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Businese Finance

Please answer 3 questions. All questions carry equal marks. Please note the layout of
your answers should be in paragraph style.

QUESTION 1
(i) Eli Lilly is very excited because sales for his nursery and plant company are
expected to double from $600,000 to $1,200,000 next year. Eli notes that net assets
(Assets — Liabilities) will remain at 50 percent of sales. His firm will enjoy an 8
percent return on total sales. He will start the year with $120,000 in the bank and is
bragging about the Jaguar and luxury townhouse he will buy. Does his optimistic
outlook for his cash position appear to be correct? Compute his likely cash balance
or deficit for the end of the year. Start with beginning cash and subtract the asset
buildup (equal to 50 percent of the sales increase) and add in profit.
(ii) In problem 1 if there had been no increase in sales and all other facts were the same,
what would Eli’s ending cash balance be? What lesson do the examples in problems
1 and 2 illustrate?

QUESTION 2
Argue why the statement of cash flows provides useful information that goes beyond
income statement and balance sheet data? Support your answer by applying examples and
academic references.

QUESTION 3
Discuss the relationship between bond prices and interest rates. What impact do changing
interest rates have on the price of long-term bonds versus short-term bonds? Your answer
must be supported with examples and academic citations.

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