Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 financial statements. The Year 8 financial statements and
other data are reproduced on the next page.

Required:

a. Prepare a statement of cash flows (indirect method) for Philip Morris. (Hint: Acquisition of Kraft requires you to remove the assets acquired and
liabilities incurred as a result of that acquisition from the balance sheet before computing changes used in preparing the statement of cash flows. Philip
Morris pays $11.383 billion for Kraft, net of cash acquired—see the Allocation of Purchase Price table.)

b. Calculate cash flows from operations using the direct method for Philip Morris.

c. Based on your answer to a, compute Philip Morris”s free cash flow for Year 8. Discuss how free cash flow impacts the company”s future earnings and
financial condition.

A toll bridge over the River Jay is operated by a private company who are thinking of installing automatic machines to collect the tolls. These machines,
however, are not perfectly reliable and it is thought that the number of breakdowns occurring per day would follow the probability distribution shown
below:

When a breakdown occurred, revenue from tolls would be lost until the equipment was repaired. Given below are approximate probability distributions for the
equipment repair time and the average revenue lost per hour.

(a) Determine the probability distribution of revenue which would be lost per day as a result of machine breakdowns (it can be assumed that the above
probability distributions are independent).

(b) Calculate the expected loss of revenue per day and interpret your result.

The managers of a food company are about to install a number of automatic vending machines at various locations in a major city. A number of types of
machine are available and the managers would like to choose the design which will minimize the profit that will be lost because the machine is out of
order. The following model is to be used to represent the lost profit: Cost of lost profit per month = (number of breakdowns per month) × (time to repair
machine after each breakdown, in hours) × (profit lost per hour) One machine that is being considered is the Super vend, and the following probability
distributions have been estimated for this machine:

(a) Use a table of random numbers, or the random number button on a calculator, to simulate the operation of a machine for 12 months and hence estimate a
probability distribution for the profit that would be lost per month if the machine was purchased.

(b) Explain why the model is likely to be a simplification of the real problem.

In the Eagle Mountain Forest controlled fires are used for a number of purposes. These include enhancing wildlife habitat by eliminating decadent
vegetation and clearing ground for planting seedlings.

The planning and carrying out of a controlled fire involves the advanced commitment of a large amount of resources, but weather conditions at the time of
the fire mean that there is no guarantee it will be successful. For example, under certain conditions the quality of the burn may be poor, and additional
resources will need to be employed to achieve the objectives. At worst, the fire can ‘escape”. If this happens the losses of additional forest and the
extra resources involved in bringing the fire under control will amount to an estimated cost of $40 000.

The managers of the forest want to apply burning to a 14 acre area of forest near Saltern Lake. If the burn is successful the benefits of the operation are
estimated to be worth $10 000. The managers have to choose between ‘conventional burning” and ‘yarding”. Conventional burning would cost an estimated
$4000.

Yarding involves using a bulldozer to remove large material from the forest before using fire. This reduces the difficulty of controlling the fire, but
costs an additional $200 per acre.

If either type of treatment is used the fir e will either be successful, or there will be problems with the quality of the burn or the fire will escape.
For a conventional burn these probabilities are estimated to be 0.848, 0.150 and 0.002, respectively. If yarding is used these probabilities are estimated
to be 0.899, 0.100 and 0.001. If there are problems with the quality of the burn the forest managers will have to decide whether to extinguish the fire at
a cost of $1000 or whether to apply $2000 worth of additional resources which will give them a 0.8 probability of achieving all of the benefits, a 0.1
probability of achieving benefits worth $3000 and a 0.1 probability of achieving no benefits.

If the managers wish to maximize the expected net benefits (i.e. benefits–costs) of the operation, determine their optimum policy.

While on assignment you discover that you have misplaced the balance sheet of Bird Corporation as of January 1, Year 1. However, you do have the following
data on Bird Corporation:

Required:

Using the available data and information, prepare the balance sheet of Bird Corporation as of January 1, Year 1. T-accounts can be helpful in
reconstructing the individual accounts. (Note: Equipment sold had accumulated depreciation of $50,000.)

Your banker confides to you after looking at a number of financial statements that she is confused about the difference between two operating measures, net
income and cash from operations.

Required:

a. Explain the purpose and significance of these two operating measures.

b. Several financial transactions or events follow. For each transaction or event, indicate whether it yields an increase (+), decrease (-), or no effect
(NE) on each of the two measures.

