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 dont 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 Warrens 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 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

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%

1.49% 11:29 PM 29.429 31,267 40.110 52,351 57,576 65,076 52,015 57.708 12,530 14,345 400,111 23,708 487,712 25,885 Cash Other Expenses Depreciation Accounts Payable Interest Taxes (30%) Sales Notes Payable (Current) Dividends Addition to Retained Earnings Accounts Receivable Common Stock Inventory Dividends 50% of Net Income Net Fixed Assets Long Term Debt Retained Earnings 20,854 50,000 43,884 27,050 75,000 60.222 254,017 128.218 94,243 316,825 148,084 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. 5. Cash flow to creditors for 2019. 6. Cash flow to stockholders for 2019. B I UA RA 3494 11:29 PM Larissa has provided you the following information, although deemed accurate, is not in a very useable form. Warren Manufacturing 2018 2019 Cost of Goods Sold 203,963 257.528 Cash 29.429 31.267 Other Expenses 40.110 52.351 Depreciation 57,576 65,076 Accounts Payable 52,015 57.708 Interest 12,530 14,345 Taxes (30%) Sales 400,111 487.712 Noles Payable (Current) 23.700 25,585 Dividends Addition to Retained Earnings Accounts Receivable 20,854 27.050 Common Stock 50,000 75.000 Inventory 43,884 60,222 Dividends 50% of Net Income Net Fixed Assets 254,017 316.525 Long Term Debt 128.218 148.084 Retained Earnings 94.243 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 Onerating cash flow for each year B = 294 11:29 PM valuacluny, 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 1.49% 11:29 PM 29.429 31,267 40.110 52,351 57,576 65,076 52,015 57.708 12,530 14,345 400,111 23,708 487,712 25,885 Cash Other Expenses Depreciation Accounts Payable Interest Taxes (30%) Sales Notes Payable (Current) Dividends Addition to Retained Earnings Accounts Receivable Common Stock Inventory Dividends 50% of Net Income Net Fixed Assets Long Term Debt Retained Earnings 20,854 50,000 43,884 27,050 75,000 60.222 254,017 128.218 94,243 316,825 148,084 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. 5. Cash flow to creditors for 2019. 6. Cash flow to stockholders for 2019. B I UA RA 3494 11:29 PM Larissa has provided you the following information, although deemed accurate, is not in a very useable form. Warren Manufacturing 2018 2019 Cost of Goods Sold 203,963 257.528 Cash 29.429 31.267 Other Expenses 40.110 52.351 Depreciation 57,576 65,076 Accounts Payable 52,015 57.708 Interest 12,530 14,345 Taxes (30%) Sales 400,111 487.712 Noles Payable (Current) 23.700 25,585 Dividends Addition to Retained Earnings Accounts Receivable 20,854 27.050 Common Stock 50,000 75.000 Inventory 43,884 60,222 Dividends 50% of Net Income Net Fixed Assets 254,017 316.525 Long Term Debt 128.218 148.084 Retained Earnings 94.243 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 Onerating cash flow for each year B = 294 11:29 PM valuacluny, 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