## What is the probability that a stock meets both your valuation and financial strength criteria?

You apply both valuation criteria and financial strength criteria in choosing stocks. The probability that a randomly selected stock (from your investment universe) meets your valuation criteria is 0.25. Given that a stock meets your valuation criteria, the probability that the stock meets your financial strength criteria is 0.40. What is the probability that a stock meets both your valuation and financial strength criteria?
Solution: Let take probability of valuation criteria is denoted by A and probability of financial strength is denoted by B: P (A) = 0.25 0.40 = P(AB) /0.25 P (AB) = 0.40…

* 0.25 = 0.10 Probability that a stock meets both your valuation and financial strength criteria = P (AB) = 0.10

## At what compound annual rate did EPS grow during these years?

You are analyzing the last five years of earnings per share data for a company. The figures are \$4.00, \$4.50, \$5.00, \$6.00, and \$7.00. At what compound annual rate did EPS grow during these years?
EPS growth for the first year needs to be blank as there is no base, EPS growth for the second year would be; (EPS of 2nd year/ EPS of first year) = (\$4.5/\$4) = 1.125 EPS growth for the third year would be; (EPS of 3rd year/ EPS of 2nd year) = (\$5/\$4.5) = 1.111 EPS growth for the fourth year would be; (EPS of 4th year/ EPS of 3rd year) = (\$6/\$5) = 1.20 EPS growth for the fifth year would be; (EPS of 5th year/ EPS of 4th year) = (\$7/\$6) = 1.16667 Therefore over a period of 5 years compounded annual rate of EPS growth is; [(EPS growth for the…

d year* EPS growth for the third year* EPS growth for the fourth year* EPS growth for the fifth year) ^ (1/5)-1]*100 [(1.125* 1.111* 1.20* 1.16667) ^ (0.20)-1]*100= 11.85% Shortcut approach to tally the EPS growth would be; [(EPS at the 5th year/ EPS at the 1st year) ^ (1/5)]-1*100 [(7/4) ^ (1/5)]-1*100= 11.85% So during these years EPS grew by 11.85% (approx)

## Explain the difference between the interest rates on Investment 1 and Investment 2.

The table below gives current information on the interest rates for two two-year and two eight-year maturity investments. The table also gives the maturity, liquidity, and default risk characteristics of a new investment possibility (Investment 3). All investments promise only a single payment (a payment at maturity). Assume that premiums relating to inflation, liquidity, and default risk are constant across all time horizons.

Maturity

Interest

Investment

(in years)

Liquidity

Default Risk

Rate (%)

1

2

High

Law

2.0

2

2

Low

Low

2.5

3

7

Low

Low

r3

4

8

High

Low

4.0

5

8

Low

High

6.5

Based on the information in the above table, address the following:
A. Explain the difference between the interest rates on Investment 1 and Investment 2.
B. Estimate the default risk premium.
C. Calculate upper and lower limits for the interest rate on Investment 3, r3.
A) Investment 2 return is higher because of low liquidity. Accordingly we can say that investment pays additional 0.5% for liquidity premium. B)Defaukt risk premium = Investment 5 return -…

stment 4 return = 6.5% – 4% = 2.5% C) Upper limit will be investment 4return = 4% Lower limit will be investment 2 return = 2.5%

## E already prepared its consolidated financial statements as at Dec 31 01 (see Example 2b). Prepare…

lists the financial ratios for 227-bed Hollywood Community Hospital. Assess the revenue, expense, profitability, liquidity, activity, and capital structure of Hollywood for 20X1. Explain why these financial measures changed between 20X0 and 20X1.

Ratio

20X1

20X0

Liquidity ratios

Current ratio

4.05

2.29

Acid test ratio

0.96

0.20

Days in accounts receivable

49

64

Days cash on hand

132

84

Average payment period, days

60

53

Revenue, expense, and profitability ratios

\$8,087

\$7,009

\$6,934

\$7,168

Salary and benefit as a percentage of total operating expense

43%

50%

Operating margin

0.05

(0.01)

Non-operating revenue

0.15

0.04

Return on net assets

0.13

0.04

Activity ratios

Total asset turnover ratio

1.15

0.95

Fixed asset turnover ratio

3.02

2.10

Age of plant

8.49

10.56

Capital structure ratios

Debt service coverage ratio

4.40

2.47

Long-term debt to net assets (equity)

0.48

3.06

Net assets to total assets

0.55

0.38
From the above figures it is clear, that from year 20X0 to 20X1, following changes are observed: The operating revenue has increased and the operating expenses have reduced. Due to which the Return on Assets also increased from 4% to 13%. As agianst of this the liquidity position has down graded in the 2 years as current ratio (from 2.29 to 4.05)…

reased shows that the liquidity in the company is worsened. Profitability ratio is showng the positive sign as it has improved. Similarly, activity ratio is also improved as total assets and fixed assets turnover ration has increased.

