Please read PNC case, which is posted on the ?Assignments? section of course Blackboard site.

Required:

Pick any four financial ratios/data of your choice from the company in 2004 (see Table 4 on the last page of the case, page 4). In a few sentences, explain how the financial ratios/data of your choice may help financial managers make optimal financial decisions.

Your report should be typed double?space. Please be brief and to the point, do not explain how the financial ratios/data are calculated. We are just interested in the applications of the financial ratios/data of your choice.

THE PNC CASE IS ATTACHED

PNC Background Information 1 of 5 Background Information on POWERLINE NETWORK CORPORATION (PNC) (This Document provides background information for all cases in the PNC Series. It should be read in conjunction with each of the individual cases.1 Powerline Network Corporation (PNC) was founded in southern California in 1993, but since it now has customers all across the globe, it has worldwide operations. Its founder had developed a computer chip that permitted digital signals to be transmitted over electric power lines, thus converting a building's interior wiring system into a computer network. The founder needed funds to commercialize the chip, so he set up a corporation, raised some funds from friends and eventually a venture capital firm, then from the public in 1997. PNC's primary competition is wi-fi, which permits computers and other devices to be \"untethered.\" 2 Wi-fi is better for laptop computers and other mobile devices. However, the powerline system has fewer security problems, operates over longer distances, has faster transmission speeds, and has fewer interference problems. PNC struggled in its early years. Its technology worked, but problems were encountered in manufacturing reliable chips. That led to higher costs and thus higher prices than wi-fi. However, in 2002 a Taiwanese contract chipmaker solved the manufacturing problems and brought PNC's costs down to a competitive level. At that point, equipment manufacturers began using PNC's chip to connect desktop computers, printers, TVs, stereo systems, and other devices, and sales and profits began to climb. However, the chip is not a one-size-fits-all productdifferent devices need somewhat different chips, so PNC's engineers must work with equipment manufacturers to design the optimal chip for different products. This customizing requires the company to spend continually on product development. Moreover, the rapid pace of technology forces PNC to maintain an ongoing research and development program to increase transmission speed and reliability. Because of these factors, the recent growth in revenues, profits, and free cash flow is expected to slow to a more sustainable level in coming years. Naturally, management wants to maintain growth at a high level, but it recognizes that the recent growth rate simply cannot be sustained. The Ray Reed, the founder and CEO, has assembled a well-qualified team of managers. Moreover, the board of directors consists of bright people, all of whom invested in the company in its early days and have useful backgrounds in technology-related matters. However, none of the directors has a background in financial management, which is a potential problem because the board must approve decisions that require the application of finance principles. Therefore, Ray asked his CFO, Bill Bostic, to set up a financial education program 1 The PNC series of cases resulted from a program several University of Florida professors developed for a major NYSE-listed corporation. The firm was concerned that its senior people did not understand finance well enough to make proper decisions, so it brought us in to teach financial management to the directors, executives, and managers. It's also interesting to note that the Wall Street Journal, on June 21, 2004, put out a special section on Corporate Governance, and the lead article was entitled: \"BACK TO SCHOOL: If directors are responsible for finding problems, first they have to know where to look. Many don't have a clue.\" The first sentence in the article was a question posed to directors of a NYSE-listed firm: \"Do you know what WACC is?\" Many of the directors did not, yet the WACC was central to most of the firm's decisions. Our point is that the issues discussed in this set of cases is generally recognized as being critically important for well-managed firms, hence equally important for finance students. 