FIN101 principle of finance

Assignment Question(s):(Marks 5)

• Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark – 0.2 each)
• Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed here:
  • What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.) (0.25 Marks)
• You have $5,100 to invest today at 11% interest compounded annually. Find how much you will have accumulated in the account at the end of: (0.5 Marks each)
• Using the values below, answer the questions that follow:

• Is a decrease in land and buildings an inflow or an outflow of cash?
• Is an increase in accounts payable an inflow or an outflow of cash?
• Is a decrease in vehicles an inflow or an outflow of cash?
• Is an increase in accounts receivable an inflow or an outflow of cash?
• Is the payment of dividends an inflow or an outflow of cash?

Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out.

• The four companies are in very different industries.
• The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.
• Financial ratios from software companies are never very reliable.
• Caution must be exercised when comparing older to newer firms, e.g., utility company vs. software company.
  • Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? (Select all the answers that apply.) (0.25 Marks)

• Their inventory balances are going to be very close to zero because it is impossible to stockpile electricity and burgers.
• The explanation for the lower current and quick ratios most likely relates to poor management performance.
• Their accounts receivable balances are going to be much lower than for the other two companies.
• The explanation for the lower current and quick ratios most likely rests on the fact that these two industries operate primarily on a cash basis.
  • Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? (Select all the answers that apply.) (0.25 Marks)

• A high level of debt can be maintained if the firm has a large, predictable, and steady cash flow.
• The software firm will have very uncertain and changing cash flow.
• Utilities tend to have steady cash flow requirements.
• The software industry is subject to greater competition resulting in more volatile cash flow.
  • Why wouldn’t investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return.) (Select all the answers that apply.) (0.25 Marks)

• Software companies tend to carry large debt which represents senior claims on the companies’ assets.
• Investors wouldn’t invest all of their money in software companies because their average collection period is usually very high.
• By placing all of the money in one stock, the benefits of reduced risk associated with diversification are lost.
• Although the software industry has potentially high profits and investment return performance, it also has a large amount of uncertainty associated with the profits.

(1)4years,

(2) 8years, and

(3)12 years.

• Calculate the future value of the annuity, assuming that it is
  • An ordinary annuity. (0.5 marks)
  • An annuity due. (0.5 marks)
• Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity—ordinary or annuity due—is preferable as an investment? Explain why. (0.5 Marks)