## What are each of the major financial statements commonly called in for-profit health care…

What are each of the major financial statements commonly called in for-profit health care organizations and in not-for-profit health care organizations? b. Describe the three major sections common to all financial statements.
a. For profit health care organizations the financial statements to review are 1) Statement of Financial Position: It is the sum of assets and liabilities 2) Operations statement and statement of difference in Net Assets: Statement of operation shows that how the organization performed over a given year. This is a measure of whether the money was generated or received. Changes in Net Assets section, which adds the excess of revenue over expenses for the year to the previous years Net Assetsmount, resulting in the Net Assets, end of yearamount. 3) Cash flows statement: Three types of cash flows are there: Operating cash flow, Financing Cash Flow and Investing Cash flow. b. For not for profit health care organizations the financial statements to review are 1) Unrestricted net assets, temporarily restricted net assets: Assets that are limited by contracts are shown on the financial statements. They can also be…

losed in the notes. 2) Operating statements: Not for Profit organizations may report peripheral transactions like interest income and expense 3) Performance indicator: This includes (revenues-expenses, earned income, performance earnings). This is to measure the operational performance of the NFP with the health care company. 4) NFPs report donated services at their fair value if material and criteria are met. NFPs and governmental HCOs report donated noncash assets at their fair value. 5) Expenses: Expenses can be reported by natural classification.At a minimum NFPs must disclose the program and support expenses separately

## Goodwill is the excess of:

Goodwill is the excess of:
(a)the price paid over the book value in an acquisition.
(b)book value over purchase price in an acquisition.
(c)book value over market value in an acquisition.
(d)the price paid over the market value in an acquisition.
Answer is (a),Goodwill is the excess ofthe price paid over the book value in an acquisition. At the time of Acquisition, Good will is calculated as the difference between the Price…

d by the acquirer, for the net assets of the acquired company and the book value of the net assets of the acquired company.

## We can decrease the cash conversion cycle by:

We can decrease the cash conversion cycle by:
(a)paying our bills sooner and taking any available discounts.
(b)allowing our customers to schedule their payments to us.
(c)buying inventory closer to actual production or shipment dates.
(d)holding cash receipts until we have a substantial deposit, saving our accounting clerks time.
(c)buying inventory closer to actual production or shipment dates. Cash conversion cycle = inventory period accounts receivable period – accounts payable period. Inventory period is the time that elapses between the acquisition and sale of inventory. The lower the inventory period…

he lower will be the cash conversion cycle. When inventory is bought closer to actual production or shipment dates the inventory period is reduced which decreases the cash conversion cycle.

## Low asset turnover is an indication of:

Low asset turnover is an indication of:
(a)the fact that the company does a good job of acquiring assets.
(b)potential financial risk.
(c)too few assets on the companys books.
(d)sales reaching too high a level for one year.
(a)the fact that the company does a good job of acquiring assets The asset turnover ratio is calculated as Sales/Assets. The asset turnover ratio indicates the efficiency with which the assets of the firm are being used in generating sales. The low…

sset turnover ratio indicates that the company does a good job of acquiring assets. The high amount of assets in the denominator results in a low asset turnover ratio.

## Investors have three concerns when investing short-term cash. They are:

Investors have three concerns when investing short-term cash. They are:
(a)security, liquidity, return.
(b)bonds, stocks, mutual funds.
(c)default, inflation, maturity.
(d)principal, interest, taxes.
(a)security, liquidity, return Investors have three concerns when investing short term cash which are: security, liquidity and return. The short term cash is the cash that is available for a small period of time. The investors want to invest this excess cash in securities that are safe enough so that the money is not lost. The…

investors want to invest their cash in the securities that can be easily converted into cash i.e. the investment should be liquid. In addition they are also concerned about earning some return by investing their cash.

## The cash budget should be prepared:

The cash budget should be prepared:
(a)first, so everyone knows how much cash the company will have.
(b)whenever the bookkeeper has time, since it is independent of the rest of the process.
(c)as early as possible, so the banker will have time to get the company the money it needs.
(d)last, because it depends on the information in the operating budget and the capital budget.
The cash budget should be prepared: 4. last, because it depends on the information in the operating budget and the capital budget. Cash budget is flow of cash in and out of the company. So it requires the revenue and expenses and finances at the hand of company. Liabilities and assets are…

en into consideration while preparing cash flow statement. So Cash budget (Cash flow statement) is prepared after preparing operation budget (income statement) and capital budget (balance sheet).