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Principles Of Managerial Finance

FIN-504: Finance Principles, Grand Canyon University, USA

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Question 1: Balance sheet preparation Use the appropriate items from the following list to pre-pare Mellark's Baked Goods balance sheet at December 31, 2019.

Answer: Balance sheet for Mellark Baked foods:

Mellark's Baked Goods

Balance Sheet as on December 31, 2019

Liabilities

Amount

 

Assets

Amount

 

Equity

 

760

Noncurrent Assets

 

815

Common Stock

90

 

Building

225

 

Preference share capital

100

 

Equipment

140

 

Share premium

360

 

Vehicles

25

 

Retained Earning

210

 

Furniture and fixtures

170

 

 

 

 

Machinery

420

 

Non current Liabilities

 

420

Less: Acc Depreciation

-265

 

Long term Debts

420

 

Land

100

 

 

 

 

 

 

 

Current Liabilities

 

750

Current Assets

 

1115

Accounts Payable

220

 

Accounts Receivable

450

 

Accruals

55

 

Cash

215

 

Notes payable

475

 

Stock

375

 

 

 

 

Marketable securities

75

 

 

 

1930

 

 

1930

Question 2: Liquidity ratio Josh Smith has compiled some of his personal financial data to determine his liquidity position. The data are as follows.

a. Calculate Josh's liquidity ratio.

b. Several of Josh's friends have told him that they have liquidity ratios of about 1.8. How would you analyze Josh's liquidity relative to his friends?

Answer: Liquidity ratio can easily be computed with current ratio which is relation between current assets and current liabilities. (Collier 2015)

Current Ratio

Current Assets

3200+1000+800

5000

 

Current Liabilities

1200+900

2100

 

 

 

2.38 times

Question 3: Inventory management Three companies that compete in the footwear market are Foot Locker, Finish Line, and DSW. The table below shows inventory levels and cost of goods sold for each company for the 2016, 2015, and 2014 fiscal years. Calculate the inventory turnover ratio for each company in each year and summa-rize your findings. All values are in $ millions.

Answer:

Inventory turnover ratio

Cost of goods sold

 

Average inventory

Foot Locker

2016

2015

2014

COGS

4907

4777

4372

Inventory

1285

1250

1220

Average Inventory

1267.5

1235

1220

ITR (times)

3.87

3.87

3.58

Finish Line

2016

2015

2014

COGS

1306

1237

1123

Inventory

377

343

304

Average Inventory

360

323.5

304

ITR (times)

3.63

3.82

3.69

DSW

2016

2015

2014

COGS

1852

1741

1629

Inventory

484

451

398

Average Inventory

467.5

424.5

398

ITR (times)

3.96

4.10

4.09

Inventory turnover ratio provides frequency at which inventory is converted. Larger the turnover ratio, better for the organization. All three firms are with almost stable ITR in last three years. Looking into year 2016, DSW has highest ITR of 3.96 times making it most efficient from other two.

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Question 4: Profitability analysis The table below shows 2016 total revenues, cost of goods sold, earnings available for common stockholders, total assets, and stockholders' equity for three companies competing in the bottled drinks market: The Coca-Cola Company, Pepsico Inc., and Dr Pepper Snapple Group. All dollar values are in thousands.

Answer: Profitability ratios:

 

Coca Cola

Pepsico

Dr Pepper

Revenues

41863

62799

6440

COGS

16465

28209

2582

Operating income (Rev- COGS)

25398

34590

3858

Earnings

6527

6329

847

Total Assets

87270

74129

9791

Shareholder Equity

23062

11246

2134

Debts (Assets- Equity)

64208

62883

7657

Gross profit ratio

60.7

55.1

59.9

GP/ Sales*100

 

 

 

Net profit ratio

15.6

10.1

13.2

NP/ Sales*100

 

 

 

Return on assets

7.5

8.5

8.7

NP/Total assets*100

 

 

 

Return on Equity

28.3

56.3

39.7

Total asset to debt ratio

1.36

1.18

1.28

a. Use the information given to analyze each firm's profitability in as many different ways as you can. Which company is most profitable? Why is this question diffi-cult to answer?

Answer: Looking into net profit ratio of different companies, Coca cola has highest Net profit ratio of 15.60% which makes it most profitable company. However, looking other items of financial statements which are resources used by business i.e. Equity and assets, Coca cola company has lowest ROA and ROE making it difficult to answer.

b. For each company, ROE > ROA. Why is that so? Look at the difference between ROE and ROA for each company. Does that difference help you determine which firm uses the highest percentage of debt to finance its activities?

Answer: ROE is greater than ROA on account of lower portion of Equity in comparison to assets. Both these ratios are compared with net profits and as Equity is lower than assets, ROE is greater. Looking total asset to debt ratio provides relation of debts and assets. As ratio is lowest for Pepsico, company is using highest debt.

