Assignment 1: LASA 2: Airvalue Airways Strategic Planning Airvalue Airways is a regional carrier whose strategy is to expand gradually as they can identify routes that offer an attractive return on the investment necessary to support successful coverage of the route. As part of this expansion, the company is planning to buy a new plane in the upcoming fiscal year. The purchasing department has narrowed the choice down to two models. One is the A220 which is manufactured in Europe. The other plane is the G435 which is built in the United States. The two aircraft have similar profiles. However, the locally-built G435 is significantly more expensive to purchase. The A220 has an expected life of 5 years, will cost $90 million and its use will produce net operating cash inflows of $30 million per year. The G435 has a life of 10 years, will cost $128 million, and its use will produce net operating cash inflows of $25 million per year. Airvalue plans to serve the route for 10 years. When they need to purchase a new A220 at the end of five years, the cost will be $115 million net after allowing for salvage value of the used plane. Net operating cash inflows will remain at $30 million throughout the second five years. At the end of 10 years, salvage value of the G435 and of the second A220 are expected to be about the same at approximately $500,000 each. As the company’s CFO you are to provide the financial analysis that will be considered by the strategic planning executive committee during evaluation of this expansion alternative. Your plan is to use a capital budgeting approach to the analysis in order to best assure that the decision will result in maximization of wealth for the company’s stockholders. You also want to convert the entire committee to the concept that capital budgeting should be used as the main tool for the financial analysis of capital expenditure alternatives. The company uses the historical difference in returns between the S&P 500 and the Treasury bond rates of 7% as their estimated market risk premium. The current yield to maturity on a 10-year Treasury bond is 6.2%. Airvalue Airways’ common-stock equity beta is estimated as 1.40. Airvalue’s capital structure is 58% common stock, 32% preferred stock and 10% long-term debt. An 8.8% after tax cost of debt has been determined and the cost of preferred stock is 12%. Your task is to: Describe for other members of the strategic planning committee the role that capital budgeting should play in corporate strategic management. Explain why the NPV and IRR capital budgeting tools are superior to the accounting rate of return and simple payback techniques for determining the attractiveness of capital investment opportunities. Use the Capital Asset Pricing Model (CAPM) to identify the cost of common stock. Calculate the weighted average cost of capital (WACC) for the firm’s existing capital structure. Calculate the net present value (NPV) for each plane model using the company’s WACC as the hurdle rate. Recommend which plane should be purchased and justify your recommendation. Discuss the need to manage implementation of the project so that the higher returns can be realized. Include the strategic management keys to protecting the project from competitive forces that would erode the earning power of the project and jeopardize realization of the projected rate of return on the investment. To complete this assignment, you must submit a 6-8 page paper that addresses the seven elements of the task as listed above and exhibits your calculations of the cost of common stock, the weighted average cost of capital, and the NPV for each plane along with an explanation of the calculations. The paper must be submitted as a Word document and it must follow APA style guidelines.
