Name : Irfan Poonawala Id # 82210015

Homework on Financial Analysis

Q1. Part A:

Managerial Income Statement

2003 2004 2005 Remarks
1 Sales 22,100 24,300 31,600
2 EBIT 650 900 1,350
3 NOPAT (2x.6) 386 538 810 Tax 40%
4 Interest A Tax (Interest x 0.6) 110 66 130 78 267 160
5 Net Income 320 460 650

Managerial Balance Sheet

6 Cash 600 350 300
7 Accts. Receivable 2,730 3,100 4,200
8 Inventories 2,800 3,200 4,300
9 Accts. Payables 1,400 1,600 2,050
10 Accrued Expenses 200 260 350
11 WCR (7+8-9-10) 3,930 4,440 6,100
12 Net Fixed Assets 1,200 1,300 1,440
13 Invested Cap (11+12+6) 5,730 6,090 7,840

14 Short Term Debt 300 500 1,900

15 Long Term Debt 1,300 1,200 1,100
16 Owners Equity 4,130 4,390 4,840
17 Cap Employed (14+15+16) 5,730 6,090 7,840

Managerial Cash Flow Statement Inflow/Outflow

18 NOPAT 538 810
19 Depreciation 100 101
20 Operating Cash Flow (18+19) 638 911
21  Cash Balance 250 50
22  WCR (510) (1660)
23  Net Fixed Assets (100) (140)
24 Depreciation (100) (101)
25 Capital Expenditures (23+24) (200) (241)
26 Investment CF (22+25+21) (460) (1851)
27 Free Cash Flow (20+26) 178 (940)
28 Financial Cash Flows
29 Interest After Taxes (78) (160)
30  Short Term Debt 200 1400
31  Long Term Debt (100) (100)
32 CF to Debt (29+30+31) 22 1140
33 Dividends to Equity (200) (200)
34 New Equity Issued 0 0
35 CF to Equity (33+34) (200) (200)
36 Free Cash Flow (32+35) (178) 940

Problem on Fin Analysis 1 Suren Mansinghka

Name : Irfan Poonawala Id # 82210015

Part B:

Ratio Formula 2003 2004 2005 Remarks

1 Op. Margin EBIT/Sales 650/22100 2.9% 3.7% 4.3%
2 Turnover Sales/Inv. Cap 22100/573 3.86 3.99 4.03%
0
3 ROICBTax EBIT/Inv. Cap 650/5730 11.34% 14.8% 17.2%
4 Int. Factor EBT/EBIT 540/650 0.83 0.86 0.80
5 Lev. Factor Inv. Cap/Equity 5730/4130 1.39 1.39 1.62
6 Financial EBT/EBIT x Inv 0.83 x 1.39 1.155 1.20 1.30
Multiplier Cap/Equity
7 Tax Factor Net Inc/EBT 320/540 0.59 0.60 0.60
8 ROE Net Inc/Equity 320/4130 7.75% 10.48% 13.43%
Alternate Formula: ROE = Net Income/Equity = ROICAT + (ROICAT – Int. RateAT) x Debt/Equity
9 ROICAT NOPAT/InvCap 386/5730 6.74% 8.83% 10.33%
10 Int. RateBT Int./Total Debt 110/1600 6.88% 7.65% 8.90%
11 Int. RateAT IntAT/T0tal Debt 66/1600 4.13% 4.59% 5.33%
12 Spread (9-11) (ROICAT – Int.RateAT) 2.63% 4.24% 5.0%
13 Debt Equity T. Debt/Equity 1600/4130 38.7% 38.7% 61.98%
14 ROE Net Income/Equity 320/4130 7.75% 10.48% 13.43%

Part C:
1. Increase in sales over the three years period
2. Decrease in WCR over 3 year period
3. Increase in leverage ratio
4. Increase in Owners equity

Part D:
Revised Amounts of Items in WCR/Operating Cycle in 2005
Item Accounts Receivable Inventories Acct. Payables
Formula Sales/365 x 30 days COGS/8 (COGS +  Inventory)/365x 33
New AMT 31600/365 x 30 =2,597 25100/8 = 3,138 25100+(3200-4300)/365 x 33 = 2170
Old AMT. 4,200 4,300 2,050

Balance Sheet New Income Statement New Cash Flow Statement

Item New Amt Old Amt Item Amount Item Amount
Cash $1285 $300 1. Sales $31,600 1. NOPAT .6 x EBIT 810
WCR 3215 6,100 2. EBIT 1,350 2.  WCR2 1,225
Net Fixed Assets 1,440 1,440 3. NOPAT 810 3.  Net Fixed Assets (140)
Invested Capital 5,940 7,840 4. Interest1 54 4.  Cash Balance3 (935)
5. Interest A Tax 32 5. FCF (1+2+3+4) 960
Short Term Debt 0 1,900 6.EBT (2-4) 1,296 6. Dividends 328
Long Term Debt 1,100 1,100 7. Tax 40% of 6 518 7. Int. A. Taxes 32
Owners Equity 4,840 4,840 8. NI (3-5 or 6-7) 778 8.  S.T & LT Debt4 600
Cap. Employed 5,940 7,840 9. Dividends 328 9. FCF (6+7+8) 960

Problem on Fin Analysis 2 Suren Mansinghka

Name : Irfan Poonawala Id # 82210015

Due to improved working capital cycle (A/R and A/P) there is reduction in WCR and
improvement of cash in hand

Q. 2:

A. SGR = 0.6*0.08*0.9*1*0.6 = 2.59%

Since SGR< target growth rate (5%) – it is not sustainable growth rate

B. Firm needs to increase the turnover by 1.7 times to achieve the growth rate of 5%.
Alternatively it will need to increase the profit margin ratio by 15.43%

C. If the firm borrows @ 10%, the growth rate is still not sustainable since ROE is
less than cost of debt. It implies that ROIC is also less then cost of debt. Hence
the firm should not borrow

Problem on Fin Analysis 3 Suren Mansinghka