Reference no: EM132579959

Part A - Questions

QUESTION 1 - A company produces fruit juice in five different flavours (Mango, Guava, Apple, Grape and Tropical). A local supermarket sells the product, but only has sufficient space to display two of the company's five fruit juice flavours at a time.

a) What is the probability that the two flavours displayed are Guava and Grape?

QUESTION 2 - The following joint probability table shows the information for a sample of 200 companies with one variable indicating the industry and the other variable indicating the sector in which a company is operating: Industry Sector Formal Informal Retail 0.03 0.17 Financial 0.24 0.56.

a) If it is known that a company is in the financial industry, what is the probability that it operates in the informal sector?

b) If it is known that a company is not in the financial industry, what is the probability that it operates in the informal sector?

c) What conclusion can be drawn by comparing the answers in a) and b)?

QUESTION 3 - A company plans to launch a new product. They have traditionally had a 60% success rate with the launch of new products. Market research predicts that a positive test market results is 80% of successfully launched products and a positive market result for 30% of failed product launches.

a) If a market test result comes back negative, what is the probability that the product will be successfully launched?

QUESTION 4 - An insurance company found that 35% of all insurance policies are terminated before their maturity date. Assume that ten polices are randomly selected from the company\'s policy database. Out of the ten randomly selected policies;

a) What is the probability that at least eight will not be terminated?

b) What is the probability that more than three but less than seven policies will be terminated?

Part B - Question

When Jay Smith took over the job of aide to the President two years ago, things were going well at the Signal Cable company. The company was on an expansionary path and had branched out into the fiber optic business. Expectations and prospects were good and the economy very strong. The threat of competition was not too serious. Due to the expectation of increasing demand for fiber optic communications, the company had established two additional manufacturing facilities and significantly increased its inventory.

Signal Cable had enjoyed a high performance run in recent years. However, when the financial statements were prepared for the current year, the results showed a lower net profit margin. More importantly, there was a severe drop in the company's cash balance and the price had recently dropped from $ 7 to $ 5.50 per share.

Jay knew that the shareholders would be very concerned and possibly angry. He was also convinced that his boss, Joe Mathis, would have to find some viable answers and suggestions on how liquidity problems could be mitigated. This concern was primarily important as the company had been hoping to raise some short-term capital in the immediate future. Jay's expectations were met when Joe called him and asked him to prepare a report explaining the company's financial situation. Table 1 and 2 presents the Income Statement and Balance Sheet for the last two years.

1. Why has the share price decreased despite the fact that net income has increased?

2. How liquid would you say this company is? Calculate the absolute liquidity of the company. How does it compare to the liquidity position of the previous year? Hint: Calculate some of the financial ratios that measure liquidity and compare the results of the last 2 years.

3. How does the market value of the shares compare to their book value? Is the book or book value accurately reflecting the true condition of the business?

4. The Board of Directors is unclear as to why the cash balance has declined sharply despite increased sales and gross profit margin. What should Jay say to the Board? Hint: In order to identify the items that have caused such a drastic decline, you need to prepare the Cash Flow Statement for 2004.