Business Finance

QUESTION 1
(i) Eli Lilly is very excited because sales for his nursery and plant company are
expected to double from $600,000 to $1,200,000 next year. Eli notes that net assets
(Assets — Liabilities) will remain at 50 percent of sales. His firm will enjoy an 8
percent return on total sales. He will start the year with $120,000 in the bank and is
bragging about the Jaguar and luxury townhouse he will buy. Does his optimistic
outlook for his cash position appear to be correct? Compute his likely cash balance
or deficit for the end of the year. Start with beginning cash and subtract the asset
buildup (equal to 50 percent of the sales increase) and add in profit.
(ii) In problem 1 if there had been no increase in sales and all other facts were the same,
what would Eli’s ending cash balance be? What lesson do the examples in problems
1 and 2 illustrate?
QUESTION 2
Argue why are Treasury bills a favorite place for financial managers to invest excess
cash, as compared to other options? Your answer must be supported with examples and
academic citations.
QUESTION 3
Discuss the relationship between bond prices and interest rates. What impact do changing
interest rates have on the price of long-term bonds versus short-term bonds? Your answer
must be supported with examples and academic citations.
QUESTION 4
Why are institutional investors important in today's business world? Your answer must be
supported with examples and academic citations.

In the given case, Eli Lilly is showing optimistic outlook for his cash position, since he is expecting it to be doubled in this year from $600,000 to $1,200,000. It can be seen that the net assets will remain at 50% of total sales and his firm is going to enjoy 8% return on total sales. Thus, being his cash balance started with $ 120,000 in the current year, further cash balance or deficit for the year end is computed below.

Actual sale of previous year = $ 600,000

Actual net asset remains 50% of the actual sale = $ 600,000 * 50%

    = $ 300,000

Expected sale of next financial year = $ 1,200,000

Expected net asset will be 50% of the expected sale = $ 1,200,000 * 50%

= $ 600,000

Assumed asset is 50% of sales increase. In this case, increase in sales is $ 600,000, hence total asset is 50% of increased sale = $ 300,000

Since Eli Lilly has started with cash of $ 120,000 therefore rest asset is assumed to be fixed asset amounted to $ 180,000 ($ 300,000 - $ 120,000).

Thus, it can be said that optimistic outlook of Eli for his cash balance is positive, because his expected sales is double of previous year’s sales.

Problem 2

In this case, if there would be no increment in sales, the ending cash balance is computed below.

Actual sale of previous year = $ 600,000