Question
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
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 pro forma income statements and balance sheets 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 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
1Depreciation expense can be assumed to consistently be the percentage of fixed assets.
2Interest is fixed, Current assets, Net Fixed Assets and Current liabilities all assume to change
with the sustainable or assumed rate of growth
4Question 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
LowerQuartile
Median Quartile
Upper Quartile
Current Ratio
0.5
0.75
1.2
Quick Ratio
0.21
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
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%
9.87%
Return on Assets
6.05%
10.53%
15.83%
Return on Equity
9.93%
16.54%
28.14%
Case 1 Part 1
Financial Statements, Cash Flows, Financial Planning Warren Manufacturing, Inc.
Larissa Warren started Warren Manufacturing several years ago. Warren manufactures electronic controls for a variety of manufacturing applications. The company is organized as an LLC. The Company is located in Willington NC. The industry is fragmented with few competitors. Warren Manufacturing has a very good reputation in the industry for quality and delivery. Larissa's background is engineering so her financial skills are limited. As a result the financial information being supplied although accurate is not in financial statement form.
Larissa has hired you to "clean things up" from a financial statement perspective. She has also asked you to prepare and comment on the "cash flows" (operating cash flow, cash flow from assets, to creditors to shareholder) for 2019. She also want for you explain what they mean and impact on company's performance.
Larissa has provided you the following information, although deemed accurate, is not in a very useable form.
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):
- An income statement for 2018 and 2019.
- A balance sheet for 2018 and 2019.
- Operating cash flow for each year.
- Cash flow from assets for 2019.
- Cash flow to creditors for 2019.
- Cash flow to stockholders for 2019.
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