Questions for the Aurora Case: 1) Evaluate the performance of the Aurora Textile Company over the past 4 years. Calculate the ratios below (use year-end values) and comment on the job you think Aurora management is doing with their: 1. Expense management 2. Asset management 3. Receivables management

2. (10%) What is the state of the industry? How does that factor into your analysis?

3. (50%) What is the NPV of the proposed Zinser 351 investment? (30%) Calculate the cash flows of the base (do nothing at the Hunter plant) case and then calculate the cash flows of the investment case (Zinser 351). The incremental cash flows are the basis for the NPV calculation. Show your calculations and your resulting investment NPV. Assume a 36% tax rate and that the firm has sufficient income to use tax benefits and pay taxes at the effective marginal rate. Ignore changes in NWC (primarily inventory levels) based on the comments from the plant manager. (5%) If the Zinser did reduce required raw materials inventory levels, would this help or hurt the investment case? (5%) Given the NPV should you invest? (5%) If you knew the market would collapse in three years based on the elimination of quotas would you change your investment decision? Why? (5%) Is the marketing research cost relevant? Should the cost of the engineering tests be included in the case? 4. (20%) Finally, with your decision made, how do you justify your decision to the Board of Directors? Should you invest or pay a dividend?

8 UV0 Exhibit 1 AURORA TEXTILE COMPANY Consolidated Income Statement for the Fiscal Years Ended December 30, 1999-2002 (dollars in thousands) \begin{tabular}{lrrrr} & 1999 & 2000 & 2001 & 2002 \\ Pounds shipped (000s) & 187,673 & 190,473 & 151,893 & 144,116 \\ Average selling price/lb. & 1.3103 & 1.2064 & 1.2045 & 1.0235 \\ Conversion cost/lb. & 0.4447 & 0.4421 & 0.4465 & 0.4296 \\ Average raw-material cost/lb. & 0.7077 & 0.6429 & 0.6487 & 0.4509 \\ & & & & \\ Net sales & $245,908 & $229,787 & $182,955 & $147,503 \\ Raw-material cost & 132,812 & 122,461 & 98,536 & 64,982 \\ Cost of conversion & 83,454 & 84,212 & 67,822 & 61,912 \\ Gross margin & 29,641 & 23,114 & 16,597 & 20,609 \\ SG\&A expenses & 14,603 & 14,218 & 11,635 & 10,305 \\ Depreciation and amortization & 15,241 & 13,005 & 11,196 & 9,859 \\ \hline Operating profit & (203) & (4,109) & (6,234) & 445 \\ \hline \hline Interest expense & 6,777 & 6,773 & 5,130 & 3,440 \\ Other income (expense) & & 1,143 & (1,232) & (409) \\ Asset impairments 1 & & & 4,758 & 7,564 \\ Earnings before income-tax provision & (6,980) & (9,739) & (17,354) & (10,968) \\ Income-tax provision @ 36\% tax rate & (2,513) & (3,506) & (6,247) & (3,949 \\ \hline Net earnings & ($4,467) & ($6,233) & ($11,106) & ($7,020) \\ \hline \hline \end{tabular} 9 UV07 Exhibit 2 AURORA TEXTILE COMPANY Consolidated Balance Sheets as of December 30, 1999-2002 (dollars in thousands) \begin{tabular}{lrrrr} & 1999 & 2000 & 2001 & 2002 \\ \hline Assets & & & & \\ \hline Cash and cash equivalents & $1,144 & $5,508 & $2,192 & $1,973 \\ Accounts receivable, net & 17,322 & 11,663 & 20,390 & 26,068 \\ Inventories & 34,778 & 33,155 & 31,313 & 33,278 \\ Other current assets & 2,774 & 1,922 & 712 & 2,378 \\ \hline Total current assets & $56,018 & $52,247 & $54,608 & $63,697 \\ \hline \end{tabular} AURORA TEXTILE COMPANY Cost of Customer Returns Exhibit 6 AURORA TEXTILE COMPANY Cotton Spot Prices (1997-2002) 1 AURORA TEXTILE COMPAN Interest-Rate Yields: January 200. Calculate the following financial ratios: \begin{tabular}{l|l|l|} Sales growth & 200020012002 \\ SG\&A E/R & \\ DSO & & \\ Asset Turnover & & \end{tabular} 8 UV0 Exhibit 1 AURORA TEXTILE COMPANY Consolidated Income Statement for the Fiscal Years Ended December 30, 1999-2002 (dollars in thousands) \begin{tabular}{lrrrr} & 1999 & 2000 & 2001 & 2002 \\ Pounds shipped (000s) & 187,673 & 190,473 & 151,893 & 144,116 \\ Average selling price/lb. & 1.3103 & 1.2064 & 1.2045 & 1.0235 \\ Conversion cost/lb. & 0.4447 & 0.4421 & 0.4465 & 0.4296 \\ Average raw-material cost/lb. & 0.7077 & 0.6429 & 0.6487 & 0.4509 \\ & & & & \\ Net sales & $245,908 & $229,787 & $182,955 & $147,503 \\ Raw-material cost & 132,812 & 122,461 & 98,536 & 64,982 \\ Cost of conversion & 83,454 & 84,212 & 67,822 & 61,912 \\ Gross margin & 29,641 & 23,114 & 16,597 & 20,609 \\ SG\&A expenses & 14,603 & 14,218 & 11,635 & 10,305 \\ Depreciation and amortization & 15,241 & 13,005 & 11,196 & 9,859 \\ \hline Operating profit & (203) & (4,109) & (6,234) & 445 \\ \hline \hline Interest expense & 6,777 & 6,773 & 5,130 & 3,440 \\ Other income (expense) & & 1,143 & (1,232) & (409) \\ Asset impairments 1 & & & 4,758 & 7,564 \\ Earnings before income-tax provision & (6,980) & (9,739) & (17,354) & (10,968) \\ Income-tax provision @ 36\% tax rate & (2,513) & (3,506) & (6,247) & (3,949 \\ \hline Net earnings & ($4,467) & ($6,233) & ($11,106) & ($7,020) \\ \hline \hline \end{tabular} 9 UV07 Exhibit 2 AURORA TEXTILE COMPANY Consolidated Balance Sheets as of December 30, 1999-2002 (dollars in thousands) \begin{tabular}{lrrrr} & 1999 & 2000 & 2001 & 2002 \\ \hline Assets & & & & \\ \hline Cash and cash equivalents & $1,144 & $5,508 & $2,192 & $1,973 \\ Accounts receivable, net & 17,322 & 11,663 & 20,390 & 26,068 \\ Inventories & 34,778 & 33,155 & 31,313 & 33,278 \\ Other current assets & 2,774 & 1,922 & 712 & 2,378 \\ \hline Total current assets & $56,018 & $52,247 & $54,608 & $63,697 \\ \hline \end{tabular} AURORA TEXTILE COMPANY Cost of Customer Returns Exhibit 6 AURORA TEXTILE COMPANY Cotton Spot Prices (1997-2002) 1 AURORA TEXTILE COMPAN Interest-Rate Yields: January 200. Calculate the following financial ratios: \begin{tabular}{l|l|l|} Sales growth & 200020012002 \\ SG\&A E/R & \\ DSO & & \\ Asset Turnover & & \end{tabular}