Question 5: Using Tables 3.1, 3.2, and 3.3, conduct a complete ratio analysis of the Bartlett Company for the years 2018 and 2019. You should assess the firm's liquidity, activ-ity, debt, and profitability ratios. Highlight any particularly positive or negative developments that you uncover when comparing ratios from 2018 and 2019.

Answer: Ratio Analysis of Bartlett Company for FY 18 and 19:

Ratio

2019

2018

Liquidity Ratios

 

 

 

 

Current Ratio

 

 

 

 

Current Assets/ Current Liabilities

1223/620

1.97

1004/483

2.08

Quick ratio

 

 

 

 

Quick assets/ current liability

(1223-289)/620

1.51

(1004-300)/483

1.46

Activity Ratios

 

 

 

 

Inventory turnover

 

 

 

 

COGS/ Avg inventory

2088/(289+300)/2

6.98

1711/300

5.70

Average collection period

 

 

 

 

365 /(Sales/Average Debtors)

365/7.08

51.55

365/7.03

51.92

Debt Ratios

 

 

 

 

Debt ratio

 

 

 

 

Debts/ Total assets

1643/3597

0.46

1450/3270

0.44

Times interest earned ratio

 

 

 

 

EBIT/Interest

418/93

4.49

303/91

3.33

Profitability Ratios

 

 

 

 

Gross margin

418/3074

13.60

303/2567

11.80

GP/ Sales

 

 

 

 

Net Profit

 

 

 

 

NP/Sales

231/3074

7.51

148/2567

5.77

ROA

 

 

 

 

Profts/ Total assets

231/3597

6.42

148/3270

4.53

ROE

 

 

 

 

Profits/ Total Equity

231/1954

11.82

148/1820

8.13

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Liquidity ratios: Current ratio in business has decreased from 2.08 times to 1.97 times. However, quick ratio has improved. This shows that portion of stock has increased in current assets in FY 2019. Firm liquidity position seems sound based on current ratio of 2 times and liquid ratio of 1.5 times.

Activity ratios: Inventory turnover ratio has increased in busiess which is indicator of converting inventory into goods at much faster speed which is positive sign for organization. (Laitinen, 2018) Debtor collection period of more than 50 days is much large. However, has remained stable in last two years.

Debt Ratio: Portion of debts has increased in year 2019. From figures of debts and assets, it seems that business has used debts to finance its assets. However, the positive sign is improvement in interest earned ratio which also indicates improved profitability in business.

Profitability Ratios: Profitability in business has improved this year significantly and in all fronts. Profits from operations or an overall profit both has increased. Most of expenses have remained stable despite of increased sales number in business. This is positive sign for business.

Question 6: Analysis of debt ratios Financial information from fiscal year 2016 for two compa-nies competing in the cosmetics industry-The Estée Lauder Companies and e.l.f. Beauty Inc.-appears in the table below. All dollar values are in thousands.

Answer:

 

Estee

beauty

Assets

9223300

414729

Liabilities

5636000

273867

EBIT

1625900

26095

Interest Exp

70700

16283

Debt Ratio

0.61

0.66

Debt/Total assets

 

 

Interest Earned ratio

 

 

EBIT/ Interest

23.00

1.60

a. Calculate the debt ratio and the times interest earned ratio for each company. In what way are these companies similar in terms of their debt usage, and in what way are they very different?

Answer: Both the companies are similar in using the percentage of debts to finance its assets. Debt contribution in total assets ranges from 60-70%.

Companies are different in their interest earning ratio. Estee is earning interest of 23 times of EBIT whereas Beauty is only earning 1.60 times of EBIT.

b. Calculate the ratio of interest expense to total liabilities for each company. Conceptually, what do you think this ratio is trying to measure? Why are the values of this ratio dramatically different for these two firms? Suggest some reasons.

Answer: Interest liability ratio:3

Interest to liability

 

 

Interest/ Liabilities

0.01

0.06

Ratio is trying to measure the net cost which business is paying upon liabilities. There is so dramatic difference in ratios as there are huge differences in level of operations both entities have and interest expense in Estee is only of 4% while same is 62% for beauty.

Question 7: Financial statement analysis The financial statements of Zach Industries for the year ended December 31, 2019, follow.

Based on a 365-day year and on end-of-year figures.

a. Use the preceding financial statements to complete the following table. Assume that the industry averages given in the table are applicable for both 2018 and 2019.

