Essay Instructions: The project assignment for module one involves the actual calculation and interpretation of some of the financial ratios you've been reading about. If you haven't reviewed them yet please see this presentation on financial ratios and this this chapter on financial analysis. There are two companies I want you to look at - Arrow Company and Plume Inc. Perform a basic financial analysis of each company by calculating the following ratios:
1. Rate of return on Equity (ROE) = Net Income / Shareholders' Equity
This ratio can be re-written as a product of the three principal components:
ROE = (Net Income/Sales) x (Sales/Assets) x (Assets/Shareholders' Equity)
The three components are actually: profit margin, asset turnover, and financial leverage, respectively.
2. Return on Assets (ROA) = Net income/Total Assets
3. Gross Margin = Gross profit/Sales
4. Inventory turnover = Cost of goods sold / Ending inventory
5. The Collection Period = Accounts receivable/Credit sales per day, where credit sales per day (or simply "sales per day" are computed by dividing total sales for the year by 365.
6. Fixed-asset turnover = Sales/Total fixed assets
7. Financial leverage ratios:
Debt-to-assets ratio = Total liabilities/Total assets
Debt-to-equity ratio = Total liabilities/Shareholders' equity
8. Liquidity ratios:
Current ratio = Current assets/Current liabilities
Acid test = (Current assets - Inventory)/Current liabilities
When you have finished your calculations, summarize them in a brief (2-3 page) report. The actual calculations should be in table format and be sure to show how you did the math. I will give partial credit for having a part of the calculation correct!
Then describe in words any conclusions that you can draw by comparing the ratios of the two companies. Which company seems to be in better financial health and less risky? If you have trouble drawing a conclusion at least tell us a little bit about what you tried to look for. On the basis of one module, you won't have the skill necessary to make a very sophisticated analysis, but at least you can get a sense of how analysts look at the numbers and make them into meaning.
Please conclude your project report with a paragraph or so describing your overall reaction to the exercise, what you got out of it and didn't get out of it, and any suggestions you have about how you can strengthen it for learning purposes. This latter part will not be graded, except in terms of its presence or absence -- it's more for guidance and assistance to the faculty in trying to make this course work as well for you as it possibly can.
Please use the following format for the paper: Mod 1 SLP format. You just need to put the ratio calculations into a table and then provide a written section on your comparison and interpretation. Having each of the ratios side-by-side in a table will help you with the comparison.
SLP expectations:
Use information from the modular background readings as well as any good quality resource you can find.
LENGTH: 2-3 pages typed and double-spaced.
The following items will be assessed in particular:
1.Your ability to correctly calculate the financial ratios;
2.Your ability to interpret the ratios and determine the financial health of the companies.
SOURCES:
http://www.missouribusiness.net/sbtdc/docs/financial_ratios.asp
http://educ.jmu.edu//~drakepp/principles/module2/fin_rat.pdf
EACH COMPANIES FINANCIAL INFORMATION:
ARROW COMPANY
Statement of Income
FY 2009
REVENUES
Sales $4,275,000
Other income +95,000
Total revenue $4,370,000
COST OF GOODS SOLD $2,650,000
GROSS PROFIT $1,720,000
OPERATING EXPENSES
Total Selling Expenses $805,000
Total General Expenses +$335,000
Total Operating Expenses $1,140,000
NET INCOME $580,000
ARROW COMPANY
Balance Sheet
December 31, 2009
ASSETS
Current Assets
Cash $295,000
Marketable Securities 520,000
Accounts Receivable 410,000
Notes Receivable 370,700
Ending Inventories 435,000
Prepaid expenses and other 105,000
Total Current Assets $2,135,700
Fixed Assets
Land $535,000
Plant and Buildings 735,000
Equipment 425,000
Total Fixed Assets $1,695,000
Other Assets
Goodwill, net $55,000
Total Other Assets $55,000
TOTAL ASSETS $3,885,700
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts Payable $320,000
Accrued expenses and other 290,000
Current liabilities
Current portion of finance debt 330,500
Total Current Liabilities $940,500
Long??'Term Liabilities
Notes Payable $265,000
Bonds 414,000
Other long-term liabilities 77,000
Total Long??'Term Liabilities $756,000
Total Liabilities $1,696,500
Shareholder’s Equity
Common Stock $1,072,200
Retained Earnings 1,117,000
Total Shareholder’s Equity $2,189,200
TOTAL LIABILITIES &
SHAREHOLDER'S EQUITY $3,885,700
PLUME INCORPORATED
Statement of Income
FY 2009
REVENUES
Sales $4,805,000
Other income +212,000
Total revenue $5,017,000
COST OF GOODS SOLD $2,900,000
GROSS PROFIT $2,117,000
OPERATING EXPENSES
Total Selling Expenses $875,000
Total General Expenses +$405,000
Total Operating Expenses $1,280,000
NET INCOME $837,000
PLUME INCORPORATED
Balance Sheet
December 31, 2009
ASSETS
Current Assets
Cash $375,000
Marketable Securities 100,000
Accounts Receivable 575,500
Notes Receivable 210,000
Ending Inventories 595,000
Prepaid expenses and other 75,000
Total Current Assets $1,930,500
Fixed Assets
Land $757,000
Plant and Buildings 1,105,000
Equipment 650,000
Total Fixed Assets $2,512,000
Other Assets
Goodwill, net $25,000
Total Other Assets $25,000
TOTAL ASSETS $4,467,500
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts Payable $670,000
Accrued expenses and other 505,000
Current liabilities
Current portion of finance debt 195,000
Total Current Liabilities $1,370,000
Long??'Term Liabilities
Notes Payable $210,000
Bonds 85,500
Other long-term liabilities 120,000
Total Long??'Term Liabilities $415,500
Total Liabilities $1,785,500
Shareholder's Equity
Common Stock $1,832,000
Retained Earnings 850,000
Total Shareholder’s Equity $2,682,000
TOTAL LIABILITIES &
SHAREHOLDER'S EQUITY $4,467,500
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