In: Finance
Kindly summarize this Literature Review Section 3.2 Efficient Techniques and Performance Measurement Recently, developed techniques compare the efficiency of similar service organizations by explicitly considering their use of multiple inputs to produce multiple outputs. These new efficiency techniques are often divided into two categories. One broad category consists of the linear programming procedures used in this paper (DEA). The second category is a set of regression-based techniques that derive inefficiency estimates from two-part error terms, and has been called the econometric or stochastic frontier approach. Both techniques use sample firms to construct an efficient production frontier. The frontier is efficient in the sense that a firm operating on the frontier could not increase output without increasing its input utilization, or it could not reduce its input utilization without decreasing output. Deviations from the frontier represent inefficiencies, and are termed X-inefficiencies in the finance and economics literature. Efficient frontier techniques avoid the need to develop a standard cost for each service provided and are more comprehensive and reliable that using a set of operating ratios and profit measures. These techniques permit managers and researchers to service organizations and identify units that are relatively inefficient, determine the magnitude of the inefficiency, suggest alternative strategies to reduce the inefficiencies, all in a composite measure. Moreover, these techniques provide an estimate of the overall efficiency level of the market that is under consideration. We know of only two studies that use efficient frontier techniques in the hotel industry. The first is that of Morey and Ditman (1995) who measure the relative performance of hotel general managers using DEA. The authors gathered input-output data for 54 hotels from a geographically dispersed area. They found that managers were operating 89 percent efficiency. In other words, given their output, managers on average could reduce their inputs by 11 percent. The study reported that the least efficient hotel was 64 percent efficient. These results are relatively high compared to those found in other industry studies that utilize DEA. Large efficiency scores are indicators of High performance and competition (Leibenstein 1966). Thus in an economic context, the market for lodging services appears to be operating efficiently. Anderson et al. (1998) argue for the benefits of using a stochastic frontier methodology in addition to DEA in order to accurately assess performance. Using a classical stochastic frontier model, they also find the hotel industry to be performing relatively efficiently, with efficiency measures above 90 percent. While both of these studies are informative, neither provides any information on the source of the inefficiencies. The source of the inefficiencies, whether technical or allocative in nature, is important information that managers need in order to take proactive positions to increase performance. We re-examine hotel efficiency using a method of DEA that provides significantly more detailed results and we further analyze the inefficiency sources. The following section describes our procedure.
SECTION 4 EFFICIENCY DETERMINATION
Section 4.1 The DEA Technique
Within the DEA framework, performance of an individual firm is evaluated with respect to an efficient frontier, which is constructed by taking linear combinations of existing firms. While there are several DEA approaches, wee use an unput-base approach, assuming that inputs are contracted proportionally with exogenous outputs. The procedure relies on sophisticated mathematics; however, the following simplified graphical example deomstates how th eefficiency measures are computed.
Figure 1 displays tha overall (OE) and (TE), and allocativ (AE) efficiency measures. In this example, we assume two inputs (X1 and X2), one output (Y), and constant returns to scale. Additionally, we assume that technology is fixed and that input prices are represented as PP. Firm A is X-efficient since it produces along output isoquant Y by utilizing the least inputs. Suppose thee is a firm operating at point C and producing an output equivalent of that produced along Y. C is uses more inputs than A to produce the output Y and is classified as inefficient with an overall efficiency score of 0D/0C )or equivalenly and inefficiency score of DC/0C).
Overall inefficiency can be decomposed into its techhnical and allocattive components. Without being able to alter input allocations, the bestt that firmC could have done was to operate at point B. The "extra" input usage that was incurred by firm C as a percentage of total input usage is the technical inefficiency measure and can be dpressed as BC/0C The technical efficiency of firm C is ecpresses as 0B/0C. Allocative inefficiency representts managerial failurd to use the optimal input mix. Here, allocative inefficiencies for firm C can be represented by DB/0B, and allocatvie effficiency is expressed as 0D/0B.
Technical efficiency can be further decomposed into technical (PTE) and scale (SE) efficiency measures. Pure technical inefficiency simply refers to deviations from the efficient frontier that result rom failure to utilize the employed resoures efficiently. Hence, this measure assumes that firms are operating at constant return to scale. Scale ineficiencies, on the other hand are losses due tofailure to operate at constant returns to scale. Figure 2 illustrates these two efficiency measures. In this figure, the Y-axis represents output and the X-axis represents input conbinations that contain an equal amount of both input 1 an dinput 2. The graph shows three observations denoted A, B, and C, respectively. Two frontiers are illustrated, a fronier assuming constant returns to scale instead of decreasing or increasing returns toscale.
After completing this analysis, we examine the SE measure to determine if it equals one. If the SE measure equals one, firms are operating at constant returns to scale. If SE does not equal one, we then determine whether the firms are oeprating at increasing or decreasing returns to scale (see Appendix A for a mathematical treatment of DEA).
