?
c. Would it be advisable for the software company to carry the same debt ratio as the utility company? Why or why not?
d. Make a recommendation to Steven regarding these investment choices. Based on these ratios, what is your advice? If another student makes different suggestions, challenge them to justify their choices.
2. Respond to each of the following questions:
a. Financial managers often view the balances their companies have in Current Assets and Current Liabilities the result of an investment decision. Discuss why these balances can be viewed as “investment” decisions.
b.. Two companies manufacture can openers. Relevant data follows:
Old School Manufacturing, Inc. Hi Tech Manufacturing, Inc.
Degree of Operating Leverage 2.2 5.7
Degree of Financial Leverage 1.5 3.3
Which of these companies is more at risk? Why?
Which of these companies has a lower break-even point? Why?
Discuss what advantages a labor intensive company has over a capital intensive company.
Discuss the advantages a capital intensive company has compared to a labor intensive company.
Discuss how “offshoring” has impacted the leverage question.
3. Respond to each of the following questions:
a. Why is the Time Value of Money (TVM) an essential concept for business decision making? Cite some examples of the types of decisions where TVM concepts are used.
b. Using TVM techniques, calculate the amount of savings you will need to comfortably retire. Be as specific as possible and discuss how you arrived at your conclusion. Justify your rate of return choice
4.Respond to each of the following questions:
a. You have been asked to make a short presentation at your company’s annual capital budget meeting to present an analysis of the strengths and weaknesses of the following capital budgeting selection methodologies: NPV, payback, IRR. Describe how you would respond to this request at the meeting.
b. The senior executives were impressed with your presentation on capital budgeting methodologies. They have asked you to present a follow up discussion regarding the company’s weighted average cost of capital (WACC). Specifically, they want to know how it is calculated and, most importantly, how it should be used. Discuss your responses.
5.Congratulations! Due to your education, skills you have learned, and hard work, you have successfully managed your fledgling start-up company to the point where you are seriously considering an Initial Public Offering (IPO).
Discuss the following questions:
a. What are the purpose, role, and responsibilities of an investment banker?
b. What are the advantages and disadvantages of “going public”?
c. Describe avenues to acquire external financing other than via an IPO.
6. As the company Treasurer, the Board of Directors has asked you to comment upon a proposal to initiate dividend payments to the company’s common shareholders. The Board wants you to address:
a. What signals does the initiation and continuance of the dividend payments make to the market?
b. How will dividend payments affect the future growth of the company?
c. Would a stock repurchase (the company buys back its own shares) be a preferable alternative to cash dividend payments?
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