A Report on

Silver River Manufacturing Company

Submitted By: Submitted To:

Nischal Gautam Prof. Dr. Radhe Shyam Pradha
Nabin Pandey
Melina Lamichhanes
Monika Singh Thakuri
Pooja Joshi
Pooja Shahi
Pradeep Kumar Sah
(MBA- Finance , II Trimester)

August 2019
 ACKNOWLEDGEMENTS

It's a great pleasure to present this report of case study on “Silver River
Manufacturing Company”. At the outset, we would like to express our immense
gratitude to our group members for the inception till the successful completion of this
case.
Furthermore, I would like to express my deepest appreciation to Prof. Dr. Radhe
Shyam Pradhan sir for extending his valuable guidance about the analysis of financial
statements concerned with this case, and his support for literature, critical reviews of
case and the report

We are really grateful because we managed to complete this report within the time given
by respected Dr. Radhe Shyam Pradhan sir. This report cannot be completed without
the effort and cooperation from our group members. We would like to acknowledge all
the group members for their sincere effort, cooperation, encouragement during the time
of case analysis and preparation of report.

The success and outcome of this report required a lot of guidance and assistance from
many people and we extremely fortunate to have got this all along the completion of
our report work.

Above all we would like to thank everyone for the moral support. We are indebted to
all group members for their time & passion during the case analysis, without such
efforts, work could not have been accomplished on time.

iii
 TABLE OF CONTENTS

Acknowledgments.........................................................................................................iii
Table of Contents .......................................................................................................... iv
General Background ...................................................................................................... 1
1.1 Liquidity Ratio: .................................................................................................... 6
1.1.1 Current ratio:.................................................................................................. 6
1.1.2 Quick ratio: .................................................................................................... 7
1.2.Leverage ratios: .................................................................................................... 8
1.2.1 Debt ratio ........................................................................................................... 8
1.2.2 Time interest earned ratio: ............................................................................. 8
1.3 Asset management ratio: ...................................................................................... 9
1.3.1 Inventory turnover ratio (cost):...................................................................... 9
1.3.2 Inventory turnover (selling): .......................................................................... 9
1.3.3 Fixed asset turnover ratio: ........................................................................... 10
1.3.5 Total asset turnover ratio: ............................................................................ 10
1.3.6 Average collection period:........................................................................... 11
1.4. Profitability ratios:............................................................................................. 11
1.4.1 Profit margin (%) ......................................................................................... 11
1.4.2 Gross profit margin (%) ............................................................................... 12
1.4.3 Return on total asset: ................................................................................... 12
1.4.4 Return on owner’s equity ............................................................................ 13
2.1 Altman Z Factor: ................................................................................................ 15
3.1 Retained Earnings .............................................................................................. 21
3.2 Accounts Receivables ........................................................................................ 21
4.1 Ratio ................................................................................................................... 23
Conclusion ................................................................................................................... 40

iv
 GENERAL BACKGROUND

This Silver River Manufacturing Company (SRM), which is a US based, and is large
regional producer of farm and utility trailers specialized lives stock carriers and mobile
home chassis whose stock is traded over the counter. More than 85% of SRM’S sales
come from the south eastern part of the United States though a growing market for
customer horse transport vans designed and produced by SRM is developing nationally
and even internationally. According to this case the SRM is a major client of Marion
Country National Bank (MCNB but due to the recession that had been plaguing the
nation’s farm economy since 2000s caused problem for agriculture for the SRM who
depends on farmers for roughly 45 to 50 percent of total sales. Several major boat
companies in Florida work closely with SRM in designing trailers for their new
offerings. SRM whose products are totally based on latest technology. SRM hold
several patents with which it can partially offsets some of the risk.

SRM had experienced high and relatively steady growth in sales, assets and profits in
the decade prior to 2013. Toward the end of 2013, the demand for new field trailers in
the citrus and vegetable industries started to fall off. In this case the white had recently
attended an executive development seminar on market penetration and profitability, he
was convinced with the factors that key to sustained profit and superior market
performance was sales growth and achievement of the high shares of the market. The
recession that had been plaguing the nation’s farm economy and disastrous freezes for
two straight winters resulted in high curtailment of demand for grove retailer and citrus
transport carriers; SRM was not immune to this. Though SRM had shown high and
steady growth in sales, assets and profits prior to 2013, however, towards the end of
2013 the demand for new field trailers in citrus and vegetable industries started for fall
off. Likewise, SRM in designing trailers for their new offerings, and these boat-trailer
packages are sold through the nationwide dealer networks of the boat companies. With
few exceptions, the products manufactured by SRM are not subject to technological
obsolescence or to deterioration, and in those instances where technology is a factor to
be considered, SRM holds several patents with which it can partially offset some of the
risks. Marion County National Bank (MCNB) is the official banker of SRM that has
1
sanctioned short- and long-term credit facilities. MCNB considered SRM to be a
financially sound and efficiently managed firm until the symptoms of illness of SRM
surfaced. Being a close friend and a well-wisher, Ms. Lesa Nix, Vice President of
MCNB, informs Mr. White that the financial health of SRM worsened from 2014
through 2015 such that MCNB might consider calling back the credit facilities while
SRM has made a commitment to expand its facility requiring an additional fund of
$7,012,500. Mr. White Had planned to obtain this additional money by a short-term
loan from MCNB.

Since, to finance these increases in assets, SRM turned to Marion Country National
Bank, (MCNB) for long term loan in 2014 and increase in its short-term credit lines in
both 2014 and 2015. MCNB had been a major banker of SRM for a long time. In the
start, Lesa Nix, the vice-president of MCNB, had handled the case of SRM. Later, she
got promoted and was no longer responsible for handling SRM’s account. However, as
Mr. White was a close friend, she still took interest on SRM. Even this was insufficient
to cover the aggressive expansion on the asset side. Consequently, Greg White who
always made prompt payments, started to delay payments. This resulted substantial
increase in accounts payable and other short-term loans. Upon analyzing SRM’s
financial conditions, Lesa Nix found that the bank’s computer analysis system revealed
a number of significant adverse trends and highlighted several potentially serious
problems. Its 2015 current, quick and debt ratios failed to meet the contractual limits of
2, 1.0 and 55% respectively. Technically, the bank had a legal right to call for
immediate repayment of both long and short-term loans, and, if they were not repaid
within ten days, could force the company into bankruptcy.

