Case solutions corporate finance ross westerfield and jaffe 9th edition

May be having liquidity problems. Quick ratio Better at managing current accounts. Total asset turnover Better at utilizing assets. Assets may be older and depreciated, requiring extensive investment soon. Inventory turnover Better at inventory management, possibly due to Could be experiencing inventory shortages.

Receivables turnover Better at collecting receivables. May have credit terms that are too strict. Decreasing receivables turnover may increase sales. Total debt ratio Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems. Especially notice that it will increase ROE. Debt-equity ratio Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems.

Equity multiplier Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems. Interest coverage Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems.

Profit margin The PM is slightly above the industry median, so May be able to better control costs. ROA Company is performing above many of its peers.

Assets may be old and depreciated relative to industry. ROE Company is performing above many of its peers. If you created an Inventory to Current liabilities ratio, East Coast Yachts would have a ratio that is lower than the industry median.

The current ratio is below the industry median, while the quick ratio is above the industry median. This implies that East Coast Yachts has less inventory to current liabilities than the industry median. Because the cash ratio is lower than the industry median, East Coast Yachts has less inventory than the industry median, but more accounts receivable. The debt ratio changes because long-term debt is assumed to remain fixed in the pro forma statements.

The other ratios change slightly because interest and depreciation are also assumed to remain constant as well. We will assume that the company will go ahead with the fixed asset acquisition. In this case, the pro forma financial statement calculation will change slightly. Before, we made the assumption that depreciation increased proportionally with sales, which makes sense if fixed assets increase proportionally with sales. This is not the case now. To estimate the new depreciation charge, we will find the current depreciation as a percentage of fixed assets, then, apply this percentage to the new fixed assets.

Age is obviously an important factor. The younger an individual is, the more time there is for the hopefully increased salary to offset the cost of the decision to return to school for an MBA. The cost includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary. Perhaps the most important nonquantifiable factors would be whether or not he is married and if he has any children.

Other factors would include his willingness and desire to pursue an MBA, job satisfaction, and how important the prestige of a job is to him, regardless of the salary. Perry MBA. In this analysis, room and board costs are irrelevant since presumably they will be the same whether he attends college or keeps his current job.

Note, this is also the PV of the direct costs since they are all paid today. He is somewhat correct. Calculating the future value of each decision will result in the option with the highest present value having the highest future value. Thus, a future value analysis will result in the same decision. However, his statement that a future value analysis is the correct method is wrong since a present value analysis will give the correct answer as well. To find the salary offer he would need to make the Wilton MBA as financially attractive as the as the current job, we need to take the PV of his current job, add the costs of attending Wilton, and the PV of the bonus on an aftertax basis.

Note, this assumes that the singing bonus is constant. Since the salary will not start for 3 years, we need to find the value in 2 years so that it is the present value of growing annuity.

The cost interest rate of the decision depends on the riskiness of the use of funds, not the source of the funds. Therefore, whether he can pay cash or must borrow is irrelevant. This is an important concept which will be discussed further in capital budgeting and the cost of capital in later chapters. An example spreadsheet is: [pic] 2. Since the NPV of the mine is positive, the company should open the mine. We should note, it may be advantageous to delay the mine opening because of real options, a topic covered in more detail in a later chapter.

There are many possible variations on the VBA code to calculate the payback period. Cells i. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating sales. Each year, the company will sell , tons under contract, and the rest on the spot market. Total debt ratio Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems.

Especially notice that it will increase ROE. Debt-equity ratio Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems. Equity multiplier Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems. Interest coverage Less debt than industry median means the company Increasing the amount of debt can increase is less likely to experience credit problems.

Profit margin The PM is slightly above the industry median, so May be able to better control costs. ROA Company is performing above many of its peers. Assets may be old and depreciated relative to industry. ROE Company is performing above many of its peers. If you created an Inventory to Current liabilities ratio, East Coast Yachts would have a ratio that is lower than the industry median.

