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At the beginning of the year 1, Down Under Company raises $400 million of equity and use the proceeds to buy a tendanset Operating profits betom delation all received in cash and dividends for the company are expected to be $40 million in year 1, $50 million in your 2 and $60 million in year 3, ath which point the company terminate. The firm pays no asuming stright line depreciation to zero of 20 milion per year the firms profits thus equal $20 in year 1, $30 million in yew 2 and $40 milion in your a. If the cost of guy is the value of the equitys: (1) Use the Discounted Dividend Valuation Method Use the Abnormal Earnings Valuation Method Dictate Styles Styles Pana Editor Check Text 9 AA 21 constant or reduced expense. This should be implemented by identifying the most profitable customer group that can consume the products for long period (Easton et al., 88). Also, the owner must consider producing the right goods that are in demand. This initiative increases the net income of the firm by improving sales. Finally, the owner should re-evaluate the performance of the company and make any necessary improvements annually to make sure that the firm meets the minimum requirements for additional financing by the bank. sh (United States B Focus DOO 510 A $ 4 * % 5 & 7 6 8 9 0 Dictate Editor Styles Styles Pana Check Text =-= A21 Recommendation for Improvement The management of AMC should consider the implementation of several amendments to improve the chances of loan approval in the future. First, the owner should prioritize the need to collect accounts receivables to limit the cash conversion cycle that has been affecting the liquidity and the current ratio of the company. This should be implemented by limiting the collection period to improve the cash flow. The owner of the company is advised to implement timely billing to make sure that customers can receive their products and settle payments within the required time. This initiative is aimed at preventing any delays in product collection and deliveries. Regarding future requests for loans, the owner of the firm should establish a stable borrowing plan. This would be useful for the management in determining the rationale behind each reason for borrowing. The firm's management should ensure that the production or output increases at a constant or reduced expense. This should be implemented by identifying the most profitable customer group that can consume the products for long period (Easton et al., 88). Also, the owner must consider producing the right goods that are in demand. This initiative increases the net income of the firm by improving sales. Finally, the owner should re-evaluate the performance ish (United States Focus 30 11 10 $ 4 * % 5 4 $ 4 % 5 & 7 * 00 6 9 0 Aa T AP Styles Styles Para Dictate Editor Check Text A A A % A ==*=y 20 Working Capital The working capital ratio represents the ability of the firm to pay all current liabilities using the current assets. It uses the relationship between the current assets and liabilities to determine the firm's financial position. The working capital ratio is crucial in measuring financial health because it determines the firm's ability to clear its debts within a year. The working capital of 2.30:1 for AMC implies that the company is not capable of settling its debts within one financial year. Conclusion Anandam manufacturing firm has several strengths like making high-quality fabrics, having a skilled workforce, producing the most revolutionary dress designs, and having great experience in the textile industry. The weaknesses of the company include the lack of an appropriate system to track credit period extensions. Most of the company orders experience delayed delivery or lack/failure of dispatch at all. The owner of the company has mainly focused on borrowing both short-term and long-term funds without having a suitable strategy for financing the business operations. Also, the company faced various threats, such as stiff competition that has kept increasing within the industry since 2012 etish (United States Focus OBS ce > $ 4 % 5 6 & 7 * 8 9 0 ' ' ADAA A. LT Dictate Editor Styles Styles Pare A 21 Check Text Investment Ratios The rate of return on equity for AMC shows a decreasing trend within three years. The rate was below the industry average of 10%, implying that the strength of investment in Anandam had been deteriorating gradually over three years. Also, the decreasing rate of return