Despite such adverse conditions Nix considered the company to have good long run
prospects, assuming, of course that management reacted immediately and appropriately
to the current situation. Hence, Nix had looked upon the threat of accelerating the loan
repayment primarily as a means to get Greg White’s undivided attention and as well to
force him to think about corrective actions that must be taken to mitigate SRM’s short-
term problems. Even though she hoped to avoid calling the loans if at all possible
because that action would back SRM into a corner from which it might not be able to
emerge intact, Nix realized that the bank’s examiners, due to the recent spate of bank

2
failures, were very sensitive to the issue of problem loans. SRM’s Altman Z factor
(2.88) for 2015 was below 2.99 which indicated that SRM was likely to get bankrupt in
two years. Because of this deficiency, MCNB was under increased pressure from the
regulators to reclassify SRM’s loan as ‘problem category’ and take whatever steps
needed to collect the money due and reduce the bank’s exposure as quickly as
practicable. In order to avoid reclassification, SRM required strong and convincing
evidence to prove that its problems were temporary in nature and it had good chance of
reversing the trend. The current financial problems were not the only problem which
Mr. White faced. He had recently signed a contract for a plant expansion that would
require another $7,012,500 of the capital during the first quarter of 2016. He had
planned to obtain this money by a short-term loan from MCNB to be repaid from the
profit generated in the first half of 2016. He believed that new facilities would enhance
the production capabilities in a very lucrative area of custom horse van.

The financial position of the company could improve significantly over the next two
years if the bank maintained or even increase the credit lines according to analysis of
Mr. White’s. Once the new facility is goes online, the company would be able to
increase output in rapidly growing (and particularly profitable) horse van and home
chassis segment of the market and also reduce the dependency on farm and light utility
trailer sales to 35% or less. He also projected that the sales growth would be 6% and
9.5% in an average for 2016 and 2017 respectively, assuming there is

no significant improvement in either national or farm economy. He also assumed that

SRM would change its policy of aggressive marketing and sales promotion and return
to full margin prices, standard industry credit term and tighter credit standards. These
changes would reduce cost of goods sold to 85% in 2015 and 82.5% in 2016 and 80 %
in 2017. Similarly, administrative and selling expenses are likely to decrease from 9%
to 8% in 2006 and 7.5% in 2017. Also, the miscellaneous expense would reduce to
1.75% and 1.25% of sales in 2016 and 2017 respectively. Average collection period
and inventory turnover will be maintained at average industry level.

3
As per the financial data provided in the case and the projected income statement and
balance sheet, we have to analyze whether SRM is eligible to obtain the bank loan.
Now, the question is whether the bank should extend the existing short and long-term
loans or should rather demand immediate repayment of both existing loans. Also, we
have to propose alternatives available to SRM if the bank were to decide to withdraw
the entire line of credit and to demand immediate repayment of the two existing loans.

Question 1(a):

Prepare a statement of changes in financial position for 2015 (sources and uses of funds
statement) or complete Table 6.

Solution:
Silver River Manufacturing Company
Statement of Changes in Financial Position
For the Year Ended December 31st (thousands of dollar)
Particulars 2014 2015
Sources of funds
Net income after taxes 6,987.00 831.00
Depreciation 1,823.00 2,244.00
Funds from operations 8,810.00 3,075.00
Long-term loan 3,506.00 0.000
Net decrease in working capital - 471.00
Total sources 12,316.00 3,546.00
Application of funds
Mortgage change 295.00 287.00
Fixed assets change 2,573.00 3,051.00
Dividends on stock 1,747.00 208.00
Net increase in working capital 7,701.00 0.0000
Total uses 12,316.00 3,546.00

4
 Analysis of changes in working Capital
Increase (decrease) in current assets
Cash change (1,260.00) (107.00)
AR change 1,500.00 11,985.00
INV change 15,505.00 14,992.00
CA change 15,745.00 26,870.00

Increase (decrease) in current liabilities

NP change 2,104.00 14,446.00
AP change 4,117.00 10,441.00
ACC change 1,823.00 2,454.00
CL change 8,044.00 27,341.00
Net increase (decrease) in working capital 7,701.00 (471.00)

From the above calculation, we can conclude that as there is no change in long term loan, and there is
decrease in net income which results on decrease in source of fund. Whereas there is little amount of
decrease in working capital due to sources of fund in comparison with other applications of fund.

Question 1(b):
Calculate SRM’s key financial ratios for 2015 and compare them with those of 2013,
2014, industry average, and contract requirement or complete Table 7.

