Discussion Finance

Case # 1 Question

Part a

East Coast Yachts Performance

Current ratio = Current Assets / Current Liabilities

55,280,000 / 49,456,000

= 1.12

Quick Ratio = (Current Assets – Inventories) / Current Liabilities

= 32,624,000 / 49,456,000

= 0.66

Net Profit Margin = earning after tax / sales

= 46,382,400 / 617,760,000

= 7.5%

Comparing the performance of Yachts Company and that of the industry, it is apparent that Yachts Company operates within the performance range of industry. Comparing the current and quick ratios of the organization and that of the industry, it is evident that the company has the capacity to pay its liabilities in the short run just like the industry. Also, the company has a high profit margin just like the industry.

Part b

The current ratio exceeds one, which is a positive indication to the company since it implies that the company is capable of paying its current liabilities. Also, the profit margin is high, which is a positive indication to the company since it indicates that the entity is capable of continuing as a going concern (Banks, 2010). However, the quick ratio is below one, which is a negative indication since the company is not capable of transforming its current assets into cash more easily.

Part c

Inventory Ratio = inventory / current liabilities

= 22,656,000 / 49,456,000

= 0.46

Part d

East Coast Yachts inventory ratio is lower than that of the industry.

Case # 2 Question

The Treasury bonds are usually issued by the United States Treasury. These bonds are deemed safest of all other investments. Also, they usually pay a low rate of interest compared to corporate bonds. United States Treasury bonds are usually not rated by any agency concerned with credit rating. This is because the United States Treasury bonds are usually backed by the entire faith and credit of the US government (Banks, 2010). Because of the government credit backing of the Treasury bonds, there is no interference by the credit rating agencies. Therefore, the US Treasury bonds are not rated by any credit rating agency. On the other hand, junk bonds usually have a high risk and a high likelihood of credit default. This is because junk bonds have a low rating in general. There is no need of paying a credit rating agency to rate junk bonds since they already have a low rating. Paying for junk bond rating will just be like wasting resources to the rating agencies since the bonds will always be lowly rated. Therefore, junk bonds are usually not rated since they already have a low rating; rating the bonds will not change anything.

Case # 3

Question # 1

A make-whole call provision entails a call provision, which allows the borrower in paying off the remaining debt early. In this case, the borrower makes a lump sum amount, which is usually dictated by the net present value (NPV) formula. Through the make-whole call provision, investors are made whole or compensated.

Question # 2

Part a

After considering all relevant factors, I would recommend a zero coupon. This is because a zero coupon will make the company not pay interest payments; instead investors will receive the face worth of the bond at maturity time and coupons over the bond’s life. Also, zero coupon will aid in the payment of taxes since it will save on tax (Banks, 2010).

Part b

I would recommend a make-whole call feature since it allows the issuer to call security prior to the maturity date already stated. The call may be at a greater of par or at par plus make whole premium.

Case # 4

Question 5

Every organization needs to assess all factors involved while making an international sale option. Of vitality is the cost involved in making international sales and the amount of profits realized. In this case, the company should not continue with its international sales intentions in Europe. One of the factors that should make the company stop the international sales is the high spending on production cost; it is estimated that production cost will be approximately 70% of the sales revenue leaving the company with only 30% of the sales revenue. The 30% will be used for paying other expenses such as sales commission, which implies that the returns from the international sales will be remarkably meager. Also, financial risks to be anticipated are still at large. This implies that the company may experience financial risks that may be beyond its position to handle.

References

Banks, E. (2010). Finance: Basics. London: Taylor & Francis.