GROUP MEMBERSGrisha Yadav

Kohinoor Thapaliya

Krishna Chalise

Manisha Baral

Mani Manandhar

Netra Bdr. Khatri

Pawan Kawan

PRESENTATION ONSILVER RIVER MANUFACTURING COMPANY

INTRODUCTION OF

Silver River Manufacturing Company (SRM)

SRM is a large regional product of farm and utility trailers specialized lives stock carriers and mobile home chassis.

More than 85% of SRM’S sales come from the south eastern part of the united state

SRM is a major client of MCNB.

SRM whose products are totally based on latest technology and it holds several patent with which it can partially offsets some of the risk.

Question 1(a)

Prepare a statement of changes in financial position for 2005 (sources and uses of funds statement) or complete Table 6.

Table 6: Silver River Manufacturing CompanyStatement of Changes in Financial Position Year Ended December 31(thousands of dollars)

Particulars 2004 2005

Sources of funds    

Net income after taxes 6, 351.70 755.02

Depreciation 1, 657.50 2, 040.00

Funds from operation 8, 009.20 2, 795.02

Long term loan 3, 187.50 0

Net decrease in working capital   428.26

Total sources 11, 196.70 3, 223.26

Application of funds    

Mortgage change 267.75

261.38

Fixed assets change 2, 339.62 2, 773.13

Dividends on stock 1, 587.93 188.76

Net increase in working capital 7, 001.40 0

Total uses 11, 196.70 3, 223.27

Analysis of changes in working capital    

Increase (decrease) in current assets    

Cash change (1, 145.83) (96.71)

AR change 1, 364.25 10, 894.86

INV change 14, 095.12 13, 629.75

CA change 14, 313.54 24, 427.9

Increase(decrease) in current liabilities    

AP change 3, 742.13 9, 492.38

NP change 1, 912.50 13, 132.5

ACC change 1, 657.50 2, 231.28

CL change 7, 312.13 24, 856.16

Net increase(decrease) in working capital 7, 001.41 (428.26)

Question 1(b)

Calculate SRM’s key financial ratios for 2005 and compare them with those of 2003, 2004, industry average, and contract requirement or complete Table 7.

Table 7: Silver River Manufacturing CompanyRatio Analysis Year Ended December 31

Particulars 2003 2004 2005 Industry Average

Comment

Liquidity ratios:

Current ratio 3.07 2.68 1.75 2.5 Poor

Quick ratio 1.66 1.08 0.73 1 OK

Leverage ratios:

Debt ratio(%) 40.46 46.33 59.8 50 High(Risky)

Times interest earned 15.89 7.97 1.48 7.7 Very Poor

Asset Management ratios:

Inventory turnover(Cost) 7.14 4.55 3.57 5.7 Poor

Inventory turnover(selling) 9.03 5.59 4.2 7 Poor

Fixed assets turnover 11.58 11.95 12.1 12 Ok

Total asset turnover 3.06 2.6 2.03 3 Low

Average collection period 36 35.99 53.99 32 High

Table 7: Silver River Manufacturing CompanyRatio Analysis Year Ended December 31

Particulars 2003 2004 2005 Industry Average

Comment

Profitability ratios

Profit margin(%) 5.5 3.44 0.38 2.9 Poor

Gross profit margin(%) 20.89 18.7 14.86 18 Poor

Return on total assets 16.83 8.95 0.78 8.8 Poor

Return on owners' equity 28.26 16.68 1.95 17.5 Poor

Potential failure indicator:

Altman Z Factor 3.1130 2.6305 2.0423 1.81/2.99 Zone of ignorance

Question 2

Based on the case data and the results of your analysis in Question 1, what are the SRM,s strengths and weakness? What are the causes thereof? (Use of the Du Pont system and Altman Z factor would facilitate analysis and strength your answer.)

Du pont system

Du pont system - basically designed: To improve the overall performance of the

firm. It’s actually used in order to evaluate the

profit margin on sales, the assets turnover ratio, and the implications of debt interact in order to determine the rate of return on equity.

Du pont system

The three most important things which affects ROE are as follows:

Operating efficiency as measured by profit margin

Asset use efficiency as measured by total assets turnover

Financial leverage as measured by equity multiplier

Weakness in either operating or asset use efficiency or both will lead to lower ROE. If ROE is unsatisfactory then it will tell us where to start looking for the reasons.

