Exam 9: Prospective Analysis

Which of the following statements is most correct?

ROE is defined as net income divided by total assets.

The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are: January February March Expected Sales \ 200 \ 220 \ 300 50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received. -Cash outflows in March for purchases will be:

Gupta Corporation has forecasted its need for external funding in the following year. It needs to raise $2 million in either debt or equity. It would like to minimize its need for external funding without decreasing its projected growth. Which of the following would reduce its need for additional funding?

Hiruit company's sales in December were $5,500. It expects sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is: Collections Percentage of total receivables In month of sale 10\% In second month 70\% In third month 15\% Not collectible 5\% Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400. -Net account receivable at the end of March is closest to:

If a company's cost of capital increases unexpectedly, which of the following actions will help it maintain or increase its stock price? I. Decrease its asset turnover II. Increase its inventory III. Increase its gross margin IV. Issue a stock dividend

As cash is the most liquid of all assets and liquidity is crucial to a company, all companies should hold as much cash as possible.

Once the projected financial statements are prepared, there is no need for sensitivity analysis to examine the assumptions used in the preparation.

You are the treasurer of Hodgkiss Suppliers Corporation (HSC), a sporting goods equipment distributor. You are trying to determine the cash flow needs for the company for the first three months of 2006. Other information: • 50% of sales are on a cash basis, of the remaining 50% half is collected in the following month and the other half two months later. • All purchases are paid for in the following month. • Selling, general, and administrative (S, G, & A) costs are fixed, and are paid as incurred. • Dividends payable in February are $20. • Interest payment is due in March of $50. • Minimum cash balance required is $10. a. Estimate what if any, HSC requires in the way of additional external financing at the beginning of January to ensure they have enough cash to maintain a $10 cash balance through until the end of March. b. If additional external financing is not available, name three approaches HSC might use in order to avoid the need for external financing.

The accuracy of a cash flow forecast is inversely related to the forecast horizon.

If a company has excess cash it wishes to return to shareholders, it can do this by either distributing extra dividends or repurchasing stock.

Yeats Corporation is trying to determine its short-term cash needs. Given the following information, how much money will Yeats need to borrow next year? •Sales in Year 9 are expected to be $500 million •Operating margin is expected to be 8% •Interest expense is expected to be $6 million (ignore additional interest expense generated by additional borrowings in Year 9) •Tax rate is 40% •Dividend payout ratio is 30% •Increase in working capital is 5% of sales •Increase in fixed assets is 10% of sales •No new equity will be issued

Which of the following statements is incorrect?

The major use of cash for declining companies is repurchasing of equity.

All other things being equal, if a company takes longer to pay its suppliers than before, indicates that suppliers are providing more financing for the company.

Below is selected data for Gertup Corporation as of 12/31/05: Total assets \ 5,500 Current assets 2,750 Long-term debt 450 Current ratio 2.5 Inventory 1,500 For year ended 12/31/05 Sales \ 18,500 Cost of goods sold 14,800 -Gertup has increased its borrowing since last year, in part to finance the increased credit terms offered to customers. Which of the following actions would not decrease its borrowing?

The statement of cash flows for Georgey Company for 2004 and 2005 is as follows: 2004 2005 Net income \1 89 \1 70 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 201 173 Deferred income taxes 14 (20) Restructuring charges 80 90 Accounts receivable 30 20 Inventory (30) 50 Current liabilities 10 30 Cash flow from operations 494 513 Sale of equipment 200 300 Purchase of equipment (130) (120) Cash flow from investing 70 180 Dividends (120) (130) Long-term debt (440) (440) Cash flow from financing (650) (570) -Which of the following statements is correct?

As per the definition of residual income model, what is the effect on stock price in a given period if the firm's cost of capital is greater than its return on equity?

Ceteris paribus, the quicker a company collects money from its sales, the greater its liquidity.

The major source of cash for most mature companies is debt.