Chapter 4: Q7B (page 475)
Cash flow from operating activities includes:
a. Inventory increases resulting from acquisitions.
b. Inventory changes due to changing exchange rates.
c. Interest paid to bondholders.
d. Dividends paid to stockholders.
Option c.
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Universal Auto is a large multinational corporation headquartered in the United States.
For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services.
The motor vehicle business is by far the larger of Universal’s two segments. It consists mainly of domestic United States passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries. This segment of Universal has had weak operating results for the past several years, including a large loss in 2012. Although the company does not reveal the operating results of its domestic passenger car segments, that part of Universal’s business is generally believed to be primarily responsible for the weak performance of its motor vehicle segment.
Idata, the information processing services segment of Universal, was started by Universal about 15 years ago. This business has shown strong, steady growth that has been entirely internal: No acquisitions have been made.
An excerpt from a research report on Universal prepared by Paul Adams, a CFA candidate, states: “Based on our assumption that Universal will be able to increase prices significantly on U.S. passenger cars in 2013, we project a multibillion-dollar profit improvement . . .”
a. Discuss the concept of an industrial life cycle by describing each of its four phases.
b. Identify where each of Universal’s two primary businesses—passenger cars and information processing—is in such a cycle.
c. Discuss how product pricing should differ between Universal’s two businesses, based on the location of each in the industrial life cycle.
The DuPont formula defines the net return on shareholders’ equity as a function of thefollowing components:
• Operating margin
• Asset turnover
• Interest burden
• Financial leverage
• Income tax rate
Using only the data in Table 14.20:
a. Calculate each of the five components listed above for 2010 and 2013, andcalculate the return on equity (ROE) for 2010 and 2013, using all of the fivecomponents.
b. Briefly discuss the impact of the changes in asset turnover and financial leverage onthe change in ROE from 2010 to 2013.
The following questions have appeared on CFA examinations.
a. Which one of the following statements best expresses the central idea of countercyclical fiscal policy?
(1) Planned government deficits are appropriate during economic booms, and planned surpluses are appropriate during economic recessions.
(2) The balanced-budget approach is the proper criterion for determining annual budget policy.
(3) Actual deficits should equal actual surpluses during a period of deflation.
(4) Government deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
b. Which one of the following propositions would a strong proponent of supply-side economics be most likely to stress?
(1) Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates because they expand government revenues.
(2) Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output because they encourage investors to undertake low-productivity projects with substantial tax-shelter benefits.
(3) Income redistribution payments will exert little impact on real aggregate supply because they do not consume resources directly.
(4) A tax reduction will increase the disposable income of households. Thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.
According to supply-side economists, what will be the long-run impact on prices of a reduction in income tax rates?
FinanceCorp has fixed costs of \(7 million and profits of \)4 million. What is its degree of operating leverage (DOL)?
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