Solution:

5
 Table 7: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31

Particulars 2013 2014 2015 Industry comments

average
Liquidity ratios
Current ratio 3.07 2.68 1.754 2.50 Poor
Quick ratio 1.66 1.08 0.73 1.00 Poor

Leverage ratios
Debt ratio (%) 40.46 46.33 59.796 50.00 High risky
Times interest earned 15.89 7.97 1.49 7.70 Low risky

Asset management ratios

Inventory turnover (Cost)a 7.14 4.55 3.57 5.70 Poor
Inven. turnover (Selling)b 9.03 5.59 4.195 7.00 Poor
Fixed asset turnover 11.58 11.95 12.097 12.00 Ok
Total asset turnover 3.06 2.60 2.04 3.00 Low
Average collection period 36.00 35.99 53.99 32.00 Poor

Profitability ratios
Profit margin (%) 5.50 3.44 0.386 2.90 Very low
Gross profit margin (%) 20.89 18.70 14.86 18.00 Low
Return on total assets(%) 16.83 8.95 0.79 8.80 Very low
Return on owners’ 28.26 16.68 1.955 17.50 Very low
equity%

Potential failure indicator 3.09 2.62 2.05 1.81/2.99 Ok

Altman Z factor

1.1 Liquidity Ratio:

1.1.1 Current ratio:

It indicates the extent to which current assets are sufficient to pay current liabilities. It
is calculated as under:
Current ratio= current assets/ Current liabilities

6
 SRM Company Industry Average

3.5
3
2.5
2
1.5
1
0.5
0
2013 2014 2015

We can conclude that the company’s ability to fulfill short term obligations as current
assets has been decreased. Current ratio of SRM has decreased in 2015 as compared to
2013, 2014 and industry average. ie. 1.75 < 3.07, 2.68 & 2.50.

1.1.2 Quick ratio:

It measures the liquidity position of company and it shows the ability of payment. It
can be calculated as:
Quick ratio= quick assets/ current liabilities

1.8
1.6
1.4
1.2
1
SRM Company
0.8
Industry Average
0.6
0.4
0.2
0
2013 2014 2005

The quick ratios of SRM’s of 2003, 2004 are high, whereas for 2005 is less than both
years. The industry average is also more than that of quick ratio of SRM (i.e.73<1.66,
1.08 and 1.00), which indicate the less liquidity position of this company.

7
1.2.Leverage ratios:
1.2.1 Debt ratio

70.00%
60.00%
50.00%
40.00%
SRM Company
30.00%
Industry Average
20.00%
10.00%
0.00%
2013 2014 2015

In comparison to the industry average, SRM is taking more risk than the competitors
where industry average is 50% and that of the SRM are 59.796%. It is clear in the sense
that the debt ratios have been in increasing trend i.e. 40.46%, 46.33% and 59.796% in
year 2013, 2014 and 2015 respectively which resembles the company’s more
dependency towards leverage in comparison with previous year.

1.2.2 Time interest earned ratio:

18
16
14
12
10
SRM Company
8
Industry Average
6
4
2
0
2013 2014 2015

The time interest earned ratio is declined from 2013 to 2015 but is not below 1 so it is
still able to meet its interest obligations. So, from this we can easily see the decreasing

8
interest paying capacity of SRM over the years. And in the year 2015 SRM has failed
to maintain the ratio as off industry.

1.3 Asset management ratio:

1.3.1 Inventory turnover ratio (cost):

8
7
6
5
4 SRM Company
3 Industry Average
2
1
0
2013 2014 2015

1.3.2 Inventory turnover (selling):

10
9
8
7
6
5 SRM Company
4 Industry Average
3
2
1
0
2013 2014 2015

Inventory turnover ratio has decreased from 7.14 to 3.57 times on cost and 9.03 to 5.59
times on sales respectively in the year between 2013 and 2015, it shows the company
is not efficient in managing the inventory.

9
1.3.3 Fixed asset turnover ratio:

12.2

12

11.8
SRM Company
11.6 Industry Average
11.4

11.2
2013 2014 2015

Effective utilization of fixed asset has been done by SRM, as the turnover generated
from fixed asset are in increasing trend i.e. from $11.58, to $12.097 in 2013 to 2015.
The industry average is $12 is less than that of Silver River Manufacturing it means the
company has used its fixed assets effectively.

1.3.5 Total asset turnover ratio:

3.5

2.5

2
SRM Company
1.5 Industry Average

0.5

0
2013 2014 2015

In 2015, the total asset turnover is $ 2.04 which is less in contrast with 2013(i.e.$ 3.06).
This indicate the company is not capable to utilize its total asset. As the industry average
is $3, which means SRM is not using its asset effectively to increase the productivity
of the company with respect to generate sales.

10
1.3.6 Average collection period:

60

50

40

30 SRM Company
Industry Average
20

10

0
2013 2014 2015

This ratio measures the average number of days customers take to pay their bills, which
resemble the effectiveness of credit and collection policies of the business. This ratio
also determines if the credit terms are realistic.

In case of SRM it takes 36 days to collect its receivable in 2013 which increased to 60
in 2015. When compared to the industry average, SRM is less capable of collecting the
receivables as compared to industry average.

1.4. Profitability ratios:

1.4.1 Profit margin (%)

3 SRM Company
Industry Average
2

0
2013 2014 2015

The profit margin ratio of SRM Company in 2013 is 5.5 and in 2015 is 0.386, which
shows the rapid decrease in profit margin ratio. The industry average is found to be 2.9,
which indicate SRM possess lesser profit margin compared with competitors.
11
1.4.2 Gross profit margin (%)

25

20

15
SRM Company
10 Industry Average

0
2013 2014 2015

The gross profit margin are 20.89% in 2013 to 14.86% in 2015, it shows decreasing
trend. The industry average in term of gross profit margin is 18%,which is more
compared to SRM. Company is unable to make profit by using raw materials, labor and
manufacturing with compared to its competitors.

1.4.3 Return on total asset:

18
16
14
12
10
SRM Company
8
Industry Average
6
4
2
0
2013 2014 2015

The return on assets of SRM has been declining from 16.83% to 0.786% from 2013 to
2015. Compared to industry average of 8.8% other companies are more efficient in
generating profit using its assets

12
SRM’s return on asset has drastically declined from 2013 to 2015 (ie.16.83% to
0.786%) as compared to industry average i.e. 8.8%. ROA indicate the efficiency in
generating profit using its asset. Therefore, SRM is less effective in generating profit
by using its asset, as compared to competitors.

