The Track Manufacturing Company Current Financial Position Analysis Part A: Jethro Gibbs and Anthony DiNozzo, experienced budget analysts at The Track Manufacturing Company, have been charged with assessing the firms financial performance during 2014 and its financial position at year-end 2014. To complete this assignment, they gathered the firms 2014 financial statements, shown below. In addition, Jethro and Anthony obtained the firms ratio values for 2012 and 2013, along with the 2014 industry average ratios (also applicable to 2012 and 2013). These are presented in the Historical Ratios table, below. Required Part A: a. Calculate the firms 2014 financial ratios, and then complete the ratio table. b. Analyze the firms current financial position from both a cross- sectional and a time-series viewpoint. Break your analysis into an evaluation of the firms liquidity, activity, leverage, and profitability. Use a common-size analysis for profitability. Based on your analysis of all the data available, provide a detailed discussion of the firms overall financial position. In your discussion, be sure to comment on the companys financial strengths and weaknesses. Provide your analysis in five sections: one for each of the four categories of ratios, and one for an overall evaluation. Balance Sheet The Track Manufacturing Company As at December 31st, 2013 and 2014

December 31

Assets 2013 2014

Current Assets $ $

Cash 24,100 25,000

Accounts Receivable 763,900 805,556

Inventories 763,445 700,625

Total Current Assets 1,551,445 1,531,181

Gross fixed assets (at cost) 1,691,707 2,093,819

Less: Accumulated Amortization 348,000 500,000

Net fixed assets 1,343,707 1,593,819

Total assets $2,895,152 $3,125,000

Liabilities and Shareholders Equity

Current Liabilities $ $

Accounts Payable 400,500 230,000

Line of credit 370,000 311,000

Accruals 100,902 75,000

Total Current Liabilities 871,402 616,000

Long-term debt 700,000 1,165,250

Total Liabilities 1,571,402 1,781,250

Shareholders Equity

Preferred Shares 50,000 50,000

Common Shares 293,750 293,750

Retained Earnings 980,000 1,000,000

Total Shareholders Equity 1,323,750 1,343,750

Total Liabilities and Shareholders Equity $2,895,152 $3,125,000

Income Statement The Track Manufacturing Company For the Year ended December 31, 2014

Sales revenue $5,075,000

Less: Cost of goods sold Gross margin 3,704,000

Less: Operating expenses 1,371,000

Selling expense $650,000

General and administrative expenses 416,000

Amortization Expense 152,000

Total operating expense 1,218,000

Operating Earnings (EBIT) 153,000

Less: Interest expense 93,000

Earnings before taxes 60,000

Less: Taxes (rate = 40%) 24,000

Net income after taxes $36,000

Historical Ratios

The Track Manufacturing Company

Ratio Actual2012 Actual 2013 Actual 2014 Industry Average 2014

Current ratio 1.7 1.8 1.5

Quick Ratio 1.0 0.9 1.2

Average age of inventory 70.2days 73 days 35.8days

Average Collection period 50 days 55 days 46 days

Total Asset turnover (times) 1.5 1.5 2.0

Debt ratio 45.8% 54.3% 24.5%

Times interest earned ratio 2.2 1.9 2.5

Gross margin 27.5% 28.0% 26.0%

Profit margin 1.1% 1.0% 1.2%

Return on total assets (ROA) 1.7% 1.5% 2.4%

Return on Equity (ROE) 3.1% 3.3% 3.2%

Part B:

The Track Manufacturing Company

Preparing Pro Forma Financial Statements for 2015 Track Manufacturing is planning to implement a major plant-modernization program to improve its competitive position. Included will be construction of a state-of-the-art manufacturing facility that will cost $500,000 in 2015 and is expected to lower the

companys variable cost per tonne of steel. Jethro and Anthony, experienced budget analysts, have been charged with preparing a forecast of the firms 2015 financial position assuming construction of the proposed new facility. They plan to use the 2014 financial statements presented above along with the forecasts for other financial accounts provided in the following table.

Key Projected Financial Data (2015) The Track Manufacturing Company Data Item Value Sales Increase to $7,500,000 Cost of goods sold Remain the same %age of sales Selling Expense Increase by 22% General and administrative expense Increase by 37.5% Amortization expense Increase to $700,000 Interest expense Increase to $97,000 Tax rate 40% Dividend payments $30,000 Average age of inventory 56 days Average collection period 52 days Average payment period 26 days Accruals Increase to $96,000 Long-term debt, preferred shares, and common shares: Remain the same Cash Balance will be maintained at $25,000 Required Part B: a. Use the historic and projected financial data provided to prepare a pro forma income statement and balance sheet for the year ended December 31, 2015. b. Will Track Manufacturing Company need to obtain external financing to fund construction of the proposed facility? If so, how much? Explain. Prepare a Statement of External Financing Needed (EFN) or also called External Funding Required (EFR). c. How would you recommend Track raise the required Financing? What options might be available if the company wanted to explore all opportunities other than using their line of credit?