444 12:27 AM + Expert Q&A + Case 1 Part 2 Financial Statements, Ratios and Financial Planning Analysis Warren Manufacturing, Inc. In addition to the information provided in Part 1 Larissa believes that the business is profitable and is considering a major (investment of $500,000.) expansion. She believes the plan will increase sales and profits. Calculate all the ratios listed in the industry table for Warren Manufacturing. Compare the performance of Warren to the industry as a whole. For each ratio, comment on why it might be viewed as positive or negative relative to the industry. Suppose you create an inventory ratio calculated as inventory divided by current liabilities. How do you interpret this ratio? How does Warren compare to the industry average? Calculate the sustainable growth rate of Warren. Calculate external funds needed (EFN) and prepare pra forma income statements and balance sheels assuming growth at the sustainable growth rate. Recalculate the ratios in the previous question. What do you observe? What concerns do you have? Be sure to back up and clearly explain your remarks As a practical maller, Warren Manufacturing is unlikely to be willing to raise external equity capital, in part because the owners don't want to dilute their existing ownership and control 444 12:27 AM + Expert Q&A ht rate. Recalculate the ratios in the previous question. What do you observe? What concerns do you have? Be sure to back up and clearly explain your remarks. As a practical matter, Warren Manufacturing is unlikely to be willing to raise external equity capital, in part because the owners don't want to dilute their existing ownership and control positions. However, Warren is planning for a growth rate of 20 percent next year. What are your conclusions and recommendations about the feasibility of Warren's expansion plans? Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, fixed assets often must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case a company has a "staircase" or "lumpy" fixed cost structure, Assume that Warren is currently producing at 100 percent of capacity. As a result, to expand production, the company must set up an entirely new line at a cost of $500,000 Calculate the new EFN with this assumption. What does this imply about capacity utilization for Warren next year? HINTS 1 Depreciation expense can be assumed to consistently be the percentage of fixed assets. 2 Interest is fixed, Current assets, Net Fixed Assets and Current liabilities all assume to change 44% 12:27 AM + Expert Q&A + HINTS 1 Depreciation expense can be assumed to consistently be the percentage of fixed assets. 2 Interest is fixed, Current assets, Net Fixed Assets and Current liabilities all assume to change with the sustainable or assumed rate of growth 4 Question 4 and 5 you are to assume that the company grows at 20% but since it was already at full capacity it must invest $500,000 in a new production capacity. Industry Ratios Lower Quartile Median Quartile Upper Quartile Current Ratio 0.5 0.75 12 Quick Ratio 021 0.38 0.62 Total Asset Turnover 0.68 0.85 1.38 Inventory Turnover 6.85 9.15 16.13 Receivable Turnover 6.27 44" 12:27 AM + Expert Q&A + Uuu 0.62 Total Asset Turnover 0.68 0.85 1.38 Inventory Turnover 6.85 9.15 16.13 Receivable Turnover 6.27 11.81 21.45 Debt Ratio 0.44 0.52 0.61 Debt - Equity Ratio 0.79 1.08 1.56 Equity Multiplier 1.79 2.08 2.56 Interest Coverage 5.18 8.06 9.83 Profit Margin 4.05% 6.98%, nn 44" 12:27 AM + Expert Q&A + Return on Assets 6.05% 10.53% 15.83% Return on Equity 9.93% 16.54% 28.14% 401110 57576 AGB Cash Other Depreciation Accountable Tres 2015 Sales 1129 PM 31.36 52351 06.096 ST.709 14,345 52015 BT.712 Dividende Aunts Receivable 27.050 Camo Stock 50 000 75.000 Inry 60.222 Dividends of het income et Feed Assets $16.05 Long Term Debt 128 218 148,084 Brand Warren Manufacturing currently pays out 50 percent of net income as dividends. The effective tax rate is 30%. You are to prepare the following in good presentation form 1. An income statement for 2018 and 2019 2. A balance sheet for 2018 and 2019. 