Eng 111 Homework 2

1. Golden parachutes are good in that managers know they have a sort of
safety net, which will encourage them to take riskier investments for
the company, thus earning the company higher return if successful.
However, the bad thing about golden parachutes could result in
managers making decisions that could put the company in jeopardy in
order to achieve his/her self-interest knowing they get a golden
parachute if fired.

2. a) Capital Budgeting, Capital Structure, Net Working Capital

(the engineer will make all future decisions for the company but he/she
also has a salary to be paid)
b) Capital Budgeting is usually it, but if the amount in the investment
is large, then it is also Capital Structure
c) Capital Structure
d) Capital Budgeting and Capital Structure
3. Risk involved and returns earned are normally proportional in an
investment. Although the grocery industry provides less profit margin,
but its risk exposure is also much lower than the pharmaceutical
industry. Lots people are risk averse, so grocery industry is considered
a safe industry to invest.

4. (I am assuming that the operating cash flow already includes the depreciation
and additional net working capital since it isnt the net operation cash flow)
Cash flows from operating
activities:
Operating Cash flow
Cash flows from investing
activities:
Purchase of fixed
assets
Net Cash provided by Investing
activities

218

(180)
(180)

Cash flows from financing

activities:
Interest payments

(35)

Net re-payment of long-term

debt
Net Cash provided by financing
activities
Total Cash
Increase

(69)
(104)
$
-66

5. Cash Flow from Assets = OCF Capital Spending Additions to NWC

OCF = EBIT + Depreciation Tax

= 1930+1370-455 = 2,845
Capital Spending = Ending NFA Beginning NFA + Depreciation
= 10670-10960+1370 = 1,080
Change in NWC = Ending NWC Beginning NWC
= (7310-2570) (6225-2820) = 1,335
Cash Flow from Assets = 2,845 -1080-1335 = $430