Scribd Logo
Upload

Welcome to Scribd!

  • 14 views

    Posted Spring 2024 Assignment 3 PDF

    Uploaded by

    Ahmed Sherif
    The document discusses the financial statements of several companies and evaluates their cash management. It asks questions about which companies received emergency loans, why they needed the loans, and how they could have been avoided. It also evaluates the cash position, cash flow, income, and assets/liabilities of the companies. The largest company by assets is Digby, and its capital structure and leverage ratio are analyzed, finding it has a balanced equity to debt ratio near 50% which is considered good.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Posted Spring 2024 Assignment 3 PDF

    Uploaded by

    Ahmed Sherif
    14 views5 pages
    The document discusses the financial statements of several companies and evaluates their cash management. It asks questions about which companies received emergency loans, why they needed the loans, and how they could have been avoided. It also evaluates the cash position, cash flow, income, and assets/liabilities of the companies. The largest company by assets is Digby, and its capital structure and leverage ratio are analyzed, finding it has a balanced equity to debt ratio near 50% which is considered good.

    Original Title

    posted Spring 2024 Assignment 3 pdf

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses the financial statements of several companies and evaluates their cash management. It asks questions about which companies received emergency loans, why they needed the loans, and how they could have been avoided. It also evaluates the cash position, cash flow, income, and assets/liabilities of the companies. The largest company by assets is Digby, and its capital structure and leverage ratio are analyzed, finding it has a balanced equity to debt ratio near 50% which is considered good.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views5 pages

    Posted Spring 2024 Assignment 3 PDF

    Uploaded by

    Ahmed Sherif
    The document discusses the financial statements of several companies and evaluates their cash management. It asks questions about which companies received emergency loans, why they needed the loans, and how they could have been avoided. It also evaluates the cash position, cash flow, income, and assets/liabilities of the companies. The largest company by assets is Digby, and its capital structure and leverage ratio are analyzed, finding it has a balanced equity to debt ratio near 50% which is considered good.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Introduction to Business

    Spring 2024

    Assignment (3)
    Look at the financial statements excerpted from the Foundation FastTrack and answer
    the following questions, explaining the reasons and justification for your answers.

    1) Look at the cash flow statement survey.


    a) Which companies got an emergency loan? How much? (4 points)
    Andrews -> $ 17,102
    Chester -> 2,833

    b) For each company you mentioned in (a) explain why it got an emergency loan (8
    points)
    Both companies ran out of cash. Chester got an emergency loan because it had an
    excessive amount of inventory (-$11,084). That’s not all, it was making losses in the
    investing activities (-$4,200) because it bought automation or capacity. At the same time,
    Andrews got an emergency loan because it was making huge losses in the operating
    activities as it had an excessive amount of inventory (-$24,718) and many accounts
    receivables (-$2,280). What’s more, they have high variable costs, selling and
    administration expenses, and interest expenses.

    c) How could each company you mentioned in (a) and (b) have avoided the

    emergenc

    y loan?

    For the companies to avoid the emergency loan they should have established suitable
    sales forecast and examine their Performa carefully. At the same time, they should have
    not produced more than needed so they won’t have excessive inventory. That’s not all;
    they could have raised enough capital through loans and equity. For the company Andrews
    they could have decreased the variable costs and selling and administration costs.
    d) For the rest of the companies (those that did not get an emergency loan) evaluate
    how well each
    company is managing its cash by looking at the following: (24 points)

    • Ending cash position (BS)


    Baldwin: $4,671 Digby: $4,127 Erie: $5,289 Ferris: $7,628 The Ending cash position of all
    four companies is good. On the other hand, the Company Ferris has a little higher Ending
    Cash position and this means that the company should have used the cash in a more
    efficient way by retiring stocks.
    • Net change in cash position (CF)
    Baldwin: $4,671 Digby: ($3,952) Erie: ($6,707) Ferris: $1,561 Digby and Erie have a
    Negative Net Change in Cash Position which is not good because this means that the
    company is not able to manage its finance well. However, Baldwin and Ferris have a good
    Net change in cash position because they are positive.
    • Compare investment with financing (CF)
    All of the Companies Baldwin, Digby, Erie, and Ferris have the financing activities greater
    than the investment activity as all the four companies made plant improvement and they
    financed them by either taking a long term loan or issuing stocks.
    • Net Income (CF)
    Baldwin: $3,273 Digby: $3,524 Erie: $3,242 Ferris: $2,189 All companies have a very good
    Net Income. The highest Net Income is Digby (3,524) and the lowest Net Income is Ferris
    (2,189).
    • Any huge cash outflow/inflow (CF)
    Baldwin: The plant improvement was a huge cash outflow. Ferris: The plant improvement
    was a huge cash outflow. Digby: The plant improvement was a huge cash outflow, the
    largest. The financing activities were a huge inflow, and this means that the company’s
    investments were mainly leveraged. Net cash from operations was negative because of
    the inventory overstock. Erie: The plant improvement was a huge cash outflow, the
    company ended up with a negative net change in cash position.
    • Compare ending cash balance (BS) with Sales (IS) (is this a good cash
    buffer?)
    Ending Cash Balance/ Sales Baldwin: Sales: $55,483 Ending Cash Balance: $4,671
    =8.4% Digby: Sales: $73,457 Ending Cash Balance: $4,127 =5.62% Erie: Sales: $54,580
    Ending Cash Balance: $5,289 =9.7% Ferris: Sales: $68,594
    Ending Cash Balance: $7,628 =11.1% All companies have a good ending cash position
    comparing to their sales. It is not too much that the company does not invest, or too little
    that the company would have to take an emergency loan.

    2) Which company has the largest asset base? How big? (Hint: look at the BS)

    The Company with the largest asset base is Digby which is $70,012. (2 points)
    3) Evaluate the capital structure of the company you picked in (2) above. Calculate
    the leverage ratio (Assets/Equity) and the percentage of equity to debt in the
    company’s assets.
    Comment on your findings.
    Leverage Ratio: Assets / Liabilities =$70,012/$36,829 = 1.9 The percentage of equity
    to debt: Equity/Debt = $36,829 / $33,128 = 1.11 Equity/Assets = $36, 829 /
    $70,012 =52.60% Debt/Assets =$33,128 / $70,012 =47.32% Based on the
    leverage ratio, Digby has assets almost twice the liabilities, which means that it has
    a good asset base. Based on the benchmark of the leverage ratio, that is 1.5- 3, the
    ratio (1.9) falls within the range, which means it is good. Based on the percentage of
    equity to debt, Digby seems to be financed equally by both equity and debt, which is
    approximately (50%-50%). This is good because both of them did not exceed their
    limit, which is (70%) (6 points)
    Hint:
    A company with too much debt (over 70% of assets) is too risky as it may not be able to
    pay back all of this debt and its interest. For banks, this company is a risky borrower –
    very few banks will be willing to lend it and those that do will charge a very high interest
    rate to match the risk of the company.
    On the other hand, a company with too much equity (over 70% of assets) is at risk of
    being taken over (i.e. bought out by another company). The company is an attractive
    target for acquisition because there is an opportunity for whoever acquires this
    company to borrow debt easily using all the equity as collateral, and to use all of this
    borrowing to expand the company and make more profits. The fact that the current
    management is not making use of this opportunity indicates that current management is
    out of profitable growth ideas. If the company is acquired, the top management will
    normally be fired.

    Total points (50


    points)

    Page 1 of 3
    Financial Summary: Cash Flow Statement

    Page 2 of 3
    Financial Summary: Balance Sheet

    Financial Summary: Income Statement

    Page 3 of 3

    You might also like