Cambridge Construction Company follows the percentage-of-completion method for reporting long-term contract revenues. The percentage of completion is based on the cost of materials shipped to the project site as a percentage of total expected material costs. Cambridge’s major debt agreement includes restrictions on net worth, interest coverage, and minimum working capital requirements. A leading analyst claims that “the company is buying its way out of these covenants by spending cash and buying materials, even when they are not needed.” Explain how this might be possible.
Answer to relevant QuestionsWhat are the critical drivers of industry profitability? Can Cambridge improve its Z-score by behaving as the analyst claims in Question 8? Is this change consistent with economic reality?Kim Silverman, CFO of the First Public Bank Company, notes: “We are fortunate to have a cost of capital of only 7 percent. We want to leverage this advantage by acquiring other banks that have a higher cost of funds. I ...As an external adviser to the U.S. government’s interagency committee that vets foreign takeovers, you have been asked to provide expert testimony on the proposed takeover of a major US airport by a Dutch airport ...Why might the CEO of the biotechnology firm discussed in Question 7 be concerned about the firm being undervalued? Would the CEO be equally concerned if the stock were overvalued? Do you believe that the CEO would attempt to ...
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