2014

3a. Explain why operating leverage decreases as a company increases sales

and shifts away from the break-even point.

At progressively higher levels of operations than 1the break-even point ,the percentage
change in operating income as a result of a percentage change in unit volume diminishes. The
reason is primarily mathematical - as we move to increasingly higher levels of operating
income, the percentage change from the higher base is likely to be less.

When you are considering two different financing plans, does being at the level where
earnings per share are equal between the two plans always mean you are indifferent as to
which plan is selected?

The point of equality only measures indifference based on earnings per share. Since our
ultimate goal is market value maximization, we must also be concerned with how these
earnings are valued. Two plans that have the same earnings per share may call for different
price-earnings ratios, particularly when there is a differential risk component involved
because of debt.

3bWhat does risk taking have to do with !he use of operating and financial leverage

Both operating and financial leverage imply that the firm will employ a

heavy component of fixed cost resources. This is inherently risky because

the obligation to make payments remains regardless of the condition of the

company or the economy.

6b) Why is trend analysis helpful in analyzing ratios.

-Trend analysis shows changes in a particular ratio over time and allows one to she the
changes that occur in profitability, asset utilization etc. over time.

This is even better when the trend analysis includes an analysis of trends within the –
industry.

-As the industry may be subject to cyclical fluctuations. Competitive pressures in the
industry might change as might the general business environment.

2A: Explain the importance of cash flow statement

- Cash can come from both internal and external sources.

- Statement of Cash Flow helps companies and investors separate and observe the
differences and extent of the cash inflows and outflows.

- Internal, as opposed to external cash sources, provide a company with successful

attributes and assurances that include:

1) preventing and monitoring company debt

2) preventing unnecessary expenditures from interest, late payment penalties and debt
costs

3) ensuring timely investment and cash available for investment opportunities

4) ensuring timely payment of expenses and debts

5) and most importantly – ensuring a level of regular business income without relying
on outside investment or cash borrowing.
2017

5b Explain how rapidly expanding sales can drain the cash resources of a firm.

To support the rapidly growing sales, there is more and more need for investment in current
assets and most of this increase in current assets will be permanent in nature. There will be
need for more raw material purchases and stock, more work in progress inventory and more
finished goods inventory. Rapid growing sales will also lead to substantial increase in
receivables. Hence, rapidly expanding sales needing a buildup in assets to support the growth
will drain the cash resources of the firm.

2016

What is Internal Rate of Return (IRR)?

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash
flows (both positive and negative) from a project or investment equal zero.

Internal rate of return is used to evaluate the attractiveness of a project or investment. If the
IRR of a new project exceeds a company’s required rate of return, that project is desirable. If
IRR falls below the required rate of return, the project should be rejected.

Typically, the higher the IRR, the higher the rate of cash inflow a company can expect from a
project or investment.

IRR allows managers to rank projects by their overall rates of return rather than their net
present values, and the investment with the highest IRR is usually preferred. This
easy comparison makes IRR attractive, but there are limits to its usefulness.

In addition, IRR does not measure the absolute size of the investment or the return. This
means that IRR can favor investments with high rates of return even if the dollar amount of
the return is very small.