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Case Study Finance
Case Study Finance
Case Study Finance
Liquidity Ratios
Year 1996
Current ratio 3.6
Quick ratio 2
Leverage Ratios
Year 1996
Debt ratio 31.6 %
Time interest earned 15.7 x
Total Liabilities 150.3
a) Debt ratio =
Total Assets
= 480.1 = 31.6 %
EBIT 62.2
b) TIE ratio =
Interest expense
= 4
=15.7x
Activity Ratios
Year 1996
Inventory turnover 5.1
Fixed asset turnover 29
Total asset turnover (TATR) 2.7
Average collection period 62
Days purchases outstanding 31
COGS 978.8
a) Inventory turnover = = = 5.1
Average inventory 191.9
nb of working days
d) Average collection period = =
acc . receivable turnover ration
Profitability Ratios
Year 1996
Gross Margin 25 %
Net profit margin 2.7 %
ROE 10.7 %
ROA 7.3 %
Operating Margin 5.9 %
Number 3:
I think that this statement is true. Company can use debit to maximize its investment
potential. Using debit financing can increase the growth of the company and greatly
increase the company’s profitability. The efficient and well effective use of debit financing
can result in an increase in revenues, and this increase might exceed the expense on interest
payments which will play a major role in increasing the firm’s value.
Number 4:
I think that not taking advantage of this potential profit is unwise. When the company is
rarely taking this discount, it will hold more cash in its accounts by which it can be used in
other purposes. Moreover, the 1% discount is not that much generous and 99% of the bill
must be paid.
Number 5:
Market to book value: MV/BV= 329,800/ 5,000= $ 65.96/share
Number 6:
Hamilton thinks that the profitability of the firm is hurt by white’s reluctance to use
more interest bearing debit.
Keeping excess inventory is a big management mistake and it affects the company’s
operating cash flow negatively.
Hamilton thinks that white has been generous in granting payments extensions to
customers.
Number 7:
The good thing about White’s management is that he cares about his customers and
doing whatever he can do to help them. On the other hand, he forgot that the policy
might negatively affect the company’s financial statements. For instance, keeping lots in
inventory tied up will decrease the company’s ability to have more cash which they will
use if many different and efficient ways. Moreover, White’s rarely takes cash discounts
because he thinks that a 1% discount is not generous, and he also uses the policy of
payments extensions in order not to lose sales. I think that White’s perspectives are
limited to specific criteria and not taking into account all the problems that he might
encounter by his managerial decisions.
Number 8:
If I play a role of an arbitrator between White and Hamilton. I can see the lack of
synergy between these two is the main reason why the company cannot improve
drastically. White is more conservative about the customer satisfaction. Whereas,
Hamilton is more conservative about the company’s standing and its financial position in
the competing market. So if they consolidate their opinions, they will both together
increase the company’s value.
Number 9:
a) All the calculated rates are based on book values because they are recorded in the
books of the company.
b) Generally speaking, Book value is the original purchasing cost which the adjusted by
several ways “depreciation for example”.
Market value is the price that can be acquired in the open market.
Between these 2 approaches of ratio analysis, whether to be on book or market
value. I chase the book value. In some cases, company can be under evaluated if it
lost value in the market which will have a negative aspect on its investors. So I
prefer to play it safe with using book values because they reflect the true data
driven numbers.