2) (20 marks) Anita, a graduate of the University of Oxford, with four years of banking experience, was recently brought in as assistant to the chairman of the board of Handy Industries, a manufacturer of electronic calculators. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Handy's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice-president plus its major stockholders (who were all local businesspeople), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, William, Handy's president, was informed that changes would have to be made-and quickly or he would be fired. At the board's insistence, Anita was given the job of assistant to Fred, a retired banker who was Handy's chairman and largest stockholder. Fred agreed to give up a few of his golfing days and to help nurse the company back to health, with Anita's assistance. Handy's 2009 and 2010 balance sheets and income statements, together with projections for 2011, are shown in the following tables. The 2011 projected financial statement data represent Anita's and Fred's best guess for 2011 results, assuming that some new financing is arranged to help the company recover. Income Statements Sales 2009 $3,432,000 2010 $5,834,400 4,980,000 2011E $7,035,600 Cost of goods sold Other expenses Depreciation Total operating costs EBIT Interest expense EBT Taxes (40%) Net income Other Data 2,864,000 340,000 18,900 $3,222,900 $ 209,100 62,500 $ 146,600 720,000 116,960 $5,816,960 S 17,440 176,000 ($ 158,560) (63.424) 58,640 87,960 (S 95,136) 5,800,000 612,960 120,000 $6,532,960 $ 502,640 80,000 $ 422,640 169,056 253,584 Stock price $ 8.50 $ 6.00 S 12.17 Shares outstanding 100,000 100,000 250,000 EPS $ 0.880 (S 0.951) S 1.014 DPS $ 0.220 0.110 0.220 Tax rate Book value per share Lease payments 40% 40% 40% S 6.638 $ 5.576 S 7.909 $ 40,000 $ 40,000 $ 40,000 Note: "E" denotes "estimated"; the 2011 data are forecasts. Department of Electrical Engineering Balance Sheets Assets 2009 2010 2011E Cash S 9,000 $ 7,282 Short-term investments 48,600 Accounts receivable 351,200 Inventories 715,200 20,000 632,160 1,287,360 Total current assets $1,124,000 $1,946,802 $ 14,000 71,632 878,000 Gross fixed assets Less: Accumulated depreciation 491,000 146,200 Net fixed assets Total assets $ 344,800 $1,468,800 1,202,950 263,160 939,790 $2,886,592 1,716,480 $2,680,112 1,220,000 383,160 $ 836,840 $3,516,952 Liabilities and Equity Accounts payable $ 145,600 Notes payable Accruals 200,000 136,000 Total current liabilities $ 481,600 $ 324,000 720,000 284,960 $1,328,960 $ 359,800 300,000 380,000 $1,039,800 Long-term debt 323,432 Common stock (100,000 shares) 460,000 Retained earnings 203,768 1,000,000 460,000 97,632 500,000 1,680,936 296,216 Total equity Total liabilities and equity $ 663,768 $1,468,800 $ 557,632 $2,886,592 $1,977,152 $3,516,952 Page2 Note: "E" denotes "estimated"; the 2011 data are forecasts. a) Has the firm's profitability, liquidity position and financial stability improved or worsened from 2009 to 2010? Explain with the help of ratio calculations. b) Use the data from the income statement and balance sheet to prepare the statement of cash flows for 2010. What do you conclude from the statement of cash flows? c) Do you think that valid assumptions have been made to create the estimated (projected) values for 2011? Do the statements show any financial improvement in the coming year for the company? Support your justification with the help of calculations