on capital shows high risks in the company because the debts are rising above the gains. Efficiency Ratios The inventory turnover for the company is fair because it increases from 0.78 to 1.08. However, it lagged slightly below the industry average of 0.03. AMC's working tumover increased from 5 in 2013 to 8 in 2015. Nevertheless, the metrics were below the industry average. This implies that the company was not efficient in exploiting the net assets to generate the required revenues (Hays, 15). sh (United States Focus echo Pro Dao 79 dop 310 $ % 5 &7 6 8 ' ' A A A A. ET 2 DE A Dictate 91 21 Style Styles Pana Editor Check Text Gr The current ratio of Anandam was lower compared to the normal value of the industry in 2015. The ratio of 1.6:1 was also lower than the average value of 2.3:1. Based on the capital structure and solvency for AMC, the trend was unfavorable because the company relied more on debts than on equity Profitability Ratios Profitability ratios were considered in the case study to measure the company's capacity in generating its earnings from the sales, assets, and shareholders' equity (Palepu et al., 133). The gross profit margin for Anandam indicates a positive trend that increased from 38% to 40% between 2013 and 2015. The positive deviation was fair because it matched with the industrial average that was 40% in 2015. Unfortunately, the net profit margin dropped rapidly from 18.2% to 10.5% based on the three years of scrutiny. The negative trend was favored by the high operational costs of the firm Investment Ratios The rate of return on equity for AMC shows a decreasing trend within three years. The rate was below the industry average of 10%, implying that the strength of investment in Anandam had been deteriorating gradually over three years. Also, the decreasing rate of return Focus United States OOO BDO 74 510 $ * 4 % 5 & 7 6 8 LT AD Styles Styles Pane Dictata Editor Check Text Gru AA Aa AA y AM A1 Liquidity Ratios Liquidity ratios comprise the current, quick, and cash ratios of the firm. They are used to determine the ability of a business is paying its short-term debts (Subalakshmi et al., 2395). The quick ratio indicates the ability of the firm in covering its current liabilities by the use of available cash. The ratio of 1.20:1 implies that AMC is not capable of turning its inventories into cash quickly. It shows a negative trend within three years. Student' last Name 9 The current ratio of Anandam was lower compared to the normal value of the industry in 2015. The ratio of 1.6:1 was also lower than the average value of 2.3:1. Based on the capital structure and solvency for AMC, the trend was unfavorable because the company relied more on debts than on equity. United States L... Focus DOO 73 BOB & 510 A $ 4 ok % 5 & 7 6 8 Exhibit 3: Industry Average of Key Ratios Ratio Sector Average Current ratio 2.30PT 1:20:1 7 times 52 days 4.85 times Acid test ratio (quick ratio) Receivable turnover ratio Receivable days Inventory turnover ratio Inventory days Long-term debt to total debt Debt-to-equity ratio Gross profit ratio Net profit ratio 75 days 24% 35% 40% 18% Return on equity 272% Return on total assets 10% Total asset turnover ratio 1.1 Fixed asset turnover ratio 2 Current asset turnover ratio 3 10 Interest coverage ratio (timesin- terest earned) Working capital turnover ratio Return on fixed assets 8 24% ted States Focus MacBook Pro LT A Aa AO =y ADAN Styles Styles Dictate Editor ALT the average limits, making the profitability of the company fall beyond the expected range. Para Ches Tax Ratios RATIO ANALYSIS 2013 2014 2015 Current ratio Acid test ratio (quick ratio) Receivable turnover ratio Receivable days Inventory turnover ratio Inventory days Long-term debt to total debt Debt-to-equity ratio Gross profit ratio Net profit ratio Return on equity Return on total assets Total asset tumover ratio Fixed asset turnover ratio Current asset turnover ratio Interest coverage ratio (times interest earned) Working capital turnover ratio Return on fixed assets 2.50 1.32 6.01 60.84 3.89 94.18 73.91% 47.07% 38.01% 18.21% 30.34% 14.21% 0.79 1.06 3.04 9.68 1.78 0.94 2.89 126.75 1.88 193.34 41.71% 46.88% 41.01% 14.01% 42.04% 12.01% 0.87 1.93 1.56 7.06 1.61 0.78 3.44 106.47 2.12 171.08 47.36% 64.51% 40.01% 10.51% 42.20% 9.18% 0.88 1.71 1.81 4.54 Industry Average 3.30:1 1.20:1 8 times 51 days 5.85 times 75 days 25% 36% 41% 16% 24% 20% 1.1 2 3 10 0 8 24% 6.00 29.18% 4.50 26.86% 5.77 18.87% Various Ratios that were Computed Based on