Directions

Use the case method to apply concepts, share ideas, and improve communication skills toward solving a complex business problem.

You must read the case (Ratios and Financial Planning at Tuxedo Air Inc. on p.107) carefully. Various assigned readings in this course lean toward value investing. Concepts related to financial statements and long-term financial planning (chapter 3) and valuation and future cash flows (chapter 7) will help you analyze the cases.

Preparing the Case Analysis

Step 1. Define the problem (15% of assignment grade)

• Be sure to identify the problem and not the symptom of a problem. For example, a decline in sales is a symptom of a problem; you must identify the actual cause of the decline in sales.

Step 2. Formulate alternative solutions to the problem (20% of assignment grade)

• It may be helpful to brainstorm as many solutions as you can and then narrow your list down to three or four solutions you feel are the strongest.

Step 3. Evaluate and compare the alternative solutions (35% of assignment grade)

• To evaluate alternative solutions you should consider their strengths (e.g., increased productivity) and their weaknesses (e.g., increased cost).

Step 4. Recommend and justify an effective solution (30% of assignment grade)

• Be sure to record the reasons why the chosen solution is most effective. In your analysis you must provide a recommendation that is supported by your analysis.

Note: Your analysis may require that you identify more than one problem and develop a set of recommendations.

Evaluation

The Mini-Case Analyses will be marked in its entirety out of 100. The following rubric indicates the criteria students are to adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated	% of Final Grade
Define the problem	/15
Formulate alternative solutions to the problem	/20
Evaluate and compare the alternative solutions	/35
Recommend and justify an effective solution
a. identify the reasons why the chosen solution is most effective	/10
b. provide a recommendation that is supported by analysis	/20
Total	/100

