1. Financial ratio analysis is used by managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios, and why?
2. How can options sell for more than their exercise value? Or can they?
3. What's wrong with using payback period? What should we use instead? Why?
4. In what sense is the weighted average cost of capital (WACC) an average cost? A marginal cost?
5. How are stocks priced
The next section is a minicase this must be 3 pages single spaced. .
James Corp. is facing a crucial cash need in the near future - without a substantial cash infusion they will be unable to complete an EPA-mandated factory upgrade, will be unable to make payroll and will have to close their doors. Although they have (collectable) receivables that would be more than adequate to cover their working capital requirements (but not the investment capital required for the new factory), their largest account is the government and while they are certain of being paid, it will take several months to collect the amount due after it is invoiced. They anticipate receiving the first payment from the government (for the fiscal year ending September of this year) in January, in the amount of $1.2 million. Their other collectable accounts receivable total $0.5 million (for the last three months), and sales are expected to increase substantially. These accounts are all on a "net 120" basis (no discounts, 120 days to pay). Their contract with the government prohibits factoring the government receivables.
The company has the option of issuing $25,000,000 in par value of 6.875% coupon, 30 year bonds (this issue will be rated AA by S&W, a highly respected rating firm - the highest rating given by S&W is AAA, which is available only to the largest "blue chips" who have credit as good as the US government, so a AA rating is very good) or selling newly issued common shares at an anticipated market price of $14 per share. Irving's Investment Bank has offered to purchase (for resale) 1,850,000 shares of the new common stock at $13.50 each. Market returns on AA rated bonds are currently 5%. The company has no long-term debt at this time. Management of the company consists of the original founders who together own 1,800,000 shares of common stock. There are no other shareholders at this time. One founder anticipates retiring within five years and would like the company to purchase his interest at that time; the others are willing to do so if financially feasible. Given the company's risk profile (beta or whatever you like), the market return on common shares of James Corp. would be 5.125%.
What should they do?
Why?
We are trying to get to 3 pages but if we have a good plan length doesn't matter as much.