the Data Given in Exhibit 3 ited States) Focus Mens DOO COD F4 > ' ' Aa A A A ADAA A E I Dictate Styles Styles Pane Editor 19 Check Text trend. If the operational performance of AMC continues to face the same situation of declined sales, the company might be compelled to terminate its services. The total fixed assets for the business are lower than the average value of the industry. The trend suggests that the firm is not utilizing the assets efficiently in stabilizing its financial position. Also, the asset turnover implies that the current assets are not fully utilized. Similarly, the inventory tumover shows a declining trend, which implies that AMC is weak at meeting its debts obligations. The liquidity position of the company is unfavorable because of the excess customers' inventory. The long-term debt rises from 24% to 47.36%. The rates show that the firm is highly leveraged because its debt is almost double the average value of the industry. Generally, the firm's liquidity is at the highest risk because the payment policies extend beyond the average limits, making the profitability of the company fall beyond the expected range. Ratios RATIO ANALYSIS 2013 2014 2015 Current ratio Acid test ratio (quick ratio) Receivable turnover ratio Receivable days Inventory turnover ratio Inventor dans (United States 2.50 1.32 6.01 60.84 3.89 0418 1.78 0.94 2.89 126.75 1.88 10214 1.61 0.78 3.44 106.47 Industry Average 3.30:1 1.20:1 8 times 51 days 5.85 times 75 days Focus 2.12 171 OR ACES doo 910 $ 4 % 5 * & 7 6. A. ELT ' ' Aa A A EN A2 A HORIZONTAL BALANCE SHEET Dictate Styles Styles Para Editor 21 Check Text 2014 (%) 2015 (%) 31.59 87.00 Assets Fixed asset Current assets cash equivalents Accounts receivable Inventories 170.00 420.00 369.75 6.00 40.00 50.00 128.75 63.50 Total Equity & Liabilities Equity share capital Reserve & surplus Long-term borrowings Current liabilities 33.34 184.63 77.93 564.64 25.00 81.08 102.27 60.88 Total 119.75 63.60 Ratio Analysis and Industry Comparison The average gross margin in the industry was 40%. Anandam maintained the same value of the margin within three years. This suggests that the firm is not facing the challenge of competition or has not altered the prices of the products within the specified period (Khan, 118). The profit margin has declined significantly against the average metrics of the industry Anandam is in a risky state because the current and quick ratios are both too low, with a negative United States) Focus Pro DOO 000 78 IL 10 A $ 4 % 5. & 7 4 A Au Dictata Styles Styles Pane Editor A21 Check Text The Trend Analysis of the Company between 2014 and 2015 Based on the horizontal financial and income statements, the sales growth for Anandam reduced from 130% in 2014 to 66.68% in 2015. The net profit and the operating profit have also declined rapidly due to the reduced sales. The profitability of the firm has also gone down as a result of the reduced value of the gross profit. The cash balance that reduced from 170% to 6% shows negative growth for the firm. The long-term debt that has increased to 102.27% in 2015 shows that the company is at a high risk of taking large debts that will eventually reduce its credit rating. The situation suggests that the loan approval is likely to be forbidden. Lastly, the total assets have a negative trend. Student last Name 6 HORIZONTAL INCOME STATEMENT 2014 (%) 2015 (%) Sales anited States) Focus OOO ODD F 2 FR Styles Styles Pane Dietate Editor TE ' ' AA IE ADA a 21 According to the vertical balance sheet, the total assets and accounts receivables have decreased rapidly. The inventories also show a negative trend. The situation suggests that the policy of working capital for the company is not appropriate for improving its financial position. VERTICAL BALANCE SHEET 2014 2015 Assets 44.63% 51.43% Fixed assets Current assets Cash and its equivalents Accounts receivable Inventories Total Equity & Liabilities Equity share capital (shares of 10 each) Reserve & surplus Long-term borrowings Current liabilities Total 1.89% 27.79% 27.79% 100.00% 1.26% 23.94% 25.57% 100.00% 28.56% 18.50% 21.07% 31.86% 100.00% 21.86% 20.59% 28,30% 30.36% The Trend Analysis of the Company between 2014 and 2015 Based on the horizontal financial and income statements, the sales growth for Anandam reduced from 130% in 2014 to 66.68% in 2015. The net profit and the operating profit have also declined rapidly due to the reduced sales. The profitability of the firm has also gone down as a United States Focus