1.4.4 Return on owner’s equity

30 28.26

25

20
16.68 17.5
15 SRM Company
Industry Average
10

5
1.955

0
2013 2014 2015

Capabilities of generating profit from shareholders money determine the ROE. Return
on equity for SRM is rapidly declining from 2013 to2015, (i.e. 28.26 to 1.95%),
industry average is found to be 17.5%. which indicate SRM is less capable of generating
profit from shareholder money compared to competitors.

Question no. 2.
Based on the case data and the results of your analysis in Question 1, what are the
SRM’s strengths and weaknesses? What are the causes thereof? (Use of the Du Pont
system and Altman Z factor would facilitate analysis and strengthen your answer.)

Solutions,

13
For 2013

X1=CA-CL/TA= (45,298.00-14,733.00)/61,539.00 = 0.4966 = 49.66%

X2 = Retained Earnings/ Total Assets = 11,041.00/61,539.00 = 17.94%
X3 = EBIT / Total Assets = 21,251.00/61,539.00 = 0.3453 times
No. of shares = NI/ EPS = 10,355.00/2.69 = 3,849 shares
ME = No. of shares * MPPS = 3,849.44 * 17.79 =68,481.5
X4 = ME / Book Value of Total Debt = 68,481.57/24,901.00 = 2.75 times
X5 = sales/total assets = 188,097.00/61,539.00 = 3.06 times
Altman Z factor = 0.012 X1 +0.014 X 2 +0.033 X3+0.006 X4+0.999 X5
=0.012(0.4966) +0.014 (0.1794) +0.033 (0.3453) +0.006 (2.75) +0.999 (3.06)
= 3.093

For 2014

X1=CA-CL/TA= (61,043.00 – 22,777.00)/78,034.00=0.4904 = 49.04%

X2 = Retained Earnings/ Total Assets = 16,282.00/78,034.00 = 20.86%
X3 = EBIT / Total Assets = 15,364.00/78,034.00 =0.1969 times
No. of shares = NI/ EPS = 6,987.00/1.81 = 3,860.22 shares
ME = No. of shares * MPPS = 3,860.22* 9.69 = 37,405.54
X4 = ME / Book Value of Total Debt = 37,405.54/36,156.00 = 1.02 times
X5 = sales/total assets = 203,124.00/78,034.00 = 2.60 times
Altman Z factor = 0.012 X1 +0.014 X 2 +0.033 X3+0.006 X4+0.999 X5
= 0.012 (0.4904) +0.014 (0.2086) +0.033 (0.1969) +0.006 (1.02) +0.999 (2.60) =
2.62

14
For 2015

X1=CA-CL/TA= (87,913.00–50,118.00)/105,711.00 =0.3575= 35.75%

X2 = Retained Earnings/ Total Assets = 16,904.00/105,711.00 = 15.99%
X3 = EBIT / Total Assets = 4,888.00/105,711.00 =0.0462 times
No. of shares = NI/ EPS =830/0.22 = 3,772.72 shares
ME = No. of shares * MPPS = 3,772.72* 1.02 = 3,848.18
X4 = ME / Book Value of Total Debt =3,848.18/63,211.00 = 0.061 times
X5 = sales/total assets = 215,305.00/105,711.00 = 2.04 times
Altman Z factor = 0.012 X1 +0.014 X 2 +0.033 X3+0.006 X4+0.999 X5
= 0.012 (0.3575) +0.014 (0.1599) +0.033 (0.0462) +0.006 (0.061) +0.999 (2.04) =
2.05

2.1 Altman Z Factor:

Z Factor
3.50%
3.09%
3.00%
2.62%
2.50%
2.05%
2.00% 2013
2014
1.50%
2015
1.00%

0.50%

0.00%
2013 2014 2015

15
2.2 Du Pont Analysis of SRM
For 2013

ROE = NI/Sales * Sales/Total Assets * Total Assets/Total Equity

ROE = 10,355.00/188,097.00 * 188,097.00/61,539.00 * 61,539.00/36,637.00
ROE = 0.0550 * 3.0565 * 1.6796 = 0.2824 =28.24%
ROE = NPM * TAT * EM

For 2014

ROE = NI/Sales * Sales/Total Assets * Total Assets/Total Equit1

ROE =6,987.00/203,124.00* 203,124.00/78,034.00* 78,034.00/41,877.0
ROE = 0.0344 * 2.6030 * 1.8633 = 0.1668 = 16.68%
ROE = NPM * TAT * EM

For 2015

ROE = NI/Sales * Sales/Total Assets * Total Assets/Total Equity

ROE = 830.00/215,305.00* 215,305.00/105,711.00 * 105,711 /42,500.00
ROE = 0.0038 * 2.0367 * 2.4873= 0.0195 = 1.95%
ROE = NPM * TAT * EM

16
Du Pont Analysis:

ROE
30.00% 28.24%

25.00%
20.00% 16.68%
15.00%
ROE
10.00%
5.00% 1.95%
0.00%
2013 2014 2015

Based on the case data and the results of ratio analysis SRM’s strengths and weaknesses
and the causes thereof are listed below:

Strengths:
• The fixed asset turnover ratio 12.097 in 2015 is increasing, which is more than
industries ratio i.e. 12 times. So, we can conclude that the company is using the
fixed assets in an efficient way.

• Altman’s Z factors for 2015 is 2.05 which is between 1.81 and 2.99. So, the
company fall under the gray zone and if some improvements are not done and
resource are not managed efficiently, company might go under the bankruptcy,
So, the company need to be more careful.

Weakness:
• The current ratio and quick acid ratio are poor in 2015 as compared to industries
which indicates that company will not be able to pay creditor if the demand
money. So, this shows the bad performance of the company.

• The debt ratio of the company is also higher as compared to industry average.
So, company need to reduce debt financing and should be encourage to
employee more of equity for efficient management.

17
 • The times interest ratio is also very low which indicates the risk in the company.
The company is also performing worse in the inventory turnover and assets
turnover as compared to the industry. Company is not able to collect its
receivable in short period of time. Industries is collecting within 32 days but in
2015, it takes about 54 days for the company to collect the receivable amounts.

