1. Using a cash flow statement, explain why Ultra Cable Questions: Corporation's cash balance has declined so precipitous ly this 2. Why has Ultra Cable's stock price dropped so much recently past year. y despite an increase in its revenues and its earnings per share? 3. Evaluate the firms absolute and relative liquidity positions, and compare them with its liquidity position last year. 4. Compare the firms market value with its book value. Is the book value a good representation of the firm's true condition? Explain your answer. 5. For the current year, calculate Ultra Cable's cash flow to in- vestors(CFI) measure using its accounting statements. What can be garnered about Ultra Cable's performance from this measure 6. Using the firm's net working capital calculation for the recent two years, what can you conclude about Ultra Cable's liquid- ity situation 7. Should the shareholders be concerned regarding the firms de- clining cash balance, or should they be pleased with the firms rising earnings per share? Please explain your answer

1 Financial Statements, Cash Flows and Taxes Ultra Cable Corporation The Ultra Cable Corporation, headquartered in Chicago, Illinois, had thus far enjoyed a fairly steady run-up in revenues and profits. Two years ago, it hired Ron Swenson away from the competition to assist the president, Tom Gray, in navigating the company through what seemed like a fairly strong growth phase at the time. With the economy looking pretty strong, and the growth prospects very favorable, the company had expanded its service facilities to a number of new markets. Recently, however, competition had become fiercer, and profit margins had started to shrink. What worried Ron the most was that the firm's stock price had declined precipitously from $35 per share to its current level of $25. Moreover, the company's cash balance had dropped from $100,000 last year to just $12,500. With the firm's annual meeting only a few weeks away, Ron knew that the firm's shareholders would be bombarding the president with many questions about the recent drop in the firm's share price and cash balance and would demand some explanations. Tom would be hard-pressed to come up with feasible responses and suggestions regarding how the firm would be gearing itself to alleviate its liquidity problems. Ron knew that the firm's management had planned on raising some short- term debt fairly soon to fund its working capital. Therefore, he expected that it would not be long before his boss, Tom, would come knocking on his door asking him that million-dollar question: "Where have all the dollars gone?" Later that day his phone rang, and just as he had feared Tom asked Ron to Ultra Cable Corporation 2 prepare a report explaining in detail the reasons for the company's curren financial condition. Ron immediately booted up his laptop and downloaded the firm's balance sheet and income statements for the recent two years, as Case 1 shown in Tables 1 and 2. Table 1 Income Statement Current Year Last Year 110g 5,125,000 Net Sales Cost of Goods Sold Depreciation Selling & Administrative Expenses Earnings Before Interest and Taxes 3,843,750 197,500 100,000 983,750 4.197.235 3,357,788 127,500 82.363 629,585 110,000 Interest Paid Taxable income Taxes (40%) Net Income Dividends Addition to Retained Earnings 387,500 596,250 238,500 357,750 107.325 250,425 519,585 207.834 311,751 93,525 218,226 Case 1 Ultra Cable Corporation 3 Table 2 Balance Sheet Current Year Last Year ASSETS Cash Accounts Receivable Inventories Total Current Assets 12.500 1,350,000 3,251,125 4,613,625 100,000 500,000 1,625,000 2,225,000 Gross Fixed Assets Accumulated Depreciation Net Fixed Assets Total Assets 3.250.000 580.000 2,670.000 1,275,000 382,500 892,500 7,283,625 3,117,500 LIABILITIES & EQUITY Accounts Payable Notes Payable Total Current Liabilities 362,500 1.875,000 2.237.500 137,500 750,000 887,500 3,065,700 500,000 Long-Term Debt Common Stock and Paid in Surplus (200,000 shares outstanding) Retained Earnings Total 1,500,000 480,425 7.283,625 1,500,000 230,000 3,117,500