The current ratio is below the industry median, while the quick ratio is above the industry median. This implies that East Coast Yachts has less inventory to current liabilities than the industry median. Because the cash ratio is lower than the industry median, East Coast Yachts has less inventory than the industry median, but more accounts receivable. The debt ratio changes because long-term debt is assumed to remain fixed in the pro forma statements. The other ratios change slightly because interest and depreciation are also assumed to remain constant as well.

We will assume that the company will go ahead with the fixed asset acquisition. In this case, the pro forma financial statement calculation will change slightly. Before, we made the assumption that depreciation increased proportionally with sales, which makes sense if fixed assets increase proportionally with sales. This is not the case now.

To estimate the new depreciation charge, we will find the current depreciation as a percentage of fixed assets, then, apply this percentage to the new fixed assets.

Age is obviously an important factor. The younger an individual is, the more time there is for the hopefully increased salary to offset the cost of the decision to return to school for an MBA.

The cost includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary. Perhaps the most important nonquantifiable factors would be whether or not he is married and if he has any children. Other factors would include his willingness and desire to pursue an MBA, job satisfaction, and how important the prestige of a job is to him, regardless of the salary. Perry MBA.

In this analysis, room and board costs are irrelevant since presumably they will be the same whether he attends college or keeps his current job. Note, this is also the PV of the direct costs since they are all paid today. He is somewhat correct. Calculating the future value of each decision will result in the option with the highest present value having the highest future value. Thus, a future value analysis will result in the same decision.

However, his statement that a future value analysis is the correct method is wrong since a present value analysis will give the correct answer as well. To find the salary offer he would need to make the Wilton MBA as financially attractive as the as the current job, we need to take the PV of his current job, add the costs of attending Wilton, and the PV of the bonus on an aftertax basis.

Note, this assumes that the singing bonus is constant. Since the salary will not start for 3 years, we need to find the value in 2 years so that it is the present value of growing annuity.

The cost interest rate of the decision depends on the riskiness of the use of funds, not the source of the funds. Therefore, whether he can pay cash or must borrow is irrelevant. This is an important concept which will be discussed further in capital budgeting and the cost of capital in later chapters. An example spreadsheet is: [pic] 2. Since the NPV of the mine is positive, the company should open the mine.

We should note, it may be advantageous to delay the mine opening because of real options, a topic covered in more detail in a later chapter. There are many possible variations on the VBA code to calculate the payback period.

Cells i. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating sales. Each year, the company will sell , tons under contract, and the rest on the spot market. The total sales revenue is the price per ton under contract times , tons, plus the spot market sales times the spot market price.

Taxes that year are a credit, an assumption given in the case. In Year 6, the charitable donation of the land is an expense, again resulting in a tax credit. The land does have an opportunity cost, but no information on the aftertax salvage value of the land is provided. Next, we need to calculate the net working capital cash flow each year. The fact that the company is keeping the equipment for another project is irrelevant. The aftertax salvage value of the equipment should be used as the cost of equipment for the new project.

In other words, the equipment could be sold after this project. Keeping the equipment is an opportunity cost associated with that project. Since the cash flows from the project extend for two years past the end of mining operation, we will include an average book value of zero for the last two years. The research and development costs and the marketing test are sunk costs.

We can calculate the future cash flows on a nominal basis or a real basis. Since the depreciation is given in nominal values, we will calculate the cash flows in nominal terms. The same solution can be found using real cash flows. Since the price and variable costs increase by 1 percent, and the inflation rate is 3. We will calculate the real cash flows, although using nominal cash flows will result in the same NPV. The sales of new automobiles will grow by 2.

Since the company expects to capture 11 percent of the market, the number of tires sold in the OEM market will be: Year 1 Year 2 Year 3 Year 4 Automobiles sold 5,, 5,, 5,, 6,, Tires for automobiles sold 22,, 22,, 23,, 24,, SuperTread tires sold 2,, 2,, 2,, 2,, The number of tires sold in the replacement market will grow at 2 percent per year, and Goodweek will capture 8 percent of the market.

So, the number of tires sold in the replacement market will be: Year 1 Year 2 Year 3 Year 4 Total tires sold in market 14,, 14,, 14,, 14,, SuperTread tires sold 1,, 1,, 1,, 1,, The tires will be sold in each market at a different price.