DU Pont System:Particulars Return

On Equity (R.O.E)

= × ×

2003 28.29%      

2004 16.69%      

2005 1.9757%      

Industry Average

17.5%   2.9   3.00    

Altman Z factor:

Z =

Where, = working capital/total assets (working capital is

current assets less current liabilities) = retained earnings/total assets = earnings before interest and taxes/total assets = market value of equity/book value of total debt

(market value of equity includes both preferred and common shares, and debt includes and long term liabilities)

= sales/total assets.

Altman Z factor:

Z2003=3.114

Z2004=2.632

Z2005=2.044

• = = • = =• = = • = =• = =• = =• =34.53%

• =6.7342• = 2.7955• )= 0.2943• = • = • =

Z =

• Z2003=3.114

• Z2004=2.632

• Z2005=2.044

Strengths of SRM:

Fixed assets turnover ratio Altman Z factor is compatible

Weakness of SRM:

Profitability Ratios Liquidity ratios Asset management ratios Financial Leverage Ratios

Question 3

If the bank were to maintain the present credit lines and grant an additional $7,012,500 short-term loan at a 16 percent rate of interest effective from January 1, 2006, would the company be able to retire all short-term loans existing on December 31, 2006? (Assume that all of White’s plans and predictions concerning sales and expenses materialize. In these calculations cash is the residual balancing figure, and SRM’s tax rate is 48 percent. Assume that SRM pays no cash dividends during the year.) Complete tables 9 and 10 included as worksheets to facilitate analysis.

Table 9: Silver River Manufacturing CompanyPro Forma Income Statements (Projected)

Worksheet for Year End 2007 (Thousands of Dollars)Particulars 2005 2006 2007

Projected ProjectedNet sales 215,305 228,223 249,904

Cost of goods sold 183,307 188,284 199,923 Gross profit 31,998 39,939 49,981 Administrative and selling 18,569 18,258 18,743

Depreciation 2,244 2,665 2,006

Miscellaneous expenses 6,297 3,994 3,124

Total operating expenses 27,110 24,917 23,873 EBIT 4,888 15,022 26,108 Interest on short-term loans 2,006 4,331 4,331

Interest on long-term loans 1,052 1,052 1,052

Interest on mortgage 233 210 189

Net income before tax 1,597 9,429 20,536

Taxes 767 4,526 9,857

Net income 830 4,903 10,679 Dividends on stock 208 - - Additions to retained earnings 622 4,903 10,679

Table 10: Silver River Manufacturing CompanyPro Forma Balance Sheets (Projected)

Worksheet for Year End 2007 (Thousands of Dollars)Particulars 2005 2006 2007

Projected Projected

Assets      

Cash 4,296 39,666 49,528

Accounts receivable 32,293 20,286 22,214

Inventory 51,324 33,032 35,074

Current assets 87,913 92,984 106,815

Land, building, plant, and equipment 25,161 32,173 33,139

Accumulated depreciation (7,363) (10,028) (10,939)

Net fixed assets 17,798 22,145 22,200

Total assets 105,711 115,129 129,015

Liabilities and equities      

Short-term bank loans 20,056 27,068 27,068

Account payable 21,998 17,594 18,474

Accruals 8,064 10,231 12,789

Current liabilities 50,118 54,893 58,331

Long-term bank loans 10,519 10,519 10,519

Mortgage 2,574 2,314 2,083

Long-term debt 13,093 12,833 12,602

Total liabilities 63,211 67,726 70,933

Common stock 25,596 25,596 25,596

Retained earnings 16,904 21,807 32,486

Owners’ equity 42,500 47,403 58,082

Total capital 105,711 115,129 129,015

Projected cash balance on 2006 = $39666400 Projected short term loan = $27068000 Difference = $12598400 Minimum cash balance to be maintained =

5% of projected sales of 2006 = $11411165 Hence, company cash balance is adequate for

the payment of the short term loan. Also the company is able to retire all short

term loan existing on Dec 31, 2006 with the maintenance of present credit lines and grant a $7012500 short term loan

Question 4

Compute projected financial ratios for 2006 and 2007 (or complete Table 11). Compare these ratios with 2005 along with industry average and analyze improvement or deterioration in financial condition

Liquidity Ratios

Particulars 2005 2006 Projected

2007 Projected

Industry Average (IA)

