Question

1. Classify the following changes in each of the accounts as either an outflowor an inflowof cash. (1 Mark – 0.2 each)

  

1. Is a decrease in land and buildings an inflow or an outflow of​ cash?
2. Is an increase in accounts payable an inflow or an outflow of​ cash?
3. Is a decrease in vehicles an inflow or an outflow of​ cash?
4. Is an increase in accounts receivable an inflow or an outflow of​ cash?
5. Is the payment of dividends an inflow or an outflow of​ cash? 

2. 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:

	Island	Burger	Fink	Roland
Ratio	Electric Utility	Heaven	Software	Motors
Current ratio	1.06	1.35	6.79	4.55
Quick ratio	0.92	0.87	5.23	3.73
Debt ratio	0.69	0.45	0.04	0.34
Net profit margin	6.25%	14.33%	28.46%	8.43%

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.

1. What problems might Robert encounter in comparing these companies to one another on the basis of their​ ratios? (Selectall the answers that​ apply.) (0.25 Marks)

1. The four companies are in very different industries.
2. The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.
3. Financial ratios from software companies are never very reliable.
4. Caution must be exercised when comparing older to newer​ firms,e.g., utility company vs. software company.

2. Why might the current and quick ratios for the electric utility and the​ fast-foodstock be so much lower than the same ratios for the other​ companies? (Selectall the answers that​ apply.) (0.25 Marks)

1. Their inventory balances are going to be very close to zero because it is impossible to stockpile electricity and burgers.
2. The explanation for the lower current and quick ratios most likely relates to poor management performance.
3. Their accounts receivable balances are going to be much lower than for the other two companies.
4. 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.

3. Why might it be all right for the electric utility to carry a large amount of​ debt,but not the software​ company? (Selectall the answers that​ apply.) (0.25 Marks)

1. A high level of debt can be maintained if the firm has a​ large,predictable, and steady cash flow.
2. The software firm will have very uncertain and changing cash flow.
3. Utilities tend to have steady cash flow requirements.
4. The software industry is subject to greater competition resulting in more volatile cash flow.

4. Why​ wouldn'tinvestors invest all of their money in software companies instead of in less profitable​ companies?(Focus on risk and​ return.) (Selectall the answers that​ apply.) (0.25 Marks)

1. Software companies tend to carry large debt which represents senior claims on the​ companies'assets.
2. Investors​ wouldn'tinvest all of their money in software companies because their average collection period is usually very high.
3. By placing all of the money in one​ stock,the benefits of reduced risk associated with diversification are lost.
4. Although the software industry has potentially high profits and investment return​ performance,it also has a large amount of uncertainty associated with the profits.

3. You have $5,100to 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)

(1)4years,

(2) 8years,and​

(3)12years.

4. Using the values​ below, answer the questions that follow:

Amount of annuity	Interest rate	Deposit period​ (years)
​$500	9​%	10

1. Calculate the future value of the​ annuity,assuming that it is
   1. ​An ordinary annuity. (0.5 marks)
   2. ​An annuity due. (0.5 marks)

2. 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)

Answer 1

As per rules I am answering the first 4 subparts of the question

a. Decrease in land and building is an inflow of cash. Decrease in assets implies that assets are being sold and generally cash or an equivalent is being received. So it will be an inflow.

b Increase in accounts payable is an inflow of cash. Accounts payable implies that payment which was to be made is deferred. It is a form of short term financing and is equivalent to cash inflow. Cash is saved from being spent.

c. Decrease in vehicles is an inflow of cash. Decrease in vehicles implies that vehicles are being sold and generally cash or an equivalent is being received. So it will be an inflow.

d. Increase in accounts receivable is a cash outflow. This is an increase in assets instead of receiving cash. So cash is not received but a receivable is created and hence it is equivalent to cash outflow.