Macbook Pro GOD ODO A FS At the beginning of the year 1, Down Under Company raises $400 million of equity and use the proceeds to buy a tendanset Operating profits betom delation all received in cash and dividends for the company are expected to be $40 million in year 1, $50 million in your 2 and $60 million in year 3, ath which point the company terminate. The firm pays no asuming stright line depreciation to zero of 20 milion per year the firms profits thus equal $20 in year 1, $30 million in yew 2 and $40 milion in your a. If the cost of guy is the value of the equitys: (1) Use the Discounted Dividend Valuation Method Use the Abnormal Earnings Valuation Method Dictate Styles Styles Pana Editor Check Text 9 AA 21 constant or reduced expense. This should be implemented by identifying the most profitable customer group that can consume the products for long period (Easton et al., 88). Also, the owner must consider producing the right goods that are in demand. This initiative increases the net income of the firm by improving sales. Finally, the owner should re-evaluate the performance of the company and make any necessary improvements annually to make sure that the firm meets the minimum requirements for additional financing by the bank. sh (United States B Focus DOO 510 A $ 4 * % 5 & 7 6 8 9 0 Dictate Editor Styles Styles Pana Check Text =-= A21 Recommendation for Improvement The management of AMC should consider the implementation of several amendments to improve the chances of loan approval in the future. First, the owner should prioritize the need to collect accounts receivables to limit the cash conversion cycle that has been affecting the liquidity and the current ratio of the company. This should be implemented by limiting the collection period to improve the cash flow. The owner of the company is advised to implement timely billing to make sure that customers can receive their products and settle payments within the required time. This initiative is aimed at preventing any delays in product collection and deliveries. Regarding future requests for loans, the owner of the firm should establish a stable borrowing plan. This would be useful for the management in determining the rationale behind each reason for borrowing. The firm's management should ensure that the production or output increases at a constant or reduced expense. This should be implemented by identifying the most profitable customer group that can consume the products for long period (Easton et al., 88). Also, the owner must consider producing the right goods that are in demand. This initiative increases the net income of the firm by improving sales. Finally, the owner should re-evaluate the performance ish (United States Focus 30 11 10 $ 4 * % 5 4 $ 4 % 5 & 7 * 00 6 9 0 Aa T AP Styles Styles Para Dictate Editor Check Text A A A % A ==*=y 20 Working Capital The working capital ratio represents the ability of the firm to pay all current liabilities using the current assets. It uses the relationship between the current assets and liabilities to determine the firm's financial position. The working capital ratio is crucial in measuring financial health because it determines the firm's ability to clear its debts within a year. The working capital of 2.30:1 for AMC implies that the company is not capable of settling its debts within one financial year. Conclusion Anandam manufacturing firm has several strengths like making high-quality fabrics, having a skilled workforce, producing the most revolutionary dress designs, and having great experience in the textile industry. The weaknesses of the company include the lack of an appropriate system to track credit period extensions. Most of the company orders experience delayed delivery or lack/failure of dispatch at all. The owner of the company has mainly focused on borrowing both short-term and long-term funds without having a suitable strategy for financing the business operations. Also, the company faced various threats, such as stiff competition that has kept increasing within the industry since 2012 etish (United States Focus OBS ce > $ 4 % 5 6 & 7 * 8 9 0 ' ' ADAA A. LT Dictate Editor Styles Styles Pare A 21 Check Text Investment Ratios The rate of return on equity for AMC shows a decreasing trend within three years. The rate was below the industry average of 10%, implying that the strength of investment in Anandam had been deteriorating gradually over three years. Also, the decreasing rate of return on capital shows high risks