• The profitability ratio indicates the company is not performing well as of its
competitors and the industry. Company earning per share(eps) is declining
gradually form years which shows the bad performance if the company.

Question No.3.
If the bank were to maintain the present credit lines and grant an additional $7,012,500
short-term loan at a 16 percent rate of interest effective from January 1, 2016, would
the company be able to retire all short-term loans existing on December 31, 2016?
(Assume that all of White’s plans and predictions concerning sales and expenses
materialize. In these calculations cash is the residual balancing figure, and SRM’s tax
rate is 48%. Assume that SRM pays no cash dividends during the year.) Complete tables
9 and 10 included as worksheets to facilitate analysis.

18
Table 9: Silver River Manufacturing Company

Pro Forma Income Statements (Projected)

Worksheet for Year End 2017 (Thousands of Dollars)

Particulars 2015 2016 2017

Projected Projected
Net sales 215,305 228223 249904
Cost of goods sold 183,307 188284 199923
Gross profit 31,998 39939 49981
Administrative and selling expenses 18,569 18258 18743
Depreciation 2,244 2665 2006
Miscellaneous expenses 6,297 3994 3124
Total operating expenses 27,110 24,917 23873
EBIT 4,888 15022 26108
Interest on short term loan 2,006 4331 4331
Interest on long-term loans 1,052 1052 1052
Interest on mortgage 233 210 189
Net income before tax 1,597 9429 20536
Taxes 767 4526 9857
Net income 831 4903 10679
Dividends on stock 208 0 0
Additions to retained earnings 623 4903 10679

Working Note:

Calculations
Particulars 2016 2017
Projected sales 215,305 *1.06 228223 228223.3* 1.095 2,49904
Cost of goods sold 82.5% of 228223.3 188284 80% of 249904.5 1,99923
Administrative and selling
expenses 8% of 228223.3 18258 7.5% of 249904.5 18743
Miscellaneous expenses 1.75%of228223.3 3994 1.25% of 249904.5 3124

Taxes 48% of 9429.23 4,526 48% of 20536.24 9857

19
Table 10: Silver River Manufacturing Company

Pro Forma Balance sheets (Projected)

Worksheet for Year End 2017 (Thousands of Dollars)

Particulars 2015 2016 Projected 2017 Projected

Assets
Cash 4296 40096 48901
Accounts receivable 32293 20286 22214
Inventory 51324 32603 35701
Current assets 87913 92985 106816
Land, Building, plant and 25161 32173 33139
equipment
Accumulated depreciation (7363) (10028) (10939)
Net fixed assets 17798 22145 22199
Total assets 105711 115130 129015
Liabilities and equities
Short term bank loans 20056 27068 27068
Account payable 21998 17594 18474
Accruals 8064 10231 12789
Current liabilities 50118 54894 58331
Long term bank loans 10519 10519 10519
Mortgage 2574 2314 2083
Long term debt 13092 12833 12602
Total Liabilities 63211 67727 70933
Common stock 25596 25596 25596
Retained earnings 16904 21807 32486
Owners’ equity 42500 47403 58082

Total Capital 105711 115130 129015

20
Working Note for table 10:

3.1 Retained Earnings

For 2016: Retained earnings (2015) + Addition in 2016

i.e. 16904+4903.19 = $21807

For 2017: Retained earnings (2016) + Addition in 2017

i.e. 21807 +10679 = $32486

3.2 Accounts Receivables

For 2016: Average collection period = Receivables / Sales per day

i.e. 32= Receivables / (228223.3 / 360
Therefore, receivables = 20286

For 2017: Average collection period = Receivables / Sales per day

i.e. 32 = Receivables / (249904.5 / 360)
Therefore, receivables = 22214

1. Inventory
ITR = sales /inventory

For 2016,
ITR =228223/inventory
7 =228223/inventory
Inventory= $32603

For 2017,
ITR= sales/ inventory
7 = 249904/inventory
Inventory= $35701

21
 Therefore, the residual balancing figure of cash for 2016 is $40096 and for 2017 is
48906. In 2016, the company had total balance of $40096 and during the same year
the short-term bank loan to be retired is, $27068.
= $(40096 – 27068)
= $13028

5% of sales is maintain by the company

Minimum cash balance = $ (228223* 0.05)
= $ 11411.15
From the calculation we can see that the company is able to maintain the minimum
cash balance. Hence, it has enough cash balance to retire the short-term bank loans
i.e. SRM will be able to retire its short-term bank loan if the prediction made were
materialized.

Question No.4.
Compute projected financial ratios for 2016 and 2017 (or complete Table 11). Compare
these ratios with 2015 along with industry averages and analyze improvement or
deterioration in financial condition.

Table 11: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31, 2017 (Projected)

Particulars 2015 2016 2017 Industry Comment Comment

Projected Projected Average 2016 2017
Liquidity ratios
1.Current Ratio 1.75 1.69 1.83 2.50 Poor Poor
2.Quick ratio 0.73 1.10 1.22 1.00 Good Good
Leverage ratios
3, Debt ratio, % 60 59 55 50.00 High (Risky) High (Risky)
4.Time Interest Earned 1.46 2.69 4.69 7.70 Low (Risky) Low (Risky)
Assets management
ratios
5.Inventory turnover 3.57 5.78 5.6 5.70 Ok Ok
(Cost)
6.Inventory turnover 4.20 7 7 7.00 Ok Ok
(selling)
7.Fixed Assets turnover 12.10 10.31 11.26 12.00 Somewhat low Somewhat
low
22
8.Total Assets turnover 2.04 1.98 1.94 3.00 Poor Poor
9. Average collection 54 32 32 32.00 Ok Ok
Period (days)
Profitability Ratios
10. Profit margin (%) 0.38 2.1 4.27 2.90 Somewhat low Ok
11. Gross profit margin 14.86 17.5 20 18.00 Somewhat low Ok
(%)
12. Return on Total Assets 0.79 4.26 8.28 8.80 Poor Ok
(%)
13. Return on owners’ 1.96 10.34 18.39 17.50 Poor Ok
equity (%)

