C-World Company

Marwa Faisal resigned from one of her leading tourism agencies after being CFO for 25 years and established C-World, Inc., a Qatar-based company whose main activity is to develop a sophisticated travel management program that later became C-World's core product.

In the four years preceding her resignation, Marwa spent most of her free time developing a detailed business plan and accurate financial calculations for the establishment and management of C-World, Inc. As the company grew, Marwa planned to develop and expand its tourism program offerings.

Although C-World suffered losses during its first two years of operation 2016 and 2017 its profits increased continuously from 2016 to 2022. Table 1 below summarizes the Company's earnings history, including dividend payments.

Table 1: Earnings, 2016-2022

Net income after tax (US$)	Dividends paid (USD)	Year
0	(55,000)	2016
0	(35,000)	2017
0	15,000	2018
0	35,000	2019
1,000	43,000	2020
2,000	90,000	2021
5,000	338,000	2022

Marwa started the company with an investment of $100,000 consisting of her savings of $50,000 in shares and a long-term bank loan of $50,000. Marwa had hoped to retain her initial 100% ownership in the company, but after suffering a loss of $55,000 during the first year of operation (2016), Marwa sold 60% of the company to a group of investors to obtain the necessary funds. Since then, no further joint stock transactions have been made.

Although Marwa owns only 40% of the company, it manages all its activities, as other shareholders are not active in managing the company.

Marwa has just prepared the company's income statement and balance sheet for 2022, as shown in Tables 2 and 3. The income statement and balance sheet for 2021 have also been provided. In addition, Marwa collected the industry's financial ratios for 2022, which apply to both 2021 and 2022 and are summarized in Table 4. Marwa is very happy to achieve a record profit of $338,000 in 2022, but she is concerned about the company's cash flows, as she finds it increasingly difficult to pay the company's bills at the same time.

Table 2: Statement of income (in thousands of dollars), C-World, Inc. for the year ended 31 December.

2021	2022
$1,525	$1,862	Sales revenue
980	1280	Minus: cost of goods sold
$545	582	Gross Profit Margin
		Minus: operational costs
$130	$150	Sales expenses
267	270	General and administrative expenses
10	11	Depreciation expenses
$407	$431	Total Operational Costs
$138	$151	Operating Profit
26	29	Minus: interest expense
$112	$122	Profit before tax
$22.40	$24.40	Minus: Taxes 20%
$90	$98	Net income after tax

Table 3: Balance sheet (in thousands of dollars), C-World, Inc. as of December 31.

2021	2022
		Assets
		Current Assets
$56	$37	cash
104	152	Accounts receivable
145	191	Inventory
$305	$380	Total Current Assets
$180	$195	Total total fixed assets (at cost)
52	63	Minus: accumulated depreciation
$128	$132	Net fixed assets
$433	$512	Total Assets
		Obligations and Shareholders' Rights
		Current Obligations
$126	$50	Accounts payable
90	60	Line of credit
25	25	Accrued expenses
$241	$135	Total Liabilities
$83	$15	Long-term debt
$324	$150	Total Liabilities
		Shareholders' Rights
$50	$60	Ordinary shares 100,000 approved and issued shares
59	302	Retained proceeds
$109	$362	Total Shareholders' Equity
$433	$512	Total Liabilities and Shareholders' Equity

Table 4: Average industry financial ratios for 2022

Industry Average 2022	Financial Ratios
1.32	Turnover
0.95	Fast turnover ratio
57.4 day	Average stock life
29.5 day	Average collection period
37.1 day	Average payment period
4.2	Total asset turnover
55.2%	Borrowing Ratio
5.6	Interest Coverage Rate
	Combined Volume Analysis
100.0%	Sales
57.7%	Cost of goods sold
42.3%	Gross Profit Margin
29.9%	Operating expenses
12.4%	Operating Profit
2.2%	Interest expense
10.2%	Profit before tax
2.0%	taxes
8.2%	Net Income
26.2%	Return on total assets
58.4%	Return on equity

Marwa is increasingly frustrated by the company's inability to afford to hire a tourism software developer to complete the development of a "travel program" that he believes has a bright future in terms of sales. Marwa started developing this package three years ago, but the company's increasing complexity forced her to devote more of her time to administrative duties, thus halting the development of this product.

