Foundations Of Finance
Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 12, Problem 1SP
Summary Introduction

To determine: Whether the following sources of new earnings volatility demonstrates the effect of business versus financial risk.

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You have just been hired as a financial analyst for a company called Basel Industries. Unfortunately, company headquarters (where all of the firm’s records are kept) have been destroyed by fire. So, your first job will be to recreate the firm’s cash flow statement for the year that has just ended. The firm had $100,000 in the bank at the end of the prior year. In addition, its net working capital accounts, except cash, remained constant during the year. The company earned $5 million in net income during the year and but only paid $750,000 in dividends to common shareholders. Throughout the year, Basel Industries purchased $5.5 million of machinery that was needed for a new project. You have just been spoken to the firm’s accountants and learnt that annual depreciation expense for the year is $450,000; however, the purchase price for the machinery represents additions to property, plant and equipment before depreciation. The only financing done by the firm was to issue long-term…
You are a Corporate Credit Analyst for your bank. A new corporate customer in the manufacturing sector approached your bank for a large credit facility in the sum of $20 million for production equipment and warehousing. The customer submitted the following financials to you.    The cash position increased from $6.7 million in 2019 to $16 million in 2021. Does this signal a strengthening of the liquidity position of the firm? Explain.
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