in the company because the debts are rising above the gains. Efficiency Ratios The inventory turnover for the company is fair because it increases from 0.78 to 1.08. However, it lagged slightly below the industry average of 0.03. AMC's working tumover increased from 5 in 2013 to 8 in 2015. Nevertheless, the metrics were below the industry average. This implies that the company was not efficient in exploiting the net assets to generate the required revenues (Hays, 15). sh (United States Focus echo Pro Dao 79 dop 310 $ % 5 &7 6 8 ' ' A A A A. ET 2 DE A Dictate 91 21 Style Styles Pana Editor Check Text Gr The current ratio of Anandam was lower compared to the normal value of the industry in 2015. The ratio of 1.6:1 was also lower than the average value of 2.3:1. Based on the capital structure and solvency for AMC, the trend was unfavorable because the company relied more on debts than on equity Profitability Ratios Profitability ratios were considered in the case study to measure the company's capacity in generating its earnings from the sales, assets, and shareholders' equity (Palepu et al., 133). The gross profit margin for Anandam indicates a positive trend that increased from 38% to 40% between 2013 and 2015. The positive deviation was fair because it matched with the industrial average that was 40% in 2015. Unfortunately, the net profit margin dropped rapidly from 18.2% to 10.5% based on the three years of scrutiny. The negative trend was favored by the high operational costs of the firm Investment Ratios The rate of return on equity for AMC shows a decreasing trend within three years. The rate was below the industry average of 10%, implying that the strength of investment in Anandam had been deteriorating gradually over three years. Also, the decreasing rate of return Focus United States OOO BDO 74 510 $ * 4 % 5 & 7 6 8 LT AD Styles Styles Pane Dictata Editor Check Text Gru AA Aa AA y AM A1 Liquidity Ratios Liquidity ratios comprise the current, quick, and cash ratios of the firm. They are used to determine the ability of a business is paying its short-term debts (Subalakshmi et al., 2395). The quick ratio indicates the ability of the firm in covering its current liabilities by the use of available cash. The ratio of 1.20:1 implies that AMC is not capable of turning its inventories into cash quickly. It shows a negative trend within three years. Student' last Name 9 The current ratio of Anandam was lower compared to the normal value of the industry in 2015. The ratio of 1.6:1 was also lower than the average value of 2.3:1. Based on the capital structure and solvency for AMC, the trend was unfavorable because the company relied more on debts than on equity. United States L... Focus DOO 73 BOB & 510 A $ 4 ok % 5 & 7 6 8 Exhibit 3: Industry Average of Key Ratios Ratio Sector Average Current ratio 2.30PT 1:20:1 7 times 52 days 4.85 times Acid test ratio (quick ratio) Receivable turnover ratio Receivable days Inventory turnover ratio Inventory days Long-term debt to total debt Debt-to-equity ratio Gross profit ratio Net profit ratio 75 days 24% 35% 40% 18% Return on equity 272% Return on total assets 10% Total asset turnover ratio 1.1 Fixed asset turnover ratio 2 Current asset turnover ratio 3 10 Interest coverage ratio (timesin- terest earned) Working capital turnover ratio Return on fixed assets 8 24% ted States Focus MacBook Pro LT A Aa AO =y ADAN Styles Styles Dictate Editor ALT the average limits, making the profitability of the company fall beyond the expected range. Para Ches Tax Ratios RATIO ANALYSIS 2013 2014 2015 Current ratio Acid test ratio (quick ratio) Receivable turnover ratio Receivable days Inventory turnover ratio Inventory days Long-term debt to total debt Debt-to-equity ratio Gross profit ratio Net profit ratio Return on equity Return on total assets Total asset tumover ratio Fixed asset turnover ratio Current asset turnover ratio Interest coverage ratio (times interest earned) Working capital turnover ratio Return on fixed assets 2.50 1.32 6.01 60.84 3.89 94.18 73.91% 47.07% 38.01% 18.21% 30.34% 14.21% 0.79 1.06 3.04 9.68 1.78 0.94 2.89 126.75 1.88 193.34 41.71% 46.88% 41.01% 14.01% 42.04% 12.01% 0.87 1.93 1.56 7.06 1.61 0.78 3.44 106.47 2.12 171.08 47.36% 64.51% 40.01% 10.51% 42.20% 9.18% 0.88 1.71 1.81 4.54 Industry Average 3.30:1 1.20:1 8 times 51 days 5.85 times 75 days 25% 36% 41% 16% 24% 20% 1.1 2 3 10 0 8 24% 6.00 29.18% 4.50 26.86% 5.77 18.87% Various Ratios that were Computed Based on the Data Given in Exhibit 3 