Assignment 2 is made up of seven questions. Read the requirements for each question thoroughly

Assignment 2

Assignment 2 is made up of seven questions. Read the requirements for each question thoroughly, and plan your responses carefully. Ensure that you answer each of the required components as concisely and completely as possible. If supporting calculations are required, present them in good form.

Case 1. Two businesses, Web Services and PC Providers, have sought business loans from you. To decide whether to make the loans, you have requested their balance sheets.

Evaluating business operations; using financial statements

Required

1. Using only these balance sheets, to which entity would you be more comfortable lending money? Explain fully, citing specific items and amounts from the respective balance sheets.

2. Is there other financial information you would consider before making your decision? Be specific.

C10-37 Use cash flow data to evaluate potential investments

Your company has some excess cash and would like to invest it in the stock of another company. You investigate several different stocks and are trying to decide which stock would be the best investment for your company. One factor you investigate is each company’s cash flow. The summaries of the cash flow statements for your three top stock choices follow:

Although you will look at many other criteria in your stock purchase recommendation, what can you tell about each of the three companies listed? Based solely on cash flow, which stock appears to be better?

C11-44 Investment recommendation

Take the role of an investment analyst at Prudential Bache. It is your job to recommend investments for your clients. The only information you have are some ratio values for two companies in the pharmaceuticals industry.

Write a report to Prudential Bache’s investment committee. Recommend on of the company’s stock over the other. State the reasons for your recommendation.

C12-72. Prepare cash budgets under two alternatives

Each autumn, as a hobby, Suzanne De Angelo weaves cotton placemats to sell at a local crafts shop. The mats sell for $20 per set of four. The shop charges a 10% commission and remits the net proceeds to De Angelo at the end of December. De Angelo has woven and sold 25 sets each of the last two years. She has enough cotton in inventory to make another 25 sets. She paid $7 per set for the cotton. De Angelo uses a four-harness loom that she purchased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The accounts payable relate to the cotton inventory and are payable by September 30.

De Angelo is considering buying an eight-harness loom so that she can weave more intricate patterns in linen. The new loom costs $1,000; it would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 18% interest, with $200 principal plus accrued interest payable each December 31. De Angelo believes she can weave 15 linen placemat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. De Angelo’s supplier will sell her linen on credit, payable December 31.

De Angelo plans to keep her old loom whether or not she buys the new loom. The balance sheet for her weaving business at August 31 is as follows:

Requirements

1. Prepare a combined cash budget for the four months ending December 31, for two alternatives: weaving the placemats in cotton using the existing loom and weaving the placemats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31, and a budgeted balance sheet at December 31.

2. On the basis of financial considerations only, what should De Angelo do? Give your reason.

3. What nonfinancial factors might De Angelo consider in her decision?

C13-77. Calculate efficiency variances

Assume that you manage your local Marble Slab Creamery ice cream parlour. In addition to selling ice cream cones, you make large batches of a few flavours of milk shakes to sell throughout the day. Your parlour is chosen to test the company’s “Made-for-You” system. The system allows patrons to customize their milk shakes by choosing different flavours.

Customers like the new system and your staff appears to be adapting, but you wonder whether this new made-to-order system is as efficient as the old system where you made just a few large batches. Efficiency is a special concern because your performance is evaluated in part on the restaurant’s efficient use of materials and labour. Assume that your superiors consider that efficiency variances greater than 5% are unacceptable.

You decide to look at your sales for a typical day. You find that the parlour used 390 kilograms of ice cream and 72 hours of direct labour to produce and sell 2,000 shakes. Assume that the standard quantity allowed for a shake is 0.2 kg of ice cream and 0.03 hours (1.8 minutes) of direct labour. Further, assume that standard costs are $1.50 per kilogram for ice cream and $8.00 an hour for labour.

Requirements

1. Compute the efficiency variances for direct labour and direct materials.

2. Provide likely explanations for the variances. Do you have reason to be concerned about your performance evaluation? Explain.

3. Write a memo to Marble Slab Creamery’s national office explaining your concern and suggesting a remedy.

C14-64. Apply time value of money to a personal decision

Samer Almasri, a second-year business student at the University of Ottawa, will graduate in two years with an accounting major and a Spanish minor. Almasri is trying to decide where to work this summer. He has two choices: work full-time for a bottling plant or work part-time in the accounting department of a meat-packing plant. He probably will work at the same place next summer as well. He is able to work 12 weeks during the summer.

The bottling plant would pay Almasri $600 per week this year and 7% more next summer. At the meat-packing plant, he would work 20 hours per week at $10.00 per hour. By working only part-time, he would take two accounting courses this summer. Tuition is $225 per hour for each of the four-hour courses. Almasri believes that the experience he gains this summer will qualify him for a full-time accounting position with the meat-packing plant next summer. That position will pay $750 per week.

Almasri sees two additional benefits of working part-time this summer. First, he could reduce his studying workload during the fall and spring semesters by one course each term. Second, he would have the time to work as a grader in the university’s accounting department during the 15-week fall term. Grading pays $50 per week.

Requirements

1. Suppose that Almasri ignores the time value of money in decisions that cover this time period because it is so short. Suppose also that his sole goal is to make as much money as possible between now and the end of next summer. What should he do? What non-quantitative factors might Samer consider? What would you do if you were faced with these alternatives?

2. Now, suppose that Almasri considers the time value of money for all cash flows that he expects to receive one year more in the future. Which alternative does this consideration favour? Why?

C15-45 Collect and analyze division data

Colgate-Palmolive operates two product segments. Using the company’s website, locate segment information for 2008 in the company’s 2008 annual report. (Hint: Look under investor relations.) Then, look in the financial statement footnotes.

Requirements

1. What are the two segments (ignore geographical subsets of the one product segment)? Gather data about each segment’s net sales, operating income, and identifiable assets.

2. Calculate ROI for each segment.

3. Which segment has the highest ROI? Explain why.

4. If you were on the top management team and could allocate extra funds to only one division, which division would you choose? Why?