4.1 Ratio
Working Note

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
a) Current Ratio, 2015 = Current Liasbilities

87913
= 50118

=1.75 times

92985
2016 (projected) = 54894

= 1.69 times

106816
2017(projected) = 58331

= 1.83 times

𝐶𝐴−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
b) Quick Ratio,2015 = Current Liasbiles

87913−51324
= 50118

= 0.73 times

92985−32603
2016(projected) = 54894

= 1.10 times

23
 106816−35701
2017(projected) = 58331

= 1.22 times

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
c) Debt Ratio,2015 = Total Assets

63211
= 105711

= 0.60 i.e. 60%

67727
2016(projected) = 115130

= 0.59 i.e. 59%

70933
2017(projected) = 129015

= 0.55 i.e. 55%

𝐸𝐵𝐼𝑇
d) Times Interest Earned,2015 = Interest
4888
= 2066+1052+233

= 1.46 times

15022
2016(projected) = 4331+1052+210

= 2.69 times
26108
2017(projected) = 4331+1052+189

= 4.69 times

𝐶𝑂𝐺𝑆
e) Inventory Turnover (cost),2015 = Inventory

183307
= 51324

= 3.57 times

24
 188284
2016(projected) = 32603

= 5.78 times

199923
2017(projected) = 35701

= 5.60 times

𝑆𝑎𝑙𝑒𝑠
f) Inventory Turnover (selling),2015 =
Inventory
215305
= 51324

= 4.20 times
228223
2016(projected) = 32603

= 7 times
249904
2017(projected) = 35701

= 7 times

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
g) Return on Total Assets,2015 = Total Assets

831
= 105711

= 0.79%

4903
2016(projected) = 115130

= 0.0426 i.e. 4.26%

10679
2017(projected) = 129015

= 0.0828 i.e. 8.28%

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
h) Return on owners’ Equity,2015 = Equity
831
= 42500

= 0.019 i.e. 1.96%

25
 4903
2016(projected) = 47403

= 0.1034 i.e. 10.34%

10679
2017(projected) = 58082

= 0.1839 i.e. 18.39%

Question No.5.
If all short-term bank loans are repaid towards the end of the first half of 2016, do you
think that company is still able to pay regular dividends and maintain minimum cash
balance? Revise the tables 9, 10, 11 (or complete the tables 12, 13 and 14). Do you find
any situations developing that may indicate poor financial policy? What should be the
impact of such situations on the ratios for the company, and are such impacts
necessarily either good or bad? Why?

Solutions,
If all the short-term loans are repaid at the end of first half of 2016, the company would
be able to pay its regular dividends in 2016 as well as in 2017. This is because the
interest on short term loan is being decreased in 2016 and is being zero by 2017.
The minimum cash balance required at the end of 2016 is 11411.15 (5% of 228223).
The company after paying the dividend of 25% during the year 2016 has the cash
balance of $10125440. So, the company will not be able to maintain the minimum cash
balance of $10387276.

The impacts on the ratios after the payment of short-term bank loans are:

26
 Table 12: Silver River Manufacturing Company
Pro Forma Income Statements (Revised)
Worksheet for Year End 2017 (Thousands of Dollars)

particular 2015 2016(Revised) 2017(Revised)

Net sales 215,305 228,223 249,904

Cost of good sales 183,307 188,284 199,923

Gross profit 31,998 39,939 49,981

Administrative and selling 18,569 18,258 18,743

Depreciation 2,244 2,665 2,006

Miscellaneous expenses 6,297 3,994 3,124

Total operating expenses 27,110 24,917 23,873

EBIT 4,888 15,022 26,108

Interest on short term-loans 2,006 2,165 0

Interest on long- term loans 1,052 1,052 1,052

Interest on mortgage 233 210 189

Net income before tax 1,597 11,595 24,867

Taxes 767 5,566 11,936

Net income 831 6,029 12,931

Dividend on stock (25% _ table 2) 208 1,507 3,233

Additions to retained earnings 623 4,522 9,698

27
 Table 13: Silver River Manufacturing Company

Pro Forma Balance Sheets (Revised)

Worksheet for Year End 2017 (Thousands of Dollars)

Particulars 2015 2016(Revised) 2017(Revised)

Assets
cash 4,296 12,646 21,565
Account receivables 32,293 20,286 22,214
Inventory 51,324 32,603 35,701
Current assets 87,913 65,535 79,450
Land, building, plant and equipment 25,161 32,173 33,139
Accumulated depreciation 7,363 10,028 12,033
Net fixed assets 17,798 20,145 21,105
Total assets 105,711 87,680 100,585
Liabilities and equities
Short term bank loan 20,056 0 0
Account payable 21,998 17,594 18,474
Accruals 8,064 10,231 12,789
Current liabilities 50,118 27,826 31,263
Long term bank loans 10,519 10,519 10,549
Mortgage 2,574 2,314 2,083
Long term debt 13,092 12,833 12,602
Total liabilities 63,211 40,658 43,865
Common stock 25,596 25,596 25,596
Retained earnings 16,904 21,426 31,124
Owner equity 42,500 47,022 56,720
Total capital 105,711 87,680 100,585

28
Working note:

For calculating account receivables,

2016: average collection period = receivable /(sales/360)

32 = receivables/ (228223/360)

