Finacne project

Dr. Kiseok Nam Sawyer Business School Suffolk University

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FIN419: Summer 2016 Individual Project 1

(Submission Due Date: May 31 in-class submission) 1. Melissa Hampton was reviewing the recent performance of the EASY Chair Company, a

company with a reputation for producing high-quality home furniture. Over the years, the name EASY had become synonymous with a kind of chair called a recliner. By 2000, the company was producing a variety of home furnishings, including reclining sofas, sleep sofas, living room cabinets, upholstered furniture, and solid-wood dining room furniture. In the past decade, the company had also entered the office furniture business by producing office systems and patient seating for clinics and hospitals. To determine the impact that diversification and expansion had on EASY, Ms. Hampton collected the following data for the company:

EASY CHAIR COMPANY

FINANCIAL DATA (dollars in millions)

2000 1999 1998 1997 1996 Sales $592.3 $553.2 $486.8 $420.0 $341.7 Net Income $28.3 $27.5 $26.5 $24.7 $23.0 Dividends per share $0.5 $0.5 $0.4 $0.4 $0.4 Number of shares 17.9 17.9 18.3 18.4 18.3 Total Assets $361.9 $349.0 $336.6 $269.9 $233.0 Total equity $214.6 &194.3 $178.8 $165.3 $147.0

a. How had EASY's sustainable growth rate changed over time? What caused any changes you found?

b. The home furniture industry had the following ratios over the same time. How did EASY

compare with the industry?

Dr. Kiseok Nam Sawyer Business School Suffolk University

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HOME FURNITURE INDUSTRY RATIOS 2000 1999 1998 1997 Return on equity 15.12% 15.54% 15.31% 15.74% Retention rate 71.00% 71.00% 71.00% 72.00% Sustainable growth rate 10.73% 11.03% 10.87% 11.33%

2. Perplexed by the declining profit margin and the rate of growth of EASY's net income,

Melissa Hampton pressed the company management for more detailed information. The management asks you, one of EASY's financial analysts, to compute component and percentage changes for the following statements and determine if there were any positive or negative trends.

EASY CHAIR COMPANY INCOME STATEMENT

(dollars in millions) 2000 1999 1998 1997 Net sales $592.3 $553.2 $486.8 $420.0 Cost of sales (430.4) (397.8) (352.1) (289.8) Gross profit 161.9 135.4 134.7 130.2 Selling, general, and administrative expenses (111.6) (106.9) (91.4) (85.5) Income from operations 50.3 48.5 43.3 44.7 Interest expense (7.2) (7.6) (4.0) (1.9) Other income 2.5 3.1 2.7 2.1 Income before taxes 45.6 44.0 42.0 44.9 Taxes (17.3) (16.5) (15.5) (20.3) Net income $28.3 $27.5 $26.5 $24.6 3. Ms. Hampton was not satisfied with EASY’s performance. She believed that the company

could achieve the following ratios:

Dr. Kiseok Nam Sawyer Business School Suffolk University

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EASY CHAIR COMPANY

MS. HAMPTON’S TARGET RATIOS Dividend payout 45.0% Profit margin 5.1% Market price $15.00 Gross margin 27.6% Dividend yield 5.2% Return on assets 9.4% Number of shares outstanding 18,000 Inventory turnover 733.3% Return on equity 13.7% Operating profit 8.7% Long-term debt/equity 27.3% Accounts receivable collection period 92.5 days Current ratio 551.0% Accounts payable payment period 28.7 days Acid-test ratio 407.3% Tax rate 34.0%

Dr. Kiseok Nam Sawyer Business School Suffolk University

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Using Ms. Hampton’s target ratios for EASY, complete the following financial statements:

EASY CHAIR COMPANY

MS. HAMPTON’S REVISED FINANCIAL STATEMENTS

Income Statement Sales Cost of sales Gross profit Selling, general, and administrative expenses Operating profit Interest Earnings before taxes Taxes Net income Balance Sheet

Cash Accounts receivable Inventory Total current assets Net property, plant, and equipment Total assets Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities Owners' equity Total liabilities and owners' equity Dividends per share