2 Wi-fi stands for \"wireless fidelity,\" and that is the name commonly used for the networking chips used in laptop computers and other wireless devices. PNC Background Information 2 of 5 for the directors. Bill then recruited his assistant, Sue Chung, and one of his former professors, Sam De Felice, to help him run the program. Fourteen sessions, each lasting for two hours, are scheduled to precede the monthly board meetings. The program will include an introduction to financial management followed by sessions on risk analysis, stocks and bonds, the cost of capital, capital budgeting, capital structure, dividend policy, financial forecasting, working capital management, leasing, mergers, and venture capitals. Bill provided the directors with a copy of a finance textbook, and he will ask them to review the relevant chapter before each sessions. In addition, he, Sue, and Sam prepared a case for each session. This document provides background material that is relevant for all the cases. Tables 1 through 4 give some financial data on the company and the 8 companies it uses for comparative purposes. Table 1. PNC Ownership Distribution (Percentage of Shares Outstanding)* PNC Background Information 3 of 5 Insiders Ray Reed (CEO) 19.6% Officers other than Reed 12.9% Directors other than Reed 18.2% Total 50.7% Institutions Investment banks 2.4% Mutual and hedge funds 13.6% Pension funds 1.9% Total institutional holdings 17.9% Public investors 31.4% Total 100.0% *Note: PNC has only one class of stock outstanding, and each share has voting rights. Table 2. Balance Sheets, PNC and Industry ($ in Thousands) PNC Benchmark Companies % of Assets % of Sales 2002 2003 2004 2.85% 1.00% Cash $346 $478 $625 0.01% 0.01% ST securities $507 $700 $625 14.24% 5.00% Accounts receivable $2,017 $2,786 $3,852 25.64% 9.00% Inventories $3,622 $5,002 $6,023 $6,492 $8,966 $11,125 42.74% 15.01% Current assets $14,512 $15,208 $18,098 57.26% 20.10% Net fixed assets 100.00% 35.11% Total assets $21,004 $24,174 $29,223 Accounts payable Accruals Notes payable Current liabilities Long-term debt Total liabilities Preferred stock (6%) Common stock Retained earnings Total com equity Total liabs and eqty $353 $478 $0 $831 $4,986 $5,817 $1,890 $8,306 $4,991 $13,297 $21,004 $399 $541 $0 $940 $7,255 $8,195 $2,130 $7,911 $5,939 $13,849 $24,174 $527 $714 $0 $1,241 $9,239 $10,480 $2,206 $8,510 $8,026 $16,536 $29,223 2.85% 1.41% 0.94% 5.20% 29.99% 35.19% 3.10% 12.82% 48.88% 61.70% 100.00% 1.00% 0.50% 0.33% 1.83% 10.53% 12.36% 1.09% 4.50% 17.16% 21.66% 35.11% PNC Background Information 4 of 5 Table 3. Income Statements, PNC and Industry (000) Benchmark Companies % of Assets % of Sales 2002 2003 2004 284.86% 100.00% Sales Revenues $31,506 $47,342 $82,739 254.27% 89.26% Cash op costs $27,300 $42,000 $74,727 12.82% 4.50% Depreciation 2,902 3,042 3,620 267.09% 93.76% Total op costs 30,202 45,042 78,347 $1,303 $2,300 $4,392 17.77% 6.24% Op Income (EBIT) 2.28% 0.80% Interest 374 508 693 15.49% 5.44% Taxable Income $929 $1,792 $3,699 372 717 1,480 6.20% 2.18% Taxes 113 128 132 0.23% 0.08% Pfd dividends 9.07% 3.18% Net Income $444 $948 $2,087 Free Cash Flow (FCF) N/A -$1,488 -$2,187 N/A N/A FCF = EBIT(1-T) - (Increase in net operating capital). All assets except ST securities are required in operations, and all current liabilities except notes payable are costless. Table 4. Ratios and Other Financial Data 2002 2,589.0 $0.17 $0.00 0% N/A $10.50 $5.14 61.20 2.04 -$1,346 $13,888 1.42 5.00% 5.00% 40% 10.38% N/A $782 95.86% 20.0% 23.4 6.4% 11.5% 46.1% 7.5% 6.0% 27.7% 9.0% 63.3% 11.2 3.5 7.81 3.82% 3.34% PNC 2003 2,600.0 $0.36 $0.00 0% N/A $12.60 $5.33 34.57 2.37 -$1,057 $18,911 1.62 5.00% 4.70% 40% 10.38% -$1,488 $1,380 95.14% 20.0% 21.5 5.9% 10.6% 32.1% 7.0% 6.0% 33.9% 8.8% 57.3% 10.5 4.5 9.54 5.88% 6.84% Benchmarks 2004 2,626.2 $0.79 $0.00 0% N/A $21.00 $6.30 26.42 3.34 -$333 $38,614 1.35 5.00% 4.80% 40% 10.38% -$2,187 $2,635 94.69% 20.0% 17.0 4.7% 7.3% 21.9% 7.5% 6.0% 35.9% 7.6% 56.6% 11.6 6.3 8.97 9.22% 12.62% Shares outstanding Earnings per share Dividends per share Dividend payout ratio Dividend growth rate Stock Price, EOY* Book value per share P/E Price/Book ratio Economic Value Added (EVA) Market Value Added (MVA) Beta Coefficient Market Risk Premium Risk-Free Rate Tax rate (Federal + State) WACC (Estimated values) Free Cash Flow NOPAT Operating costs/Sales Depreciation/Fixed assets Days sales outstanding Receivables/sales Inventory/Sales Fixed assets/Sales Interest rate on all costly debt Preferred dividend yield Debt/Assets Preferred stock/Assets Common equity/Assets EBITDA/Interest Times interest earned (TIE) Current ratio Return on Invested Capital (ROIC) ROE DuPont Analysis: Total assets turnover (TATO) 1.50 1.96 2.83 Assets/Common equity 1.58 1.75 1.77 Profit margin 1.41% 2.00% 2.52% DuPont ROE 3.34% 6.84% 12.62% * EOY stands for End Of Year. BOY would indicate Beginning Of Year. 2004 N/A N/A N/A 20% 8.30% N/A N/A 30.1 4.2 N/A N/A 1.35 5.00% 4.80% 40% 10.00% N/A $3.74 93.76% 22.4% 18.3 5.0% 9.0% 20.1% 7.0% 6.0% 35.2% 3.1% 61.7% 13.4 7.8 8.20 N/A 14.7% 2.85 1.62 3.18% 14.70% PNC Background Information 5 of 5