Receivable = 20286

Similarly for 2017,

Receivable= 22214

Inventory turnover ratio 2016, = sales / inventory

7 = 228223/inventory

Inventory= 32603

For 2017,

Inventory = 35701

29
 Table 14: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31 (Revised)

Particulars 2015 2016(Revised) 2017(Revised) Industry comment Comment

Average 2016 2017
Liquidity ratio

Current ratio 1.75 2.35 2.54 2.5 poor ok

Quick ratio 0.73 1.18 1.4 1 ok good

Leverage ratio

Debt ratio 60% 46.37% 43.61% 50% ok ok

Time interest earned 1.49% 4.38% 21.03% 7.70% poor good

ratio
Assets
management ratio
Inventory Turnover 3.57 5.77 5.6 5.7 ok poor
(cost)
Inventory 4.2 7 7 7 ok ok
turnover(selling)
Fixed assets 12.1 10.3 11.84 12 poor poor
turnover
Total assets 2.04 2.6 2.48 3 poor poor
turnover
Average collection 54days 32.6 32 32 ok ok
period
Profitability ratio

Profit margin 0.39% 2.64% 5.17% 2.90% poor good

Gross profit margin 15% 17.50% 20% 18% ok good

Return on total 0.79% 6.87% 12.86% 8.88% poor good

assets
Return on owners’ 1.96% 12.82% 22.80% 17.50% poor good
equity

Working note:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
a. Current Ratio (2016) =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

65535
=
27826

= 2.35 times
30
 79480
2017 = 31263

= 2.54 times

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
b. Quick ratio (2016) = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

65535−32603
=
27826

= 1.18 times

79480−35701
2017 =
31263

= 1.4 times

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
c. Debt Ratio =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

40658
=
87680

= 46.37 %

43865
2017 =
100585

= 10.95 %

𝐸𝐵𝐼𝑇
d. Times interest earned ratio (2016) =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

15022
=
3427

= 4.38 times

26108
2017 =
1241

= 21.03 times
31
 𝐶𝑂𝐺𝑆
e. Inventory turnover Cost (2016) =
𝐼𝑛𝑣𝑒𝑛𝑜𝑟𝑦

188284
=
32603

= 5.77 times

199923
2017 =
35701

= 5.6 times

𝑆𝑎𝑙𝑒𝑠
f. Inventory turnover (selling) 2016 =
𝐼𝑛𝑣𝑒𝑛𝑜𝑟𝑦

228223
=
32603

= 7 times

249904
2017 =
35701

= 7 times

𝑆𝑎𝑙𝑒𝑠
g. Fixed Assets Turnover (2016) =
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

228223
= 22145

= 10.3 times

249904
2017 =
21105

= 11.84 times

𝑆𝑎𝑙𝑒𝑠
h. Total Assets Turnover ratio (2016) =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
32
 228223
=
87680

= 2.6 times

249904
2017 =
100585

= 2.48 times

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
i. Average Collection period(2016) =
𝑆𝑎𝑙𝑒𝑠/360

20286
=
228223/360

= 32 days

22214
2017 =
249904/365

= 32 days

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
j. Profit Margin Ratio (2016) =
𝑆𝑎𝑙𝑒𝑠

6029
= 228223

= 2.64 %

12931
2017 =
249904

= 5.17 %

33
 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
k. Gross Profit Margin (2016) =
𝑆𝑎𝑙𝑒𝑠

39939
=
228223

= 17.5 %

49981
2017 =
249904

= 20 %

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
l. Return on Total Assets (2016) =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

6029
=
87680

= 6.87 %

12931
2017 =
100585

= 12.86 %

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
m. Return on owner’s equity (2016) =
𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

6029
=
47022

= 12.82 %

12931
2017 =
56720

= 22.8 %

34
Again,

Comparing the proposed and revised financial ratios with 2015.

Particulars 2015 2016(Projected) 2016(Revised) 2017(Projected) 2017(Revised)

Current ratio 1.75 1.69 2.35 1.83 2.54

Quick ratio 0.73 1.1 1.18 1.22 1.4

Debt ratio 60 59 46.37 55 10.95

Time interest earned
ratio % 1.46 2.69 4.38 4.69 21.03
Inventory
turnover(cost) 3.57 5.78 5.97 5.6 5.6
Inventory
turnover(selling) 4.2 7 7 7 7

Fixed assets turnover 12.1 10.31 10.3 11.26 11.84

Total assets turnover 2.04 1.99 2.6 1.94 2.48

Average collection
period 54days 32days 32 32 32

Profit margin % 0.38 2.1 2.64 2.9 51.17

Gross profit margin % 14.86 17.5 17.5 18 20

Return on total assets
% 0.79 4.26 6.87 8.8 12.86

Return on equity % 1.96% 10.34 12.82% 17.5 22.8

35
Question 6. On the basis of your analyses, do you think that the bank should?

a) Extend the existing short- and long-term loans and grants the additional
$7,0125,00 loan, or
b) Extend the existing short- and long-term loans without granting the additional
loan, or
c) Demand immediate repayment of both existing loans?

If you favor (a) or (b) above, what conditions (collateral, guarantees, or safeguards)
should the bank impose to protect itself on the loans?

Answer

• From our analysis we found that bank should extend the existing short and
long – term loans and grant the additional $7012500 loans. From the case, we
know that the SRM was a good client of MCNB as they usually never had any
due, giving them unquestioned reputation.

• The current problem occurred due to financial downturn which was forced on
people all around which affect the sales revenue of the firm because of the
unexpected change in climate condition that reduce the demand of the products
, but the problem can be said to be temporary.

• As we see in the year 2014-2015, we see that the financial position of the firm
is degrading till 2015. The entire ratio from liquidity to profitability is
decreasing. From the Altman Z factor we know the potential failure indication,
which has been decreasing from 3.09 to 2.05. Z factor being in the gray Zone
means that the company must watch its activity very carefully, since bankruptcy
is around the corner.

• Further, Mr. White had signed a contract for a plant expansion. The company
has jumped into custom horse van which is a beneficial area. According to Mr.
White’s analysis, this area is free from recession. The company’s financial
position might improve significantly over the next two years.

