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Answer:Single Month's Cash Budget for the Chadmark CorporationCurrent month sales collected: 3000 x 40% x (100%-2%) = \$1176+ Prior month sales collected: 3000 x 60% = \$1800- purchases \$1500- other expenses \$700= \$ 776 Average cash gain during a typical month = \$ 7768. If you were a manager of a company, which of the three right side components of theDuPont Identity would you want to increase and which would you want to decrease,other things being equal? Give a specific example for how to do that for each of thethree. Ans:The DuPont Identity measures the company’s ROE in terms of its profitability, assetefficiency, and leverage. The model helps investors compare similar companies like thesewith similar ratios. Investors can then apply perceived risks with each company's businessmodel. Based on these three performances measures i.e. Profit Margin, Total Asset Turnoverand Financial Leverage, the model concludes that a company can raise its ROE bymaintaining a high profit margin, increasing asset turnover, or leveraging assets moreeffectively. The first term in the DuPont Identity is the firm’s net profit margin, whichmeasures its overall profitability. The second term is the firm’s asset turnover, whichmeasures how efficiently the firm is utilizing its assets to generate sales. Together, theseterms determine the firm’s return on assets. The third term is the equity multiplier whichindicates the value of assets held per dollar of shareholder equity. The right side componentsof the DuPont Identity that can be increased are Net Income and sales. The inventory andaccount receivable can be reduced which can help the current assets position and in turnreduces total assets, which then improves total asset turnover. I would like to decrease theinefficiencies in asset utilization and inventory holding to improve the ROE. If investors areunsatisfied with a low ROE, the management can use this formula to pinpoint the problemarea whether it is a lower profit margin, asset turnover, or poor financial leveraging.References: 9. (TCO B) Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).Year: 1 2Free cash flow: -\$50 \$100 Answer:Value of Operations=Present value of the expected free cash flowsHorizon value at year 2= (CF in year 3)/(WACC-G)Horizon value at year 2 = 100(1.05)/(.11-.05) = 1,750.00 Year Yearly earnings Present value 1(50.00)(45.05)2100.00 81.16 Horizon Value 1,750.00 1,420.34 at Year 2Net Present value =1,456.4610. A stock pays an annual dividend of \$2.50 and that dividend is not expected tochange. Similar stocks pay a return of 10%. What is P0?  #### You've reached the end of your free preview.

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• Spring '10
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