Dr. Kiseok Nam Sawyer Business School Suffolk University

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4. As the new financial analyst for Peterson’s Chemicals, you have been asked to analyze the profitability problems encountered during the last two years. Current financial statements and selected industry averages are as follows:

PETERSON’S CHEMICALS FINANCIAL STATEMENTS

(dollars in millions) Income Statement 2000 1999 Sales

$1,478

$1,435

Cost of goods sold (1,182) (1,076) Gross profit 296 359 Selling and administrative expenses (443) (445) Operating profit (147) (86) Interest expense (27) (29) Net income $(174) $(115) Balance Sheet

2000

1999

Cash and equivalent

$120

$76

Accounts receivable (net) 432 437 Inventory 324 284 Other current assets 37 38 Total current assets 913 835 Plant, property, and equipment 300 376 Total assets $1,213 $1,210 Accounts payable $500 $412 Other current liabilities 309 98 Total current liabilities 809 510 Long-term debt 178 300 Total liabilities 987 810 Owners' equity 226 400 Total liabilities and owners' equity $1,213 $1,210

Dr. Kiseok Nam Sawyer Business School Suffolk University

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Using your analysis of the financial statements, how does Peterson’s compare to the following industry averages?

CHEMICAL INDUSTRY AVERAGES

Industry Ratios Current ratio 150% Acid-test ratio 90% Receivables collection period 65 days Payables payment period 60 days Debt/equity 110% Return on assets 7% Return on equity 19%

5. Peterson's management has decided to reexamine the company's short-term credit policies.

The chief financial officer estimates that reducing the receivables collection period to 78 days would result in a sales decrease of 3 percent. The purchasing department reports that by reducing the payables period to 68.5 days, discounts would be available that would reduce the cost of goods by 9 percent. Initially the cash required to finance these changes would come from additional long-term debt, resulting in a debt to equity ratio of 100 percent. As an analyst:

a. Determine whether Peterson's Chemicals would have been profitable if management had

made these changes at the beginning of 2000. b. Determine how the ROE and ROA would have been affected.

c. Prepare new financial statements to reflect these changes.

Dr. Kiseok Nam Sawyer Business School Suffolk University

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6. Lacey Harmoniski had just moved to the Endura Republic as a part of a business school

summer internship. His mentor and supervisor, Mr. Rickki, had handed him THE FASTNER CO. income statements and asked him to analyze them. His mentor was proud of the progress the company had made. Lacey knew that the analysis would show how well the joint fastener company had done over the past five years, and that his analysis was his introduction to a company of which his mentor was proud. Mr. Rickki had described the economic environment as one that was difficult: inflation had been high and variable. The company, he said, had coped with the inflation, and prospered.

THE FASTNER CO.

INCOME STATEMENTS (currency in millions)

1999 1998 1997 1996 1995 Volume (in units) 54,518 55,631 54,540 54,000 50,000 Revenues 10,119 8,294 6,480 4,800 4,000 Cost of goods sold: Labor 2,255 1,762 1,456 1,120 1,000 Material 4,588 3,584 2,636 1,856 1,600 Gross profit 3,276 2,948 2,388 1,824 1,400 Marketing expenses 873 715 559 414 345 Administrative expenses 539 435 334 385 282 Operating profit 1,864 1,798 1,495 1,166 855 Taxes 615 593 493 385 282 Net Income 1,249 1,205 1,002 781 573

a. Calculate common-size statements for the income statements of THE FASTNER CO. On the basis of this analysis, determine how well the company did.

b. What was the price per unit of the goods being sold by mE FASTNER co.? c. Mr. Rickki has asked that Lacey calculate and comment on the growth rates of the

various items on the income statement. Lacey asks that you draft the report. Please do so.

Dr. Kiseok Nam Sawyer Business School Suffolk University

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d. In spite of the fact that Mr. Rickki had not asked, Lacey decided to put one of his new

business school tools to use: an analysis of real growth rates. In addition to the nominal growth rates of the various items, please help him by calculating and commenting on the real growth rates the company has achieved over the past four years. Inflation was as follows:

1999 1998 1997 1996 Inflation 28% 26% 40% 12%

e. Draft a report to Mr. Rickki stating your conclusions regarding how well THE FASTNER

co. has done.