case study

University of La Verne College of Business and Public Management

Bus 530 - Financial Management Case Study #1 Summer 2016

2014 2015 Year-end common stock price $6.00 $12.17 Year-end shares outstanding 100,000 250,000 Tax rate 40% 40%

Balance Sheets

Prepare the following: Assets 2014 2015

Cash and equivalents $7,282 $14,000 1). Free Cash Flow available for 2015 Short-term investments $20,000 $71,632 Accounts receivable $632,160 $878,000 2). Uses of Free Cash Flow for 2015 Inventories $1,287,360 $1,716,480 In your opinion what does this FCF analysis Total current assets $1,946,802 $2,680,112 tell you about this firm in 2014. Gross Fixed Assets $1,202,950 $1,220,000 Less Accumulated Dep. $263,160 $383,160 3). For 2015 find the following - Net Fixed Assets $939,790 $836,840 Current Ratio Total Assets $2,886,592 $3,516,952 Debt Ratio

Profit Margin on Sales Liabilities and equity Return on Total Assets Accounts payable $324,000 $359,800 Price/earnings (P/E) Notes payable $720,000 $300,000 Earnings Per Share Accruals $284,960 $380,000 In addition explain what these financial Total current liabilities $1,328,960 $1,039,800 ratios/analysis tell you about the company. Long-term bonds $1,000,000 $500,000 Total liabilities $2,328,960 $1,539,800 4). Present Value of Long Term Bonds Common stock $460,000 $1,680,936 The Long Term Bond of $500,000 is due in Retained earnings $97,632 $296,216 5 years. The company would like to allocate some funds Total common equity $557,632 $1,977,152 to a bond sinking fund on January 1, 2016. Total liabilities and equity $2,886,592 $3,516,952 The firm can find an investment that returns an annual

interest rate of 8.0% compounded quarterly for 5 years. Income Statements How much must they place into that fund on January 1, 2016

to have the $500,000 available to pay in 5 years? 2014 2015

Net sales $5,834,400 $7,035,600 5). 2016 Financial Forecasting: Additional Funds Needed Costs of Goods Sold $4,980,000 $5,800,000 The firm is planning on a 15% increase in sales for 2016, Other Expenses $720,000 $612,960 with the Profit Margin remaining the same percentage as 2015 Depreciation $116,960 $120,000 and the Dividend Payout Rate the same at 22% for 2016, the firm is Total Operating Cost $5,816,960 $6,532,960 forecasting an AFN of $189,379 for 2016. Earnings before interest and taxes (EBIT) $17,440 $502,640 How can the firm reduce this need for external capital for 2016? Less interest $176,000 $80,000 What strategies can be used to reduce the need for external Earnings before taxes (EBT) ($158,560) $422,640 funds and the firm to be entirely internally financed for 2016? Taxes (40%) ($63,424) $169,056 Net Income ($95,136) $253,584

Dividends Per Share $0.110 $0.220 Book Value Per Share $5.576 $7.909

Case 1 BUS 530 Summer 2016.xlsx The Case represents 15% of your course grade.