Exhibit 2 - Balance Sheet (in $ thousand, some numbers are rounded)

At December 31 2002 2003 2004 2005 2006E

Assets
Cash 705 1542 1818 2158 1955
Accounts Receivable 3485 4405 6821 10286 14471
Inventories 3089 2795 3201 3291 3847
Current Assets 7279 8742 11839 15735 20273
Plant, Property, & Equipment (net) 2257 2680 2958 3617 4347
Other Assets 645 645 645 645 645
Land 450 1750 2853 2853 2853
Non-Current Assets 3352 5075 6456 7115 7844
Total Assets 10631 13817 18295 22850 28117
Liabilities & Shareholders Equity
Accounts Payable 2034 2973 4899 6660 9424
Current Portion of Long-term Debt 315 352 525 730 649
Current Liabilities 2349 3325 5423 7390 10074
Long-Term Debt 3258 4400 5726 7123 8480
Shareholders Equity 5024 6091 7146 8336 9563
Total Liabilities & Shareholders Equity 10631 13817 18295 22850 28117
Exhibit 3 - Income Statement (in $ thousand, some numbers are rounded)
For Years Ending December 31 2002 2003 2004 2005 2006E
Sales 24652 26797 29289 35088 42597
Cost of Goods Sold 20461 21706 23841 28597 35100
Gross Profit 4191 5091 5448 6491 7497
General & Administrative Expense 1999 2138 2372 2877 3578
Research & Development 203 203 212 222 232
Depreciation & Amortization 347 412 455 557 669
Earnings before Interest & Taxes 1641 2338 2408 2836 3018
Interest 187 349 440 547 658
Earnings before Taxes 1454 1989 1968 2289 2360
Taxes 264 696 689 801 826
Net Income 1191 1293 1279 1488 1534
Derived Statement of Cash Flows (in $ thousand, some numbers are rounded)
For Years Ending December 31 2003 2004 2005 2006E
Net Income 1293 1279 1488 1534
Depreciation & Amortization 412 455 557 669
Change in Accounts Receivable -920 -2416 -3465 -4185
Change in Inventories 294 -406 -90 -556
Change in Accounts Payable 939 1926 1761 2765
Operating Cash Flow 2019 838 250 226

Investment in PP&E -835 -734 -1215 -1398

Investment in Other Assets 0 0 0 0
Investment in Land -1300 -1103 0 0
Investing Cash Flow -2135 -1836 -1215 -1398

Debt Issuance 1494 1850 2128 2006

Retirement of Debt -315 -352 -525 -730
Dividends -226 -224 -298 -307
Financing Cash Flow 953 1274 1306 969

Change in Cash 837 276 340 -203

 Answer for Question 1

Question 1A Out of the net income of 1,534 expected to be earned in 2006, only 226 will translate to the
cash flow from operations' for 2006. This means only 14.73% of the net income will
translate to the 'cash flow from operations.

Out of the three categories, Operating Cash Flow' has contributed majorly to the decrease
in the change in cash' by the company from 2003 to 2006(E).

Question 1B Trend in cash flow from 'operating activities' - Over the years, the cash flow from operating
activities are constantly decreasing.
the reason for decrease in cash flow from operating activities is 'Increase in Accounts
Receivable'

Trend in cash flow from 'investing activities' - Over the years, the cash flow from investing
activities are increasing.
Reason for increase in cash flow from investing activities is the decrease in investment in
land over the years.

Trend in cash flow from 'financing activities' - The cash flow from financing activities
increased constantly from 2003 till 2005 but decreased in 2006(E).
Reason for firstly increase and then decrease in cash flow from investing activities is the
amount of debt issued by the company in each year.

Question 1C Cash position of the company - The cash position of the company is not satisfactory. The
company has generated only 226 in cash flow from operating activities in 2006(E) despite
earning a net income of 1,534 in 2006(E). This has led to the negative change in cash of
cash of -203 in 2006(E)

Funding of investments - The company is currently relying upon issuance of debt to fund
its investment. The company has issued debt of 2,006 in 2006(E) in order to fund its
investment of PP&E of -1,398. This might lead to the company being caught in the debt
trap. Instead, the company can use its accumulated profits and reserves to fund its
investments.

