(MBA 5220)(Please type the answer)

4. Use pro forma sources and uses of funds statement on page 86 and rules about Sources and Uses of Funds (Funds Flow) Statement on page 13 of word lecture notes. The amount of dividend paid is $38 which is determined as follows: Earnings after tax ($80) = changes in retained earnings (714 -672) + dividend paid. Total sources and uses are supposed to be $444 respectively.

This sources and uses of funds statement will tell you that the airline violated the matching principle which is the maturity structure of assets and liabilities.

Case Study 1 RATIO ANALYSIS WELLINGTON AIRLINES Mellow Myers is the new treasure of Wellington Airlines, She graduated from make university in Delaware with a M.B.A. in Finance. After five years of experience with one of the big eight CPA firms in New York, she joined the accounting staff of Midwest Airlines and served in a variety of accounting and finance positions for ten years. She Assumed the position of treasurer at Wellington Airlines on May 3, 1986. One other first mponsibilities is to analyze the company's financial condition shortly after the airline's fiscal year, which ended on June 30, 1986 Exhibit 1 Wellington Airlines Balance Sheets as of June 30, 1985-1986 tin millions of dollars) 1986 Cash Accounts receivable Maintenance and supplies inventory Total current assets Gross plant and equipment Less: accumulated depreciation Net plant and equipment Total assets Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings 1985 $42 182 196 $120 1.580 700 999 $1,400 $63 $42 140 210 5392 2,072 784 1.288 $1,680 $76 280 84 28 $175 273 280 672 $406 280 280 714 $1.400 $1,680 Total liabilities and net worth 387 358 Per Case SAS Angele med et the air The fa indust contro phased out by the end of 1983 hade for the 1979 Me Myse marchanges in the industry ince Conged the Air Transportation Regulatory Reform Act (ATRRA) in 1978. The ATKRA d. 7 lw among other thing increased competition and facilitated the entry of the Federal Aviation Act of 1958 deregulated the airline industry By befand authored routes for airlines Under the 1973 legislation, the CA airies into the marketplace. Before 1978 the Civil Aeronautics Board (CAB) badge Wellington Aire added several cities to its routes shortly after the deregulation of the industry begungent felt sich a move would facilitate growth. Wengi airplanes These airplanes were mostly financed by short-term bank loans to be paid purchased a number of new airplanes to meet its expanded routes and replaced fare and route competition from other trunk carriers. The industry's deregulation in from profits generated by the expansion. However the airline encountered substa 197 caught Wellington with huge fixed costs and expensive labor agreements. New regional carrier, free of succombersome overhead were able to offer lower Point downtum depressed passenger traffic, thereby causing a glut of airline capacity to do . , Exhibit 2 Wellington Airlines Income Statement for Year Ended June 30, 1986 tin millions of dollars) Operation revenues Passengers $1,830 Freight 95 Other 35 Total revenues $1,960 Operation expenses Flying operations Maintenance Equipment and passenger services Promotion and sales General and administrative Depreciation Total operating expenses 662 212 523 209 52 84 1.742 Operating income Interest expense Earnings before tax Tex Earning after tax $218 58 $160 80 $80 Case Study 1: Ratio Analysis Wington one of the largest airlines in the United States hered in Los Ape Calidomia. Since its establishment in 1917. the company has colly weath theatre industry. Its sales and profitability for the last few years eve declined and one clical fluctuation characteristic of the industry, Botswithstof The failure of Branit Airlines elected the serious problems fading the entide crosstrike higher fuel costs, and intend competition Expanding operations industry because of business slowdown, deregulation of the industry, the Aadresulted in an increasingly strained working capital position for Wellington Profits Ar the airline had dropped considerably since its expansion program started early in Oy Exhibits 1, 2 and 3). ch Exhibit Industry Average Ratios Ratios Current ratio Quick ratio Average collection period Asset tumover Debt ratio Times interest earned Profit margin on sales Return on investment Return on net worth Industry 3.5mm 150 tones 30.0 days 120 times 15.0 percent 4.10 times 4.00 percent 450 percent $73.peront QUESTIONS 1. Calculate the appropriate ratios of liquidity leverage, activity and profitability for Wellington 2. What would happen to net working capital if Wellington Airlines used 510 million cash to pay off $10 million long-term debt in 1986? What would hap- pen to net working capital if Wellington Airlines used $10 million cash to buy inventory in 1986 3 List and discuss cautions which must be taken in using industry average ratios 4. Prepare Wellington's funds flow statement and then explain why the company encountered an increasingly strained working capital position. 