ited States) Focus Mens DOO COD F4 > ' ' Aa A A A ADAA A E I Dictate Styles Styles Pane Editor 19 Check Text trend. If the operational performance of AMC continues to face the same situation of declined sales, the company might be compelled to terminate its services. The total fixed assets for the business are lower than the average value of the industry. The trend suggests that the firm is not utilizing the assets efficiently in stabilizing its financial position. Also, the asset turnover implies that the current assets are not fully utilized. Similarly, the inventory tumover shows a declining trend, which implies that AMC is weak at meeting its debts obligations. The liquidity position of the company is unfavorable because of the excess customers' inventory. The long-term debt rises from 24% to 47.36%. The rates show that the firm is highly leveraged because its debt is almost double the average value of the industry. Generally, the firm's liquidity is at the highest risk because the payment policies extend beyond the average limits, making the profitability of the company fall beyond the expected range. Ratios RATIO ANALYSIS 2013 2014 2015 Current ratio Acid test ratio (quick ratio) Receivable turnover ratio Receivable days Inventory turnover ratio Inventor dans (United States 2.50 1.32 6.01 60.84 3.89 0418 1.78 0.94 2.89 126.75 1.88 10214 1.61 0.78 3.44 106.47 Industry Average 3.30:1 1.20:1 8 times 51 days 5.85 times 75 days Focus 2.12 171 OR ACES doo 910 $ 4 % 5 * & 7 6. A. ELT ' ' Aa A A EN A2 A HORIZONTAL BALANCE SHEET Dictate Styles Styles Para Editor 21 Check Text 2014 (%) 2015 (%) 31.59 87.00 Assets Fixed asset Current assets cash equivalents Accounts receivable Inventories 170.00 420.00 369.75 6.00 40.00 50.00 128.75 63.50 Total Equity & Liabilities Equity share capital Reserve & surplus Long-term borrowings Current liabilities 33.34 184.63 77.93 564.64 25.00 81.08 102.27 60.88 Total 119.75 63.60 Ratio Analysis and Industry Comparison The average gross margin in the industry was 40%. Anandam maintained the same value of the margin within three years. This suggests that the firm is not facing the challenge of competition or has not altered the prices of the products within the specified period (Khan, 118). The profit margin has declined significantly against the average metrics of the industry Anandam is in a risky state because the current and quick ratios are both too low, with a negative United States) Focus Pro DOO 000 78 IL 10 A $ 4 % 5. & 7 4 A Au Dictata Styles Styles Pane Editor A21 Check Text The Trend Analysis of the Company between 2014 and 2015 Based on the horizontal financial and income statements, the sales growth for Anandam reduced from 130% in 2014 to 66.68% in 2015. The net profit and the operating profit have also declined rapidly due to the reduced sales. The profitability of the firm has also gone down as a result of the reduced value of the gross profit. The cash balance that reduced from 170% to 6% shows negative growth for the firm. The long-term debt that has increased to 102.27% in 2015 shows that the company is at a high risk of taking large debts that will eventually reduce its credit rating. The situation suggests that the loan approval is likely to be forbidden. Lastly, the total assets have a negative trend. Student last Name 6 HORIZONTAL INCOME STATEMENT 2014 (%) 2015 (%) Sales anited States) Focus OOO ODD F 2 FR Styles Styles Pane Dietate Editor TE ' ' AA IE ADA a 21 According to the vertical balance sheet, the total assets and accounts receivables have decreased rapidly. The inventories also show a negative trend. The situation suggests that the policy of working capital for the company is not appropriate for improving its financial position. VERTICAL BALANCE SHEET 2014 2015 Assets 44.63% 51.43% Fixed assets Current assets Cash and its equivalents Accounts receivable Inventories Total Equity & Liabilities Equity share capital (shares of 10 each) Reserve & surplus Long-term borrowings Current liabilities Total 1.89% 27.79% 27.79% 100.00% 1.26% 23.94% 25.57% 100.00% 28.56% 18.50% 21.07% 31.86% 100.00% 21.86% 20.59% 28,30% 30.36% The Trend Analysis of the Company between 2014 and 2015 Based on the horizontal financial and income statements, the sales growth for Anandam reduced from 130% in 2014 to 66.68% in 2015. The net profit and the operating profit have also declined rapidly due to the reduced sales. The profitability of the firm has also gone down as a United States Focus Macbook Pro GOD ODO A FS