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As a stockholder, what would you look for when maximizing wealth? In your response, be sure to describe how cash flow and risk affect share price and the three key reasons why profit maximization is inconsistent with wealth maximization.
You have been assigned the task of putting together a statement for the ACME
Company that shows its expected inflows and outflows of cash over the months of July 2013 through December 2013.
You have been given the following data for ACME Company:
(1) Expected gross sales for May through December, respectively, are $300,000, $290,000, $425,000, $500,000, $600,000, $625,000, $650,000, and $700,000.
(2) 12% of the sales in any given month are collected during that month. However, the firm has a credit policy of 3/10 net 30, so factor a 3% discount into the current month’s sales collection.
(3) 75% of the sales in any given month are collected during the following month after the sale.
(4) 13% of the sales in any given month are collected during the second month following the sale.
(5) The expected purchases of raw materials in any given month are based on 60% of the expected sales during the following month.
(6) The firm pays 100% of its current month’s raw materials purchases in the following month.
(7) Wages and salaries are paid on a monthly basis and are based on 6% of the current month’s expected sales.
(8) Monthly lease payments are 2% of the current month’s expected sales.
(9) The monthly advertising expense amounts to 3% of sales.
(10) R&D expenditures are expected to be allocated to August, September, and October at the rate of 12% of sales in those months.
(11) During December a prepayment of insurance for the following year will be made in the amount of $24,000.
(12) During the months of July through December, the firm expects to have miscellaneous expenditures of $15,000, $20,000, $25,000, $30,000, $35,000, and $40,000, respectively.
(13) Taxes will be paid in September in the amount of $40,000 and in December in the amount of $45,000.
(14) The beginning cash balance in July is $15,000.
(15) The target cash balance is $15,000.
Liquidity ratios measure how easily the firm can lay its hands on cash. Name and describe at least two of these ratios
Explain each of the three other approaches to common stock valuation:
Which of these is considered the best?
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