In: Economics
Statement of Cash Flows—Indirect Method
The comparative balance sheet of Tru-Built Construction Inc. for December 31, 2016 and 2015, is as follows:
| Dec. 31, 2016 | Dec. 31, 2015 | ||||
| Assets | |||||
| Cash | $208 | $67 | |||
| Accounts receivable (net) | 119 | 84 | |||
| Inventories | 74 | 46 | |||
| Land | 170 | 191 | |||
| Equipment | 96 | 74 | |||
| Accumulated depreciation-equipment | (26) | (13) | |||
| Total Assets | $641 | $449 | |||
| Liabilities and Stockholders' Equity | |||||
| Accounts payable (merchandise creditors) | $81 | $67 | |||
| Dividends payable | 13 | - | |||
| Common stock, $10 par | 42 | 21 | |||
| Paid-in capital: Excess of issue price over par—common stock | 101 | 53 | |||
| Retained earnings | 404 | 308 | |||
| Total liabilities and stockholders' equity | $641 | $449 | |||
The following additional information is taken from the records:
Land was sold for $53.
Equipment was acquired for cash.
There were no disposals of equipment during the year.
The common stock was issued for cash.
There was a $138 credit to Retained Earnings for net income.
There was a $42 debit to Retained Earnings for cash dividends declared.
a. Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.
| Tru-Built Construction Inc. | ||
| Statement of Cash Flows | ||
| For the Year Ended December 31, 2016 | ||
| Cash flows from operating activities: | ||
| Net income | $ | |
| Adjustments to reconcile net income to net cash flow from operating activities: | ||
| Depreciation | ||
| Gain on sale of land | ||
| Changes in current operating assets and liabilities: | ||
| Increase in accounts receivable | ||
| Increase in inventories | ||
| Increase in accounts payable | ||
| Net cash flow from operating activities | $ | |
| Cash flows from investing activities: | ||
| Cash received from sale of land | $ | |
| Less cash paid for purchase of equipment | ||
| Net cash flow provided by investing activities | ||
| Cash flows from financing activities: | ||
| Cash received from sale of common stock | $ | |
| Less cash paid for dividends | ||
| Net cash flow provided by financing activities | ||
| Increase in cash | $ | |
| Cash at the beginning of the year | ||
| Cash at the end of the year | ||
In: Accounting
Almost all U.S. light-rail systems use electric cars that run on
tracks built at street level. The Federal Transit Administration
claims light-rail is one of the safest modes of travel, with an
accident rate of .99 accidents per million passenger miles as
compared to 2.29 for buses. The following data show the miles of
track and the weekday ridership in thousands of passengers for six
light-rail systems.
| City | Miles of Track | Ridership (1000s) |
| Cleveland | 16 | 16 |
| Denver | 18 | 36 |
| Portland | 39 | 82 |
| Sacramento | 22 | 32 |
| San Diego | 48 | 76 |
| San Jose | 32 | 31 |
| St. Louis | 35 | 43 |
| SSE | |
| SST | |
| SSR | |
| MSE |
In: Statistics and Probability
Almost all U.S. light-rail systems use electric cars that run on
tracks built at street level. The Federal Transit Administration
claims light-rail is one of the safest modes of travel, with an
accident rate of .99 accidents per million passenger miles as
compared to 2.29 for buses. The following data show the miles of
track and the weekday ridership in thousands of passengers for six
light-rail systems.
| City | Miles of Track | Ridership (1000s) |
| Cleveland | 14 | 17 |
| Denver | 16 | 37 |
| Portland | 37 | 83 |
| Sacramento | 20 | 33 |
| San Diego | 46 | 77 |
| San Jose | 30 | 32 |
| St. Louis | 33 | 44 |
| SSE | = |
| SST | = |
| SSR | = |
| MSE | = |
In: Statistics and Probability
Almost all U.S. light-rail systems use electric cars that run on
tracks built at street level. The Federal Transit Administration
claims light-rail is one of the safest modes of travel, with an
accident rate of .99 accidents per million passenger miles as
compared to 2.29 for buses. The following data show the miles of
track and the weekday ridership in thousands of passengers for six
light-rail systems.