• Analyzing the condition of SRM we can find that they seems quite able to repay
their short term loan

36
 In addition for the purpose of safety, bank should impose collaterals, guarantees
and other safeguards. The collaterals will serve as a value given or pledged as
security for payment of loan. In this case, the bank may charge SRM following
collaterals:

• Financial collaterals:
o Stocks,
o Negotiable paper

• Merchandise collaterals:
o Warehouse receipts,
o Rights in real estates
o Machineries,
o Further,
o Livestock.

The most promising collateral option for the bank to charge SRM would be the new
operation which is going to start. Above mentioned collaterals may also be charged by
the bank in securing itself from default. In case of default, the bank may sell the
collateral pledged by SRM and apply the money thus acquired to payment of the debt.

Question 7: If the bank decides to withdraw the entire line of credit and to demand
immediate repayment of the two existing loans, what alternatives would be open to
SRM?

Answer

In case if the bank withdraws the entire line of credit and demands immediate
repayment of the two existing loans, SRM can adopt following actions:

• Take mortgage loan from bank:

SRM has land, buildings, plant and equipment worth of $ 25161. Hence, it can
request loan with another bank mortgaging its land and buildings.

37
 • Sell accounts receivables and liquidate inventory:
SRM has accounts receivables of $ 32,293 and inventory worth $ 51,324. It can
sell its receivables and liquidate the inventory in order to repay the loan.

• Make strict collection policies:

The average collection period of SRM is 54 days in 2015. The company has to
make its collection policies stricter. So, that the debtors will pay in time. Here,
SRM is adopting liberal collection policies.

SRM has to take immediate actions as well as gradual steps to stabilize its condition. It
can mix the above-mentioned actions as a response to the bank’s decision of
withdrawing entire line of credit and demanding immediate repayment of existing
loans.

Question 8. Explain some of the lesson learnt from the case.

Answer: After analyzing the case of SRM Company we learnt to analyze the case of
the company, to calculate the financial ratios and know its interpretation, to learn to
compare the financial ratios with industry average, learn to compute and analyzed Du
Pont System. They are briefly discussed below:

a. To analyze the company’s financial position on the basis of ratio analysis:-

After analyzing all the issues of SRM Company, we are able to analyze financial
position of company. We also further learnt how to interpret the financial statement by
comparing with industry average.

b. To decide what types of company should be given loan:-

After solving the issues of SRM Company we can evaluate that what kind of loan must
be given or taken to the company under certain situation of the company.

38
 c. To analyze financial ratios of the company:-
We have learnt different ratios to analyze financial performance of the company
through which various decisions can be performed. The different ratios we have learnt
in the case are liquidity ratio, assets management ratio, debt management ratio,
profitability ratio, market value ratio, Altman Z factors.

d. For decision making process:-

For the loan purpose the bank must analyze the different ratios of the company like:
➢ Short-term loan: Liquidity ratio
It includes current ratio and quick ratio.
➢ Long-term loan: Solvency ratio
It includes profit margin ratio, debt ratio, time interest ratio and different
turnover ratios.

39
 CONCLUSSION

Silver River Manufacturing Company (SRM) is U.S based, whose stock is traded over the
counter, and is large regional producer of farm and utility trailers specialized lives stock carriers
and mobile home chassis. More than 85% of SRM’S sales come from the southern part of the
United States though a growing market for customer horse transport vans designed and
produced by SRM is developing nationally as well as internationally. This company has been
a good customer of Marion country National Bank (MCNB) however, due to inability to meet
the contractual financial ratio by the company, Lesa Nix; Vice-president of MCNB had made
an alerting phone call to the Greg White, founder and president of SRM.

The past performance of SRM had been recognized to be effective, because SRM pays due
amount within the due time which reflects the good reputation in the market and considered the
SRM company to have good long run prospect. And The current problems faced by SRM are
not solely because of its operational failure. Rather, it is due to unavoidable circumstances like
financial downturn (recession) in the market and the unexpected change in the climatic
conditions that reduced the demand of its products in the market. SRM is also committed to
repaying its loan.

Further, Mr. White had signed a contract for a plant expansion. The company has jumped into
mobile chassis, which is beneficial area. Shifting from policy of aggressive marketing and sales
promotion to full margin prices, standard industry credit term and tighter credit standard would
reduce the cost of goods sold. Likewise, he is also planning to minimize administrative and
selling expenses and miscellaneous expenses in the coming two years, which shows the
company financial position might improve significantly over the next two years.

40
 Financial ratio used in case

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
1. Current Ratio = Current Liasbilities

𝐶𝐴−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
2. Quick Ratio = Current Liasbiles

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
3. Debt Ratio = Total Assets
𝐸𝐵𝐼𝑇
4. Times Interest Earned = Interest

𝐶𝑂𝐺𝑆
5. Inventory Turnover (cost) = Inventory

𝑆𝑎𝑙𝑒𝑠
6. Inventory Turnover (selling) = Inventory

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
7. Return on Total Assets = Total Assets
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
8. Return on owners’ Equity = Equity

9. Fixed assets turnover = Sales/Net fixed assets

10. Total assets turnover = Sales/ Total assets

11. Net profit margin = Net income/ Sales

12. Basic earning power = EBIT/Total assets

13. Return on equity (ROE) = Net Income / Equity

14. EPS = NI/ No. of shares

15. Price-earning (P/E) = MPS/ EPS

16. Book value per share = Book equity/ No. of shares

17. Market/Book values = MPS/ Book value per share

41
18. ROE = NPM x TAT x EM
19. Z=0.012 X1 +0.014 X 2 +0.033 X3+0.006 X4+0.999 X5
X1 = (CA-CL)/ TA, %
X2 = Retained Earnings/ Total Assets, %
X3 = EBIT / Total Assets, %
X4 = ME / Book Value of Total Debt (market value of equity includes
both pref. & com. shares, and debt includes CL + LTL), %
X5 = sales/total assets, times

42