© 2000 John Petroff
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© 2000 John Petroff |
Assignments, Cases & Exercises
Research assignments:
R-10B.1 Choose a sample of six firms in the same industry. Tabulate the amounts for fixed assets, current year depreciation, accumulated depreciation and relate them to sales and equity. See if the absolute and relative measures compare. Determine if recording of fixed assets at cost and difference in date of purchase is a cause of distortion. For which firm are assets overstated and for which understated?
R-10B.2 Choose a sample of three firms from countries of hyperinflation. Describe how adjustments for inflation are performed, if any. Estimate the size of the remaining distortions and their cause. Comment on the meaning of financial conclusions drawn on the basis these numbers.
R-10B.3 Return to the firms used in either of the two previous questions. Analyze the amounts of equity investment, intangibles and other non-current assets for each of these firms. Discuss the cause and magnitude of any potential distortion of these amounts.
R-10C.1 Still using the same firms as before, list their turnover and return on fixed assets ratios. Draw conclusion about which firm is most efficient. Offer suggestions for verification of the conclusion with the help of additional investigation.
R-10D.1 Find a company that has just recently gone through a substantial expansion of its operating capacity with internal resources (i.e. not acquisition). Verify that the expansion consisted in a disproportionate increase in fixed assets compared to labor and other variable inputs. Construct a hypothetical break-even graph. Discuss whether vulnerability to sales shortfall has increased.
R-10E2.1 Read and summarize the treatment of capital budgeting under conditions of uncertainty presented in two leading capital budgeting textbooks. Show how the approach is applicable to a range of different projects.
R-10E3.1 Study how infinite life equivalent NPV is explained and justified in capital budgeting textbooks. Inquire from a sample of companies to what extent the method is applied in actual capital budgeting.
R-10E5.1 Study how adjusted NPV and adjusted IRR are explained in capital budgeting textbooks. Inquire from a sample of companies when or whether these statistics are calculated in actual capital budgeting decisions.
R-10E6.1 Choose a sample of six firms with significant new projects being undertaken on a regular basis. Study the number of projects undertaken each year. Read carefully their financial annual report to determine if each has a target maximum each year and how that maximum is set.
R-10F.1 Read articles and advanced corporate finance textbooks that promote the use of free cash flow. Report on the arguments presented in its favor and its applications (i.e. in decision making).
Cases for Chapter 10 Fixed Assets
Study Warwick Valley Telephone Company expansion strategy in
Case - WWVY. Based on the data
available project cash flows for the internet and new access lines
activities. Use an appropriate cost of capital to determine which
of the projects is desirable. Discuss why the company should or
should not attempt to expand more quickly. Does it have the resources
to do so? What prevents it?
In 1999, LaCrosse Footwear, Inc. (described in Case
- BOOT), approaches your bank with a request for a loan of
$ 5 millions to finance an increase in working capital, and $20
millions to finance the purchase of producer of lady's dress shoes.
Do you approve such the loans? If no, why? If yes, what should
be the rate and what should be the loan structure? Present your
argumentation in the form of a report to a credit committee.
You are asked to analyze the performance of Big Rock Brewery Ltd. in the late 1990's presented in Case - BR, with a special focus of operating leverage by the credit department where you work. Big Rock Brewery Ltd. has asked your bank for a $12 millions term loan to finance the construction of a new vat to produce the light beer. Do you approve the loan? If so, on what terms?
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