| City | Miles of Track | Ridership (1000s) |
| Cleveland | 15 | 17 |
| Denver | 17 | 37 |
| Portland | 38 | 83 |
| Sacramento | 21 | 33 |
| San Diego | 47 | 77 |
| San Jose | 31 | 32 |
| St. Louis | 34 | 44 |
| SSE | |
| SST | |
| SSR | |
| MSE |
In: Statistics and Probability
In: Nursing
Almost all U.S. light-rail systems use electric cars that run on
tracks built at street level. The Federal Transit Administration
claims light-rail is one of the safest modes of travel, with an
accident rate of .99 accidents per million passenger miles as
compared to 2.29 for buses. The following data show the miles of
track and the weekday ridership in thousands of passengers for six
light-rail systems.
| City | Miles of Track | Ridership (1000s) |
| Cleveland | 13 | 16 |
| Denver | 15 | 36 |
| Portland | 36 | 82 |
| Sacramento | 19 | 32 |
| San Diego | 45 | 76 |
| San Jose | 29 | 31 |
| St. Louis | 32 | 43 |
| SSE | |
| SST | |
| SSR | |
| MSE |
In: Statistics and Probability
QUESTION 15:
Built-Tight is preparing its master budget for the quarter ended September 30, 2017. Budgeted sales and cash payments for product costs for the quarter follow:
| July | August | September | |||||||
| Budgeted sales | $ | 60,000 | $ | 76,000 | $ | 52,000 | |||
| Budgeted cash payments for | |||||||||
| Direct materials | 16,960 | 14,240 | 14,560 | ||||||
| Direct labor | 4,840 | 4,160 | 4,240 | ||||||
| Factory overhead | 21,000 | 17,600 | 18,000 | ||||||
Sales are 30% cash and 70% on credit. All credit sales are collected in the month following the sale. The June 30 balance sheet includes balances of $15,000 in cash; $45,800 in accounts receivable; $5,300 in accounts payable; and a $5,800 balance in loans payable. A minimum cash balance of $15,000 is required. Loans are obtained at the end of any month when a cash shortage occurs. Interest is 1% per month based on the beginning-of-the-month loan balance and is paid at each month-end. If an excess balance of cash exists, loans are repaid at the end of the month. Operating expenses are paid in the month incurred and consist of sales commissions (10% of sales), office salaries ($4,800 per month), and rent ($7,300 per month).
PART 1: Prepare a cash receipts budget for July, August, and September. (Negative balances and Loan repayment amounts (if any) should be indicated with minus sign. Enter your final answers in whole dollars.)
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PART 2: ) Prepare a cash budget for each of the months of July, August, and September.
