Mini Case Chapter 8
Note: NPV is the net present value, BV is the book value and PV is the present value.
Questions a, b, c, and d are found in the excel sheet attached.
Question d: the net present value for the leasing process is higher than the net present value for the purchases. Therefore, the leasing process has a reduced cash flow. Hence, Lewis Health has an effective way to lease rather than do acquisitions.
Mini Case Chapter 11
The answer to question a is found in the excel sheet.
Question b
L is slightly more sensitive than S. The case concerns the cost of capital. Sensitivity levels differ (Diamond & Verrecchia,1991). The fact means that the greater cash flows are realized in the axis time for L compared to S. The later cash flows are highly sensitive since they are heavily discounted and a slight change in the rate of interest changes vastly in the entire present values. The costs intersect at the X-axis at CC=24% AND 18% measured using the IRR respectively. Note: CC is the cost of capital.
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Question c
If the projects are both independent, then they have to be accepted because the net present value is certainly positive. On the other hand, if both projects are stated to be mutually exclusive, then Franchise S is to be selected because the net present value is higher compared to Franchise L.
Question d is done within the excel sheet.
Mini Case Chapter 13
Computations for the chapter are found in the excel sheet for further guidance.
A concern for the entire business in my understanding is that both the company's employees benefit and the salary are positively increasing. On the contrary, the same is not realized in the revenue growth of the company. Secondly, there are fewer liquid assets in the company compared to the current liabilities. The case is the reason for the late repayment to the company’s creditors. For such a case, the liquid asset for year 2 is $6589,442, yet the current liability is $1,328,960 that is likely double meaning that the company has reduced bank balance and low to no cash. Thirdly, the projection for the third year is $500,000 for its long-term debt at the time the company is facing a liquidity crunch.
Notably, while the ratios of the financial position of the company keep improving, the liquidity ratios are comparably low. The financial ratios are very vital in the stability and decision making for the company (Schroeder, Clark & Cathey, 2009). As a financial analyst, no credit extension is to be offered at the current state of the company. The actions of the creditors are impacted by the equity capital being infused in the firm. Hence, the case reduces the ratios based on creditors and debtors.
Recommendations
The company has to strategize on mechanisms that help in the computation of revenue for every employee since the significant cost that the company has is the employee cost alone. Hence, the issue will have to be reduced on the inefficiencies and lead to the company to employ the best employees it requires. Secondly, the company should develop liquidity improvement techniques and should be able to meet its current liabilities timely and postpone their liability over the long term. It is evident that the company would have assessed its financial ratio analyses before undertaking expansion plans. The analysis of the financial ratios would have made the stakeholders know on the determination of the general financial implications before the expansion proposals.
Reference
Diamond, D. W., & Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. The journal of Finance, 46(4), 1325-1359.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2009). Financial accounting theory and analysis: text and cases (p. 82). John Wiley & Sons.