Marwa's reluctance to take the position stems from her concern that the salary and additional benefits of $90,000 per year for the position would reduce the company's earnings per share (EPS) over the next two years. Although the success of the project is by no means guaranteed, Marwa believes that if the money is spent to hire a software developer, the company's sales and profits will rise significantly once the development, production and marketing process takes two to three years is completed.

Another concern for Marwa is the company's rising interest costs. Because the company relies heavily on short-term borrowing to maintain financial flexibility, recent rate increases have caused C-World's interest expenses to increase. In an attempt to identify interest rates, Marwa researched interest rates on loans with different maturities. These are shown in Table 5 below.

Table 5: Interest rates for different loan maturities as of January 2023

Loan maturity	Interest rate (%)
3 months	10
6 months	11.7
year	11.5
3 Years	11.0
5 Years	10.5
10 Years	9.75
20 years	9.36

With all these concerns in mind, Marwa set out to review various data to develop strategies that would help ensure a bright future for C-World. As part of this process, Marwa believed that a comprehensive analysis of the company's results for 2021 and 2022 would provide important additional insights. Marwa also wanted to prepare preliminary financial statements for 2023. Table 6 presents the assumptions that Marwa deems appropriate for the projected year 2023. Marwa also feels that she has to complete a ratio analysis once the preliminary data for 2023 is completed.

Table 6: Forecast for the forecast year 2023

1. Sales are expected to increase by 29 percent.

2. Marwa wants to reduce the cost of goods sold to 50 percent of sales. The company will maintain an increase in selling, general and administrative expenses to 10 percent compared to 2022. In addition, Marwa plans to recommend to C-World's board that the company hire a new tourism software developer with a salary of $90,000. This amount will be added to general and administrative expenses.

3. Since C-World plans to hire the new developer, Marwa wants to minimize fixed asset acquisitions. However, the company has delayed acquiring some fixed assets in the past and must now invest $25,000 in fixed assets in 2023. In 2023, consumption will be $15,000.

4. Interest expense is based on the size of C-World's outstanding debt in 2023 and the maturity date of the loan. Marwa must determine the total amount of debt that C-World must secure in 2023 and use Table 5 to determine the cost of debt. Long-term debt of 3 can be renegotiated

Required:

1. What financial goal does Marwa seem to be focusing on? Is this goal appropriate or not? Please explain your opinion. Is there a potential agency problem in this company? Please provide a detailed explanation.
2. Please calculate the company's earnings per share (EPS) for each year, noting that the number of outstanding ordinary shares has remained unchanged since 2017. Please provide a comment on EPS performance based on your opinion in question a.
3. What do we mean by common volume analysis shown in Table 4? What is the base amount used in the calculations in this table?
4. Use the financial statements provided to calculate operating cash flows and free cash flows for the year ended 31 December 2022. Please discuss the results in the context of C-World's current cash flow difficulties.
5. Analyze the Company's financial position in 2021 and 2022 with respect to (1) liquidity, (2) activity, (3) leverage, and (4) profitability using the financial statements in Tables 2 and 3, and the financial ratios listed in Schedule 4. Please ensure that you evaluate the company based on sectors and time series, discuss the company's financial strengths and weaknesses comprehensively, and make some recommendations to help Marwa correct the financial difficulties addressed.
6. Please describe Qatar's tourism sector and its forecasts for the coming years (2023 and beyond). Do the projections presented in Table 6 match your research on the future of the sector? If the forecast is disproportionate, please specify the assumptions or projections that need to be adjusted and provide the proposed new value.
7. What do we mean by pro forma financial statements?
8. Based on the ratio analysis and data presented in Table 5, what funding strategy do you recommend to C-World?
9. Based on the projections presented in Table 6 and any changes you have proposed in question (h), please prepare a proforma income statement and balance sheet for C-World for the projected year 2023. You must specify the amount and type of debt that C-World should use for the projected year 2023 in line with your answer in question (d).
10. Based on the pro forma financial statements prepared above, please complete the ratio analysis for 2023 and add it to the ratios calculated in the previous section. Please comment on C-World's financial position in 2023, including potential improvements and deterioration in ratios.