In: Accounting
. Wal-Mart’s Foreign Expansion Wal-Mart, the world’s largest retailer, has built its success on a strategy of everyday low prices, and highly efficient operations, logistics, and information systems that keeps inventory to a minimum and ensures against both overstocking and understocking. The company employs some 2.1 million people, operates 4,200 stores in the United States and 3,600 in the rest of the world, and generates sales of almost $400 billion (as of fiscal 2008). Approximately $91 billion of these sales were generated in 15 nations outside of the United States. Facing a slowdown in growth in the United States, Wal-Mart began its international expansion in the early 1990s when it entered Mexico, teaming up in a joint venture with Cifra, Mexico’s largest retailer, to open a series of supercenters that sell both groceries and general merchandise. Initially the retailer hit some headwinds in Mexico. It quickly discovered that shopping habits were different. Most people preferred to buy fresh produce at local stores, particularly items like meat, tortillas and pan dulce which didn’t keep well overnight (many Mexicans lacked large refrigerators). Many consumers also lacked cars, and did not buy in large volumes as consumers in the United States did. WalMart adjusted its strategy to meet the local conditions, hiring local managers who understood Mexican culture, letting those managers control merchandising strategy, building smaller stores that people could walk to, and offering more fresh produce. At the same time, the company believed that it could gradually change the shopping culture in Mexico, educating consumers by showing them the benefits of its American merchandising culture. After all, Wal-Mart’s managers reasoned, people once shopped at small stores in the United States, but starting in the 1950s they increasingly gravitated towards large stores like WalMart. As it built up its distribution systems in Mexico, Wal-Mart was able to lower its own costs, and it passed these on to Mexican consumers in the form of lower prices. The customization, persistence, and low prices paid off. Mexicans started to change their shopping habits. Today Wal-Mart is Mexico’s largest retailer and the country is widely considered to be the company’s most successful foreign venture. Next Wal-Mart expanded into a number of developed nations, including Britain, Germany and South Korea. There its experiences have been less successful. In all three countries it found itself going head to head against well-established local rivals who had nicely matched their offerings to local shopping habits and consumer preferences. Moreover, consumers in all three countries seemed to have a preference for higher quality merchandise and were not as attracted to Wal-Mart’s discount strategy as consumers in the United States and Mexico. After years of losses, Wal-Mart pulled out of Germany and South Korea in 2006. At the same time, it continued to look for retailing opportunities elsewhere, particularly in developing nations where it lacked strong local competitors, where it could gradually alter the shopping culture to its advantage, and where its low price strategy was appealing. Recently, the centerpiece of its international expansion efforts has been China. Wal-Mart opened its first store in China in 1996, but initially expanded very slowly, and by 2006 had only 66 stores. What Wal-Mart discovered, however, was that the Chinese were bargain hunters, and open to the low price strategy and wide selection offered at Wal-Mart stores. Indeed, in terms of their shopping habits, the emerging Chinese middle class seemed more like Americans than Europeans. But to succeed in China, Wal-Mart also found it had to adapt its merchandising and operations strategy to mesh with Chinese culture. One of the things that Wal-Mart has learned is that Chinese consumers insist that food must be freshly harvested, or even killed in front of them. Wal-Mart initially offended Chinese consumers by trying to sell them dead fish, as well as meat packed in Styrofoam and cellophane. Shoppers turned their noses up at what they saw as old merchandise. So Wal-Mart began to display the meat uncovered, installed fish tanks into which shoppers could plunge fishing nets to pull out their evening meal, and began selling live turtles for turtle soup. Sales soared. Wal-Mart has also learned that in China, success requires it to embrace unions. Whereas in the United States Wal-Mart has vigorously resisted unionization, it came to the realization that in China unions don’t bargain for labor contracts. Instead, they are an arm of the state, providing funding for the Communist Party and (in the government’s view) securing social order. In mid- 2006 Wal-Mart broke with its long standing antagonism to unions and agreed to allow unions in its Chinese stores. Many believe this set the stage for Wal-Mart’s most recent move, the purchase in December 2006 of a 35 percent stake in the Trust-Mart chain, which has 101 hypermarkets in 34 cities across China. Now Wal-Mart has proclaimed that China lies at the center of its growth strategy. By early 2009 Wal-Mart had some 243 stores in the country, and despite the global economic slowdown, the company insists that it will continue to open new stores in China at a “double digit rate.”
Case Discussion Questions
1. Do you think Wal-Mart could translate its merchandising strategy wholesale to another country and succeed? If not, why not?
2. Why do you think Wal-Mart was successful in Mexico?
3. Why do you think Wal-Mart failed in South Korea and Germany? What are the differences between these countries and Mexico?
4. What must Wal-Mart do to succeed in China? Is it on track?
In: Economics