3. Operating cash flow for each year, 4. Cash flow from assets for 2019 rooh flown orirebu 2010 444 12:27 AM + Expert Q&A + Case 1 Part 2 Financial Statements, Ratios and Financial Planning Analysis Warren Manufacturing, Inc. In addition to the information provided in Part 1 Larissa believes that the business is profitable and is considering a major (investment of $500,000.) expansion. She believes the plan will increase sales and profits. Calculate all the ratios listed in the industry table for Warren Manufacturing. Compare the performance of Warren to the industry as a whole. For each ratio, comment on why it might be viewed as positive or negative relative to the industry. Suppose you create an inventory ratio calculated as inventory divided by current liabilities. How do you interpret this ratio? How does Warren compare to the industry average? Calculate the sustainable growth rate of Warren. Calculate external funds needed (EFN) and prepare pra forma income statements and balance sheels assuming growth at the sustainable growth rate. Recalculate the ratios in the previous question. What do you observe? What concerns do you have? Be sure to back up and clearly explain your remarks As a practical maller, Warren Manufacturing is unlikely to be willing to raise external equity capital, in part because the owners don't want to dilute their existing ownership and control 444 12:27 AM + Expert Q&A ht rate. Recalculate the ratios in the previous question. What do you observe? What concerns do you have? Be sure to back up and clearly explain your remarks. As a practical matter, Warren Manufacturing is unlikely to be willing to raise external equity capital, in part because the owners don't want to dilute their existing ownership and control positions. However, Warren is planning for a growth rate of 20 percent next year. What are your conclusions and recommendations about the feasibility of Warren's expansion plans? Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, fixed assets often must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case a company has a "staircase" or "lumpy" fixed cost structure, Assume that Warren is currently producing at 100 percent of capacity. As a result, to expand production, the company must set up an entirely new line at a cost of $500,000 Calculate the new EFN with this assumption. What does this imply about capacity utilization for Warren next year? HINTS 1 Depreciation expense can be assumed to consistently be the percentage of fixed assets. 2 Interest is fixed, Current assets, Net Fixed Assets and Current liabilities all assume to change 44% 12:27 AM + Expert Q&A + HINTS 1 Depreciation expense can be assumed to consistently be the percentage of fixed assets. 2 Interest is fixed, Current assets, Net Fixed Assets and Current liabilities all assume to change with the sustainable or assumed rate of growth 4 Question 4 and 5 you are to assume that the company grows at 20% but since it was already at full capacity it must invest $500,000 in a new production capacity. Industry Ratios Lower Quartile Median Quartile Upper Quartile Current Ratio 0.5 0.75 12 Quick Ratio 021 0.38 0.62 Total Asset Turnover 0.68 0.85 1.38 Inventory Turnover 6.85 9.15 16.13 Receivable Turnover 6.27 44" 12:27 AM + Expert Q&A + Uuu 0.62 Total Asset Turnover 0.68 0.85 1.38 Inventory Turnover 6.85 9.15 16.13 Receivable Turnover 6.27 11.81 21.45 Debt Ratio 0.44 0.52 0.61 Debt - Equity Ratio 0.79 1.08 1.56 Equity Multiplier 1.79 2.08 2.56 Interest Coverage 5.18 8.06 9.83 Profit Margin 4.05% 6.98%, nn 44" 12:27 AM + Expert Q&A + Return on Assets 6.05% 10.53% 15.83% Return on Equity 9.93% 16.54% 28.14% 401110 57576 AGB Cash Other Depreciation Accountable Tres 2015 Sales 1129 PM 31.36 52351 06.096 ST.709 14,345 52015 BT.712 Dividende Aunts Receivable 27.050 Camo Stock 50 000 75.000 Inry 60.222 Dividends of het income et Feed Assets $16.05 Long Term Debt 128 218 148,084 Brand Warren Manufacturing currently pays out 50 percent of net income as dividends. The effective tax rate is 30%. You are to prepare the following in good presentation form 1. An income statement for 2018 and 2019 2. A balance sheet for 2018 and 2019. 3. Operating cash flow for each year, 4. Cash flow from assets for 2019 rooh flown orirebu 2010