MINI CASE Ed Cowan was recently hired by Tuxedo Air Inc. to assist the organization with its financial planning and to evaluate the organization's performance. Ed graduated from university six years ago with a finance degree. He has been employed in the finance department of a TSX100 company since then. Tuxedo Air was founded 12 years ago by friends Mark Taylor and Jack Rodwell. The organization manufactured and sold light airplanes over this period, and its products have received high reviews for safety and reliability. The organi- zation has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models; the Sparrow, which sells for $53,000, and the Vulture, which sells for $78,000. Although the company manufactures aircraft, its operations are different from commercial aircraft companies. Tuxedo Air builds aircraft to order. By using prefabricated parts, the organization can complete the manufacture of an airplane in only five weeks. The organization also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial airplane may take one and one-half to two years to manufacture once the order is placed Mark and Jack have provided the following financial statements. Ed has gathered the industry ratios for the light air- plane manufacturing industry. TUXEDO AIR INC. 2015 Statement of Comprehensive Income $36,599,300 26,669,496 Sales Cost of goods sold 4,641,000 1,640,200 $ 3,648,604 Other expenses Depreciation EBIT 573,200 $3,075,404 Interest Taxable income 1.230.162 $ 1,845,242 Taxes (40%) Net income S560,000 Dividends 1,285,242 Add to retained earnings Assets Current assets TUXEDO AIR INC. 2015 Statement of Financial Position Liabilities and Equity Current liabilities $ 396,000 Accounts payable $ 844,550 637,560 Notes payable 1.928,500 Total current liabilities 2,773,050 433,400 Cash Accounts receivable Inventory Total current assets $ 1,967,860 Long-term debt $ 5,050,000 Fixed assets Net plant and equipment $15,411,620 Owners' equity Common stock Retained earnings Total equity Total liabilities and owners' equity $ 322,500 4,233,930 $ 9,556,430 $17,379,480 Total assets $17,379,480 LIGHT AIRPLANE INDUSTRY RATIOS Lower Quartile Median Current ratio 0.50 Upper Quartile 1.89 1.43 Quick ratio 0.21 0.08 0.38 Cash ratio 0.62 0.21 Total asset turnover 0.39 0.68 0.85 4,89 1.38 6.15 9.82 10.89 6.27 0.44 0.79 14.11 0.52 0.61 1.08 Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit margin Return on assets Return on equity 1.79 1.56 2.08 5.18 2.56 8.06 5.84 4.05% 8.43 9.83 10.27 6.98% 6.05% 4.87% 9.93% 10.53% 16.54% 13.21% % 26.15% Questions 1. Using the financial statements provided for Tuxedo Air, calculate each of the ratios listed in the table for the light aircraft industry. 2. Mark and Jack agree that a ratio analysis can provide a measure of the company's performance. They have chosen Bombardier as an aspirant company. Would you choose Bombardier as an aspirant company? Why or why not? There are other aircraft manufacturers Tuxedo Air could use as aspirant companies. Discuss whether it is appropriate to use any of the following companies: Boeing, XOJET, Piper Aircraft, and AeroCentury. 3. Compare the performance of Tuxedo Air to the industry. 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 think Tuxedo Air would compare to the industry average? MINI CASE Ed Cowan was recently hired by Tuxedo Air Inc. to assist the organization with its financial planning and to evaluate the organization's performance. Ed graduated from university six years ago with a finance degree. He has been employed in the finance department of a TSX100 company since then. Tuxedo Air was founded 12 years ago by friends Mark Taylor and Jack Rodwell. The organization manufactured and sold light airplanes over this period, and its products have received high reviews for safety and reliability. The organi- zation has a niche market in that it sells primarily to individuals who own and fly their own airplanes. The company has two models; the Sparrow, which sells for $53,000, and the Vulture, which sells for $78,000. Although the company manufactures aircraft, its operations are different from commercial aircraft companies. Tuxedo Air builds aircraft to order. By using prefabricated parts, the organization can complete the manufacture of an airplane in only five weeks. The organization also receives a deposit on each order, as well as another partial payment before the order is complete. In contrast, a commercial airplane may take one and one-half to two years to manufacture once the order is placed Mark and Jack have provided the following financial statements. Ed has gathered the industry ratios for the light air- plane manufacturing industry. TUXEDO AIR INC. 2015 Statement of Comprehensive Income $36,599,300 26,669,496 Sales Cost of goods sold 4,641,000 1,640,200 $ 3,648,604 Other expenses Depreciation EBIT 573,200 $3,075,404 Interest Taxable income 1.230.162 $ 1,845,242 Taxes (40%) Net income S560,000 Dividends 1,285,242 Add to retained earnings Assets Current assets TUXEDO AIR INC. 2015 Statement of Financial Position Liabilities and Equity Current liabilities $ 396,000 Accounts payable $ 844,550 637,560 Notes payable 1.928,500 Total current liabilities 2,773,050 433,400 Cash Accounts receivable Inventory Total current assets $ 1,967,860 Long-term debt $ 5,050,000 Fixed assets Net plant and equipment $15,411,620 Owners' equity Common stock Retained earnings Total equity Total liabilities and owners' equity $ 322,500 4,233,930 $ 9,556,430 $17,379,480 Total assets $17,379,480 LIGHT AIRPLANE INDUSTRY RATIOS Lower Quartile Median Current ratio 0.50 Upper Quartile 1.89 1.43 Quick ratio 0.21 0.08 0.38 Cash ratio 0.62 0.21 Total asset turnover 0.39 0.68 0.85 4,89 1.38 6.15 9.82 10.89 6.27 0.44 0.79 14.11 0.52 0.61 1.08 Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit margin Return on assets Return on equity 1.79 1.56 2.08 5.18 2.56 8.06 5.84 4.05% 8.43 9.83 10.27 6.98% 6.05% 4.87% 9.93% 10.53% 16.54% 13.21% % 26.15% Questions 1. Using the financial statements provided for Tuxedo Air, calculate each of the ratios listed in the table for the light aircraft industry. 2. Mark and Jack agree that a ratio analysis can provide a measure of the company's performance. They have chosen Bombardier as an aspirant company. Would you choose Bombardier as an aspirant company? Why or why not? There are other aircraft manufacturers Tuxedo Air could use as aspirant companies. Discuss whether it is appropriate to use any of the following companies: Boeing, XOJET, Piper Aircraft, and AeroCentury. 3. Compare the performance of Tuxedo Air to the industry. 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 think Tuxedo Air would compare to the industry average