Q1.What is net working capital? Why a low value for this number might be considered Undesirable?
Q2. If you were given a choice of investing in an account that paid quarterly interest and one that paid monthly interest, which one should you choose if they both off are the same stated interest rate and why?
Q3. DuPont Equation: Lemmon Enterprises has a total asset turnover of 4.2 and a net profit margin of 9.5%. If its equity multiplier is 1.70, what is the ROE for Lemmon Enterprises? LO 4
Q4. Brittany Willis is looking to invest for retirement, which she hopes will be in 20 years. She is looking to invest $22,500 today in U.S. Treasury bonds that will earn interest at 6.25 percent annually. How much will she have at the end of 20 years? (Round to the nearest dollar.)
Q5. What is the difference between a growing annuity and a growing perpetuity?
Answers:
1. Net working capital:
Net working capital is the difference between the total current assets and current liabilities of a company. Net working capital is an analysis which is done to evaluate the short term liquidity position of the company. this is also used to analyze and obtain the company’s management’s ability to use the assets of the company in a better manner.
Undesirable value:
The low working capital depict that company do not have enough amount to carry the activities and operations of the company and the current obligation of the company could also not be paid (Deegan, 2009). Thus the low values of the working capital are considered as undesirable value.
2. Investments:
If a choice is given to chose among the monthly compounded security or quarterly compounded security with the same % of the interest, than the best choice is choosing the security which would be monthly compounded because in that the amount of interest would be high than the quarterly compounded interest due to the fact that monthly return would fall bit earlier than quarterly payments. Such as if the security amount is of 100 and the interest rate is 12% annually than the monthly compounded interest of the company would be bit higher due to compounding interest (Needles, Powers and Crosson, 2013).
3. Du Pont equation:
Given,
Asset turnover = 4.2
Net profit margin = 9.5%
Equity Multiplier = 1.70
Calculation of ROE =
Asset turnover * Net profit margin * Equity multiplier
= 4.2 * 9.5% * 1.70
= 0.6783 (Bierman, 2010)
4. Treasury bills calculations:
Given,
Term = 20 years
Current investment = $ 22,500
Interest rate = 6.25%
Treasury bill =
Original investment * (1+rate) ^ n
= 22500 * (1+ 0.0625) ^20
= 75641.70205
5. Differences between growing annuity and growing perpetuity:
Growing perpetuity and growing annuity is only different from each other on the basis of the ending period. In terms of growing annuity, payments last for a particular period of time whereas in terms of growing perpetuity, they continue for infinity period. For calculating the values of both, different formulas and equations are used.
Formula of perpetuity = First payment / interest rate per period
Growing perpetuity = first payment / (interest rate per period - constant growth rate)
Growing annuity = first payment ( 1+ growth rate) ^n-1 (Van der Stede, 2001).
References:
Bierman, H., 2010. An introduction to accounting and managerial finance: a merger of equals. World Scientific.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Needles, B., Powers, M. and Crosson, S., 2013. Financial and managerial accounting. Nelson Education.
Van der Stede, W.A., 2001. Measuring ‘tight budgetary control’. Management Accounting Research, 121, pp.119-137.