A local council owns an underground railway system and the railway”s managers have to make a decision on whether to lower fares in an attempt to increase
passenger numbers. If they decide to reduce fares they will then have to decide whether to launch an advertising campaign on local television to increase
awareness of the fare reduction. If fares remain the same then it is estimated that there is a 0.7 probability that the mean number of passengers carried
per day over the next year will equal 20 000 and a 0.3 probability that it will decline to 15 000. The annual profits associated with these passenger
numbers are estimated to be $3 million and $1 million, respectively. If fares are reduced, but television advertising is not used, then it is thought that
there is a 0.6 probability that the mean number of passengers carried will increase to 25 000 and a 0.4 probability that it will increase to 22 000. The
resulting profits generated by these passenger numbers are estimated to be $2 million and $1.7 million, respectively. Advertising the fare reduction on
television would increase the probability of an increase to a mean of 25 000 passengers to 0.8 and reduce the probability that the mean will be 22 000 to
0.2. However, it would reduce the profits associated with these mean passenger numbers by $0.6 million. The railway”s objectives are to maximize profit and
to maximize passenger numbers (since this

brings environmental benefits such as reduced traffic congestion).

(a) Utility functions for the mean numbers of passengers carried and profit have been elicited from the railway”s chief executive and these are given
below.

Plot these utility functions and interpret them.

(b) The elicitation session revealed that, for the chief executive, mean number of passengers and profit are mutually utility independent. You are reminded
that, in this case, a two-attribute utility function can be obtained from:

u(x1, x2) = k1u(x1) + k2u(x2) + k3u(x1)u(x2)

where k3 = 1 – k1 – k2.

The elicitation session also revealed that k1 = 0.9 andk2 = 0.6, where attribute number 1 is the mean number of passengers. Determine the policy that the
railway should pursue in the light of the above utilities and comment on your answer.

A food company runs a computerized processing plant and needs to formulate a series of decision rules to advise its managers on how they should react if
the control panel indicates particular problems with the system. Because there is always a possibility that an indicated problem is in fact caused by a
fault in the control panel itself, there is some concern that unnecessary losses will be incurred if production is halted because of a non-existent
problem.

Light number 131 will illuminate on the panel if the computer detects that packs of a frozen food are being filled to below the legal weight. However, it
is known that there is a 0.15 probability that this light will give a false alarm. In the event of this light illuminating, the manager would have to
decide whether or not to gather further information before making a decision on whether to stop production immediately. Any stoppage would cost an
estimated $150 000, but a decision to ignore the light would lead to losses of $300 000 if the bags being filled on the automatic production line really
were under weight. If the manager decides to gather further information before taking the decision on whether to stop production then this will involve
taking a sample from output and weighing the selected packs. This will render the sampled packs un saleable and cost the company $5000. The sample will
indicate whether or not there is a fault in production, but there is a 0.2 probability that it will give misleading results. Despite this it has always
been company policy to take a sample because of the small cost of sampling relative to the other costs.

(a) If the company”s objective is to minimize expected costs, formulate a decision rule which will tell the duty manager how to react when light 131
illuminates.

(b) Explain the rationale behind your recommended decision rule in non-technical terms.

(c) Explain the role which sensitivity analysis could have in this problem.

Interpret the effect of the following six independent events and transactions for the:

a. Accounts receivable turnover (currently equals 3.0).

b. Days” sales in receivables.

c. Inventory turnover (currently equals 3.0).

The three columns to the right of each event and transaction are identified as (a), (b), and (c) corresponding to the three liquidity measures. For each
event and transaction indicate the effect as an increase (I); decrease (D); or no effect (NE).

The Lux Company experiences the following unrelated events and transactions during Year 1.The company”s existing current ratio is
2:1 and its quick ratio is 1.2:1.

1. Lux wrote off $5,000 of accounts receivable as uncollectible.

2. A bank notifies Lux that a customer”s check for $411 is returned marked insufficient funds. The customer is bankrupt.

3. The owners of Lux Company make an additional cash investment of $7,500.

4. Inventory costing $600 is judged obsolete when a physical inventory is taken.

5. Lux declares a $5,000 cash dividend to be paid during the first week of the next reporting period.

6. Lux purchases long-term investments for $10,000.

7. Accounts payable of $9,000 are paid.

8. Lux borrows $1,200 from a bank and gives a 90-day, 6% promissory note in exchange.

9. Lux sells a vacant lot for $20,000 that had been used in its operations.

10. A three-year insurance policy is purchased for $1,500.

Required:

Separately evaluate the immediate effect of each transaction on the company”s:

a. Current ratio

b. Quick (acid-test) ratio

c. Working capital