Case study An experienced budget analyst at Technica, Inc,. , has been charged with assessing the firm's financial performance during 2006 and its financial position at year-end 2006. To complete this assignment, she gathered the firm's 2006 financial statements (below). In addition, She obtained the firm's ratio values for 2004 and 2005, along with the 2006 industry average ratios (also applicable to 2004 and 2005). TO DO Q1. Calculate the firm's 2006 financial ratios, and then fill in the preceding table. (Assume a 365-day year.) (13 marks ) (1 mark each ratio listed above) Q2. Analyze the firm's current financial position from both a cross- sectional and a time-series viewpoint. Break your analysis into evaluations of the firm's liquidity, activity, debt, profitability, and market. (10 marks) (2 marks each categories ) Q3. Summarize the firm's overall financial position on the basis of your findings in part b ( 4 marks ) Q4. What ethical issues could confront a financial manger? ( 3 marks) $5,075,000 3,704,000 $1,371,000 Martin Manufacturing Company Income Statement for the Year Ended December 31, 2006 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense $650,000 General and administrative expenses 416,000 Depreciation expense 152,000 Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders 1,218,000 $ 153,000 93,000 $ 60,000 24,000 $ 36,000 3,000 $ 33,000 Tin Martin Manufacturing Company Balance Sheets December 31 Assets 2006 2005 Current assets Cash $ 25,000 $ 24,100 Accounts receivable 805,556 763,900 Inventories 700,625 763,445 Total current assets $1,531,181 $1,551,445 Gross fixed assets (at cost) $2,093,819 $1,691,707 Less: Accumulated depreciation 500,000 348,000 Net fixed assets $1,593,819 $1,343,707 Total assets $3.125,000 $2,895,152 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 230,000 $ 400,500 Notes payable 311,000 370,000 Accruals 75,000 100,902 Total current liabilities $ 616,000 $ 871,402 Long-term debt $1,165,250 $ 700,000 Total liabilities $1.781,250 $1,571,402 Stockholders' equity Preferred stock (2,500 shares, $1.20 dividend) $50,000 $ 50,000 Common stock (100,000 shares at $4 par) 400,000 400,000 Paid-in capital in excess of par value 593,750 593,750 Retained earnings 300,000 280,000 Total stockholders' equity $1,343,750 $1,323.750 Total liabilities and stockholders' equity $3,125,000 $2,895,152 "The firm's 100,000 outstanding shares of common stock closed 2006 at a price of $11.38 per share Industry average 2006 1.5 1.0 1.2 10.2 46 days Martin Manufacturing Company Historical and Industry Average Ratios Actual Actual Actual Ratio 2004 2005 2006 Current ratio 1.7 1.8 Quick ratio 0.9 Inventory turnover (times) 5.2 5.0 Average collection period 50.7 days 55.8 days Total asset turnover (times) 1.5 1.5 Debt ratio 45.8% 54.3% Times interest carned ratio 2.2 1.9 Gross profit margin 27.5% 28.0% Net profit margin 1.1% 1.0% Return on total assets (ROA) 1.7% 1.5% Return on common equity (ROE) 3.1% 3.3% Price/carnings (P/E) ratio 33.5 38.7 Market/book (M/B) ratio 2.0 24.5% 2.5 26.0% 1.2% 2.4% 3.2% 43.4 1.0 1.1 1.2