Current Ratio 1.75 1.69 1.83 2.50

Quick Ratio 0.73 1.09 1.23 1.00

Leverage Ratios

Particulars 2005 2006 Projected

2007 Projected

Industry Average (IA)

Debt Ratio (%) 59.8 58.83 54.98 50.00

Times Interest Earned 1.49 2.69 4.69 7.70

Asset Management Ratio

Particulars 2005 2006 Projected

2007 Projected

Industry Average (IA)

Inventory Turnover (Cost) 3.57 5.70 5.70 5.70

Inventory Turnover (Selling) 4.20 6.91 7.12 7.00

Fixed Asset Turnover 12.1 10.31 11.26 12.00

Total Assets Turnover 2.04 1.98 1.93 3.00

Average Collection Period 54.0 32.00 32.00 32.00

Profitability Ratios

Particulars 2005 2006 Projected

2007 Projected

Industry Average (IA)

Profit Margin (%) 0.39 2.15 4.27 2.90

Gross Profit margin (%) 14.86 17.5 20 18.00

Return on Total Assets (%) 0.79 4.25 8.28 8.80

Return on Equity (%) 1.96 10.34 18.39 17.50

Interpretation

In comparison of SRM projected financial ratios of year 2006 and 2007 with financial ratios of 2005, the financial position of SRM is improved.

In comparison of SRM projected financial ratios of year 2006 and 2007 with industry average, the financial position of SRM is deteriorated.

Question 5

If all short-term bank loans are repaid towards the end of the first half of 2006, do you think that company is still able to pay regular dividends and maintain minimum cash balance? Revise the tables 9, 10, 11 (or complete the tables 12, 13 and 14). Do you find any situations developing that may indicate poor financial policy? What should be the impact of such situations on the ratios for the company, and are such impacts necessarily either good or bad? Why?

Assumption in Table 9, 10 and 11

Sales Growth: 6% in 2006 and 9.5% in 2007 COGS: 82.5% in 2006 and 80% in 2007 of sales Administrative and selling Expenses: 6% in 2006

and 9.5% in 2007 of sales Miscellaneous Expenses: 8% in 2006 and 7.5%

in 2007 of sales Average collection Period: 32days (Industry

Level)

Assumption in Table 9, 10 and 11

Average Industry Level: 5.7 (Industry Level) No changes in level of Interest Rates over two

year period Tax: 48% of Net Income before tax MCNB will charge 16% for the short term loan Dividend: 25% of Net Income (through back

dated calculation)

Comparison of Cash Balance

2006 20070

5000

10000

15000

20000

25000

Minimum BalanceActual Balance

Amount in ‘000

11411 12217 12495

22263

Ratios

Ratios:

Question 6: Solution

On the basis of our analyses company's forecasted future market growth is favorable.

Demanding immediate repayment won’t be in the best interest for both the company and the bank.

The bank should extend the existing short and long term loans without granting the additional loan.

Analysis of following ratio shows that option B is better

Debt ratio- It determines the degree of company relying on outside fund.

Cont…

Times Interest Earned ratio It is the measure of the company’s ability to make

interest payments on time

It shows how much of current assets it has to pay the current liabilities.

Current ratio

Cont… Quick Ratio The company ability to meet the short term debts

without having to sell off receivables

Profit Margin It shows how much profit the firm is earning to know

that it can pay the short term and long term loan easily or not.

The conditions/safe guards the bank should impose to protect itself on the loans are listed below

Security Mortgage Guarantee Loan Covenants

• Restriction on Disposal of Certain Assets• Barring or Limiting the Grant of Dividend• Requiring A Minimum Net Worth Of The Business• Limitation on Use of The Funds Loaned

Monitoring Insurance

Question 7

If the bank decides to withdraw the entire line of credit and to demand immediate repayment of the two existing loans, what alternatives would be open to SRM?

Solution:

Converting the cash equivalent assets into cash which includes:

Decreasing Account Receivable: Minimize Inventory: Delay Accounts Payable Period: Minimum cash balance policy: Selling/Issue of Common Stock: Hold back dividend Payment: Sale of Assets:

Lesson Learnt

To analyzed the case of the company.

To calculate the financial ratios and know its interpretation

Learn to compare the financial ratios with industry average

Learn to compute and analysed du pont system

THANK YOU