Free cash flow -

Free cash flow (2006E) = Operating Cash Flow - Capital Expenditures
Free cash flow (2006E) = 226 - 1,398
Free cash flow (2006E) = -1,172
The free cash flow of the company in 2006(E) is negative because of the two factors,
namely increase in accounts receivable and increased investment in PP&E. The accounts
receivable increased by 4,185 which resulted in lower Operating Cash Flow and increased
investment in PP&E further reduced the free cash flow.

Anser for Question 2

Question 2A 2002 2003 2004 2005

 Operating working capital 4,540.00 4,226.57 5,122.45 6,917.20

Question 2B 2002 2003 2004 2005

OWC/Sales 0.18 0.16 0.17 0.20

Question 2C 2002 2003 2004 2005

Days Inventory Outstanding 55.10 47.00 49.00 42.00
Days Sales Outstanding 51.60 60.00 85.00 107.00
Days Payables Outstanding 36.28 50.00 75.00 85.00

2002 2003 2004 2005

Cost of Goods Sold Per Day 56.06 59.47 65.32 78.35
Sales revenue per day 67.54 73.42 80.24 96.13

Question 2D Based on the DSO and DPO computed, the days that the receivable are outstanding is longer than the da
are outstanding. In other words it takes longer to collect cash than to pay the suppliers. Because of this i
that there will be a shortage of cash to settle the current obligations.

Anser for Question 3

Ceres Gardening Company

Balance Sheet as on December 2006
Dr Cr
Assets $28,117 Debt $18,554
Equity $9,563
Total Assets $28,117 Total Debt and $28,117

Capital Employed = Total Assets - Current Liabilities

= $28,117 - $10,074
Capital Employed $18,043

Answer for Question 4

Question 4A 2002 2003 2004 2005

Sales 24,652 26,797 29,289 35,088
Cost of Goods Sold 20,461 21,706 23,841 28,597
Gross Profit 4,191 5,091 5,448 6,491
Earnings before Interest & Tax 1,641 2,338 2,408 2,836
Interest 187 349 440 547
Earnings before Taxes 1,454 1,989 1,968 2,289
Taxes 264 696 689 801
Earnings after taxes before inte 1,378 1,642 1,719 2,034
Net Income 1,191 1,293 1,279 1,488
Capital Employed 8,282 10,491 12,872 15,460
Shareholders Equity 5,024 6,091 7,146 8,336

Variable Margin 17.00% 19.00% 18.60% 18.50%

Operating Margin 6.66% 8.72% 8.22% 8.08%
 Return on Equity 23.70% 21.23% 17.90% 17.85%
Return on Average Capital Emp 7.96% 9.49% 9.93% 11.76%

Average Capital Employee = 17,303.70

Capital Employed = Total Asstes- Current Liabilites

Question 4B 2002 2003 2004 2005

Return on Capital Employed (R 19.82% 22.28% 18.71% 18.34%

The trend in ROE from 2002 to 2006(E) shows decreasing over the years.
The reason for decrease in ROE is the decrease in performance of the operations of the company
The performance of operations of the company measured using Return on Capital Employed (ROCE)
ROCE for the company is decreasing over the years.

Question 4C 2002 2003 2004 2005

Return on Average Capital Emp 7.96% 9.49% 9.93% 11.76%

The trend in ROACE from 2002 to 2006(E) shows Oncreasing over the years.
The Drivers for ROACE are Operating Margin and Efficiency.
The reason for increasing ROACE is the increasing in operating margin of the company.
Operating margin for the company is increasing over the years.
On 2002 the operating margin was 7.96% and on 2006(E) it increased to 12.67%.

Answer for Question 5

Pros Cons
Constant Growth in Sales Insufficient Distribution
Reputation and Branding Longer Payment Terms
Aggressive growth Seasonal Sales

The program can be continued as it shows a sustainable and positive performance.

As observed in the financial analysis the Activity Ratio of the program shows positive results as
the company can effectively and efficiently leverage its resources. Moreover, it shows that
even with the existence of the project the company has enough liquidity to satisfy its
obligations and continue to operate. Most importantly, the program has a high probability
of more increased sales in the future as it already depicts 73% in its early stages.
However, the Financial leverage shows that there is too much debt outstanding and most fund
outsourcing is done through debt financing. This exposes the company to high risks of
default that might become another drawback. Seemingly, Profitability ratios show that the
company has less ability to earn income or sales from its own operations.
Overall, considering all the financial evaluations, the company should add additional measures and
extend policies in order to carry on and manage the program to maximize its potential for
the company.
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