a. Divide the firm's monthly funding requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components. b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs. c. Assuming that short-term funding costs 5% annually and that the cost of long-term funding is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the firm can earn 3% on any excess cash balances. d. Discuss the profitability-risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.

a. Divide the firm's monthly funding requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components. b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs. c. Assuming that short-term funding costs 5% annually and that the cost of long-term funding is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the firm can earn 3% on any excess cash balances. d. Discuss the profitability-risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm's strategic goals. Companies often use several methods to evaluate the project's cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The NPV shows how much value the company is creating for its shareholders. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. is the single best method to use when making capital budgeting decisions.
How would you classify dividends from investments on a cash budget? a. Cash brought forward b. Payment c. Receipt d. Opening balance When comparing mutually exclusive alternatives that have different lives by the present worth method, it is necessary to: a. Always compare them over a time period of equal service b. Find the present worth over one life cycle of each alternative c. Always compare them over a period equal to the life of the shorter-lived alternative d. Always compare them over a period equal to the life of the longer-lived alternative
What are the advantages of evaluating fund performance based on Internal Rate of Return (IRR)? Why would an investor prefer to evaluate a fund based on a cash-on-cash return?
explain how a firm that expect funds during the coming year might make sure the needed funds will be avaiilable
A) Calculate the Return on Investment (ROI) for each of the portfolio. B) Based on the required rate of return, determine the Residual Income (RI)for each of the portfolio. C) If King Bhd is to choose only ONE (1) portfolio to invest in, advise the management team based of your answer in (a). Please provide a calculation for each of them.
All of the following are data rules associated with capital budgeting EXCEPT: a. Include changes across the full life cycle of the product or service. b. Include changes in every functional area of the business. c. Include financing flows in the cash flows of all proposed projects. d. Include forecasted inflation in the cash flow estimates.
Statement 1: Three of the four capital budgeting screening methods (Net Present Value, Internal Rate of Return and Payback Method) rely on the relevant expected cash inflows and outflows, whereas one (the Accrual Accounting Rate of Return Method) utilizes relevant accounting incomes and expenses. Statement 2: All expected cash flows in a capital budgeting analysis are treated as though they are received at the end of the year to which they are assigned, even though in actuality, they will be received throughout the year. Select the correct response: Both statements are correct. Only statement 1 is correct. Only statement 2 is correct. Both statements are incorrect.
Define each of the following terms:c. Additional funds needed (AFN); AFN equation; capital intensity ratio;self-supporting growth rate
An investor is evaluating the historical performance of an investment fund. The following annual returns are provided to the investor: Fund Value Year 0 $120 Year 1 132 Year 2 146 Year 3 133 Year 4 128 Year 5 123 Required: a. Calculate the investment returns for each year. b. Compute the arithmetic mean return. c. Calculate the geometric mean return.
A preference decision in capital budgeting: O is concerned with whether a project clears the minimum required rate of return hurdle. comes before the screening decision. O is concerned with determining which of several acceptable alternatives is best. O involves using market research to determine customers' preferences.
Using Problem 1, if Hogwarts Corp.’s policy is to employ Aggressive financing policy, which of the following statement would best describe the policy employed? a. all fixed asset and half of the permanent current assets was financed with long-term liabilities b. all the fixed assets, permanent current assets and half of the temporary current assets was financed with long-term liabilities c. all the fixed assets, and permanent current assets was financed with long-term liabilities d. none of the above 2) Using Problem 1, how much is the temporary current assets needed during April?
The nature of financing is different for different stages of financing. Choose one of the stages below that describes the nature of financing for the stage. “Funds are likely to pay for initial marketing and product refinement.” Group of answer choices a. Seed-Money Stage b. Start-Up c. First-Round Financing d. Second-Round Financing