5. Discuss how to solve the airline's most pressing problema LAO Internet Questions 1. Go to http://finance.yahoo.com. Enter ticker symbol DAL and you will find various information about Delta Airlines Inc. PANT 2 CASE STUDIES 390 2 On the left hand side panel click "Competitors and you will find Delta A lines major competitors, including AAL (American Airlines) and UAL (United ano Short and Cash Flow at the bottom of the left-hand side panel tot For each of the three major airlines in the US click "Income Statement "Be Continental Airlines) their financial information calculate the region of liquidity, severage, activity, and profitability for such as airlines 5. Calculate the average of the three major airlines and treat it as the industry 6 Compare cachairline's performances against the industry averages and eval average The ant ate those major players in the field. SISSEZ LUI Case Study 1 RATIO ANALYSIS WELLINGTON AIRLINES Mellow Myers is the new treasure of Wellington Airlines, She graduated from make university in Delaware with a M.B.A. in Finance. After five years of experience with one of the big eight CPA firms in New York, she joined the accounting staff of Midwest Airlines and served in a variety of accounting and finance positions for ten years. She Assumed the position of treasurer at Wellington Airlines on May 3, 1986. One other first mponsibilities is to analyze the company's financial condition shortly after the airline's fiscal year, which ended on June 30, 1986 Exhibit 1 Wellington Airlines Balance Sheets as of June 30, 1985-1986 tin millions of dollars) 1986 Cash Accounts receivable Maintenance and supplies inventory Total current assets Gross plant and equipment Less: accumulated depreciation Net plant and equipment Total assets Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings 1985 $42 182 196 $120 1.580 700 999 $1,400 $63 $42 140 210 5392 2,072 784 1.288 $1,680 $76 280 84 28 $175 273 280 672 $406 280 280 714 $1.400 $1,680 Total liabilities and net worth 387 358 Per Case SAS Angele med et the air The fa indust contro phased out by the end of 1983 hade for the 1979 Me Myse marchanges in the industry ince Conged the Air Transportation Regulatory Reform Act (ATRRA) in 1978. The ATKRA d. 7 lw among other thing increased competition and facilitated the entry of the Federal Aviation Act of 1958 deregulated the airline industry By befand authored routes for airlines Under the 1973 legislation, the CA airies into the marketplace. Before 1978 the Civil Aeronautics Board (CAB) badge Wellington Aire added several cities to its routes shortly after the deregulation of the industry begungent felt sich a move would facilitate growth. Wengi airplanes These airplanes were mostly financed by short-term bank loans to be paid purchased a number of new airplanes to meet its expanded routes and replaced fare and route competition from other trunk carriers. The industry's deregulation in from profits generated by the expansion. However the airline encountered substa 197 caught Wellington with huge fixed costs and expensive labor agreements. New regional carrier, free of succombersome overhead were able to offer lower Point downtum depressed passenger traffic, thereby causing a glut of airline capacity to do . , Exhibit 2 Wellington Airlines Income Statement for Year Ended June 30, 1986 tin millions of dollars) Operation revenues Passengers $1,830 Freight 95 Other 35 Total revenues $1,960 Operation expenses Flying operations Maintenance Equipment and passenger services Promotion and sales General and administrative Depreciation Total operating expenses 662 212 523 209 52 84 1.742 Operating income Interest expense Earnings before tax Tex Earning after tax $218 58 $160 80 $80 Case Study 1: Ratio Analysis Wington one of the largest airlines in the United States hered in Los Ape Calidomia. Since its establishment in 1917. the company has colly weath theatre industry. Its sales and profitability for the last few years eve declined and one clical fluctuation characteristic of the industry, Botswithstof The failure of Branit Airlines elected the serious problems fading the entide crosstrike higher fuel costs, and intend competition Expanding operations industry because of business slowdown, deregulation of the industry, the Aadresulted in an increasingly strained working capital position for Wellington Profits Ar the airline had dropped considerably since its expansion program started early in Oy Exhibits 1, 2 and 3). ch Exhibit Industry Average Ratios Ratios Current ratio Quick ratio Average collection period Asset tumover Debt ratio Times interest earned Profit margin on sales Return on investment Return on net worth Industry 3.5mm 150 tones 30.0 days 120 times 15.0 percent 4.10 times 4.00 percent 450 percent $73.peront QUESTIONS 1. Calculate the appropriate ratios of liquidity leverage, activity and profitability for Wellington 2. What would happen to net working capital if Wellington Airlines used 510 million cash to pay off $10 million long-term debt in 1986? What would hap- pen to net working capital if Wellington Airlines used $10 million cash to buy inventory in 1986 3 List and discuss cautions which must be taken in using industry average ratios 4. Prepare Wellington's funds flow statement and then explain why the company encountered an increasingly strained working capital position. 5. Discuss how to solve the airline's most pressing problema LAO Internet Questions 1. Go to http://finance.yahoo.com. Enter ticker symbol DAL and you will find various information about Delta Airlines Inc. PANT 2 CASE STUDIES 390 2 On the left hand side panel click "Competitors and you will find Delta A lines major competitors, including AAL (American Airlines) and UAL (United ano Short and Cash Flow at the bottom of the left-hand side panel tot For each of the three major airlines in the US click "Income Statement "Be Continental Airlines) their financial information calculate the region of liquidity, severage, activity, and profitability for such as airlines 5. Calculate the average of the three major airlines and treat it as the industry 6 Compare cachairline's performances against the industry averages and eval average The ant ate those major players in the field. SISSEZ LUI