Answer: Computing Ratios:

Ratio

Industry

Actual 2018

Actual 2019

Current Ratio

1.8

1.84

1.04

Quick ratio

0.7

0.78

0.38

Inventory turnover

2.5

2.59

2.33

Average collection period

37.5 days

36.5 days

56.15

Debt ratio

65%

67%

0.61

Times interest earned ratio

3.8

4

2.79

Gross margin

38%

40%

33.75

Net Profit

3.50%

3.60%

4.09

ROA

4%

4%

4.36

ROE

9.50%

8.00%

11.27

market/book value

1.1

1.2

1.29

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b. Analyze Zach Industries' financial condition as it is related to (1) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market. Summarize the company's overall financial condition.

Answer: Analyses of Zach Industries: 

Liquidity ratios: Current ratio and quick ratios are indicator of liquidity in business. Both of these ratios have decreased in FY 19 which indicates tight liquidity position in business. Current ratio of near 1 is just sufficient to meet current liabilities. Quick ratio of below 0.50 times indicates that business is not in position to pay of immediate liabilities. (Penman, 2015)

Activity Ratio: Inventory turnover ratio and debtor collection period are important indicator of management efficiency in business. Here also, both ratios have depleted and same is also low from industry standards which shows that management has lose its efficiency to manage operations.

Debt ratios: Debt ratio and interest earned ratio shows position of debts in business and their capability to pay off same. Debt ratio has decreased which is positive sign and this is below industry norms. However, EBIT in business has decreased in relation to interest as indicated by Interest earned ratio. (Bhatia 2016)

Profitability ratios: This can be judged using GP and NP ratio along with return on assets and equity earned by business. In 2019, GP has decreased which shows profits from core operations have decrease. Surprisingly, net profit has increased and crossed industry standard. ROA and ROE bath have improved and has outperformed industry.

Market ratios: Relation between book value and market value is important indicator of internal wealth and market value of share. Share in market is much higher than its book value which shows confidence of shareholders in stock. (Paul, 2017)

Question 8: DuPont system of analysis Use the following 2016 financial information for ATT and Verizon to conduct a DuPont system of analysis for each company.

Answer:

 

ATT

Verizon

Sales

163786

125980

Earnings

13333

13608

Total Assets

403821

244180

Equity

124110

24032

 

 

 

Profit Margin

0.081

0.10

Earnings/Sales

 

 

Asset Turnover

0.40

0.51

Sales/Total assets

 

 

Financial Leverage

 

 

Total Assets/ Equity

3.25

10.16

 

 

 

DuPont

Profit margins*Total assets turnover*Financial leverage 

 

0.08*0.40*3.25

0.10*0.51*10.16

 

10%

52%

 

 

 

ROA

3.30

5.57

(Earnings/ Total assets)

 

 

ROE

10.74

56.6

a. Which company has the higher net profit margin? Higher asset turnover?

Answer: Verizon has higher net margin ratio. Verizon margin is of 10% against margin of 8.1% in ATT. Same way, Verizon has higher asset turnover ratio in business.

b. Which company has the higher ROA? The higher ROE?

Answer: Verizon again has higher ROA of 5.57 against 3.3 of ATT. ROE is higher of ATT than of Verizon.

Question 9: Cash disbursements schedule Maris Brothers Inc. needs a cash disbursement sched-ule for the months of April, May, and June.

Answer: Cash disbursement schedule:

 

April

May

June

Cash receipts

 

 

 

Op Balance

688400

783100

980000

Sales

560000

610000

650000

 

1248400

1393100

1630000

 

 

 

 

Cash payments

 

 

 

Purchases

324600

356400

380400

Rent

8000

8000

8000

Wages and Salaries

6000

6000

6000

 

39200

42700

45500

Taxes

               -  

                -  

54500

Fixed asset

75000

                -  

                -  

Interest Payment

               -  

                -  

30000

Dividend

12500

                -  

                -  

 

465300

413100

524400

Cl. cash Balance

783100

980000

1105600

Computing Cash Payment On Purchases:

 

Feb

March

April

May

June

Purchases

300000

336000

366000

390000

390000

10%

30000

33600

36600

39000

39000

50%

 

150000

168000

183000

195000

40%

 

 

120000

134400

146400

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Question 10: Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.

Answer:

 

May

June

July

Cash receipts

 

 

 

Op Balance

5000

8000

5000

Sales

60000

70000

82000

Other income

2000

2000

2000

Bank Overdraft

0

18000

13000

 

67000

98000

102000

 

 

 

 

Cash payments

 

 

 

Purchases

50000

70000

80000

Rent

3000

3000

3000

Wages and Salaries

6000

7000

8000

Taxes

 

         6,000

 

Fixed asset

 

 

         6,000

Interest Payment

 

         4,000

 

Dividend

 

         3,000

 

 

59000

93000

97000

Cl. cash Balance

8000

5000

5000

 

March

April

May

June

Sales

50000

60000

70000

80000

20%

10000

12000

14000

16000

60%

 

30000

36000

42000

20%

 

 

10000

12000

 

10000

42000

60000

70000


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