Financial Planning and Analysis
Problem 1:
The following data are taken from the annual report of Khalin Drug Stores. In addition, relevant industry data are provided.
a. Compute the ratios for Khalin corresponding to the industry ratios.
b. What are its strengths (weaknesses) compared to the retail drug industry?
Khalin Drug Stores Balance Sheet as of January 31 (in thousands)
Cash$ 8,143Accounts payable$54,449
Receivables 5,596Notes payable 7,711
Inventory 148,554Accrued expenses 28,823
Other current 11,608Deferred income taxes 20,347
Net long-term assets 132,609Long-term debt and leases103,662
Total $306,510Stockholder’s equity 91,518
Total $306,510
Khalin Drug Stores Income Statement for Year Ended January 31
(in thousands)
Sales$761,734
Cost of goods sold 550,930
Gross profit 210,804
Selling, general, and administrative expenses$156,070
Depreciation 10,784166,854
EBIT 43,950
Interest 15,245
EBIT 28,705
Taxes 12,056
Net Income$ 16,649
Retail Drug Industry Ratios
Current2.00Total asset turnover 3.20
Quick0.50Total debt to total assets 0.43
Days sales outstandingTimes interest earned 3.00
(365-day year) 12 daysnet profit margin 3.33%
Inventory turnover4.00Return on total assets10.60%
Long-term assetReturn on equity18.40%
turnover8.00
Problem 2:
The statement of cash flows for Amoco Corp. for 3 recent years was as follows (in millions):
-2 -1 0 _
Cash Flows from Operating Activities _
Net income$1,953$ 747$1,360
Depreciation, depletion,
amortization, and
retirements and abandonments 2,059 2,418 2,295
Decrease (increase) in receivables (73) 672 (197)
Decrease (increase) in inventories (34)
Increase (decrease) in payables and
accrued liabilities 159(1,367) 331
Deferred taxes and other items 603 297 257
Net cash provided by
operating activities$4,718$2,842$4,012
Cash Flows from Investing Activities _
Capital expenditures (3,881)(2,256)(2,332)
Proceeds from distribution
of property 185 97 129
Distribution of cash
of Cyprus Minerals Co. (23) ______
New investments and advances (42) (192) (42)
Proceeds from sale of investments 25 131 119
Other __(11)__(32)__141
Net cash used in investing activities$(3,747) $(2,252) $(1,985)
Cash Flows from Financing Activities _
New long-term obligations 3341,153 3
Repayment of long-term
obligations (375) (979) (259)
Cash dividends paid (872) (849) (847)
Issuances of common stock 127 161 603
Acquisitions of common stock (937) (363) (443)
Increase (decrease) in short-term
obligations 324 (263) (9)
Net cash used in financing
activities$(1,399) $(1,140) $(952)
Increase (decrease) in cash
and marketable securities (428) (550) 1,075
Cash and marketable securities--
beginning of year 1,419 991 441
Cash and marketable securities--
end of year $ 991 $ 441 $1,516
Supplemental Cash Flow Information
The effect of foreign currency exchange fluctuations on total cash and marketable securities balances was not significant. Net cash provided by operating activities reflects cash payments for interest and income taxes as follows:
-2 -1 0 _
Interest paid$ 459$ 408$ 398
Income taxes paid$1,368$ 877$ 861
a. Analyze the firm’s financial performance for the 3 years and comment on the primary sources of cash, the primary uses of cash, and any apparent trends. How else (in terms of a general approach) could the operating section of the statement be constructed?
b. What else would you like to know that is not reflected or apparent on Amoco’s statement of cash flows?
Problem 3:
Camden Corporation has decided to embark on a rapid expansion. Its most recent income statement and balance sheet are as follows:
Income Statement (in millions)
Sales$30.0
Cost of goods sold 15.0
Selling general, and administrative expenses 6.0
EBIT 9.0
Interest 1.0
EBT 8.0
Taxes (30%) 2.4
Net income 5.6
Cash dividends 3.0
Transferred to retained earnings$ 2.6
Balance Sheet (in millions
Current assets $ 6.0Accounts payable$ 2.0
Long-term assets 14.0Note payable 2.0
Total assets$20.0Long-term debt 6.0
Common stock 3.0
Retained earnings 7.0
Total liabilities and
stockholders’ equity $ 20.0
In attempting to determine its financial condition and needs, Camden believes the following will happen:
Sales$40.0
Cost of goods soldSame percent of sales as current year
Selling, general, and
administrative expenses$ 9.0
Interest$ 1.0 (initially, before additional financing)
TaxesSame percent of EBT
Cash dividends$ 3.0 (initially)
Current assets$ 7.0
Long-term assets$23.0
Accounts payable$ 3.0
Notes payable$ 2.0
Long-term debt$ 6.0 (initially)
Common stock$ 3.0
a. Based on these estimates, prepare a pro forma income statement and balance sheet for Camden. How much additional financing (regardless of where it comes from) do you estimate the firm needs?
b. What happens if Camden acquires sufficient additional long-term debt financing to keep its ratio of total debt to total assets at its original level? Assume interest expenses increase by $500,000.
c. By cutting its cash dividends in addition to the step taken in(b), can Camden finance all its cash needs? What do you think will happen to the market price of Camden’s common stock if it cuts cash dividends? Do you see any alternative means of raising the needed funds?