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1. a) Increase and decrease values of assets and liabilities are calculated comparing

the 2013 and 2014 numbers for Microhard.

Microhard Corporation

2014 Sources and Uses of Cash (numbers in millions)

Cash, beginning of year

Sources of cash

Operations:

Net income

Depreciation

Working capital:

Increase in accounts

payable

Decrease in accounts

receivable

Long-term financing:

Increase in common stock

Total sources of cash

Uses of cash

Working capital:

Increase in inventory

Change in notes payable

Long-term financing:

Decrease in long-term debt

Fixed asset acquisitions

Dividends paid

Total uses of cash

Net addition to cash

Cash, end of year $

3000

9804

1400

200

100

1097

12600

200

0

500

2400

9000

12100

500

3500

b) Net Purchase of fixed assets was 1000 million. But since we wrote of 1400 as

depreciation, the amount Microhard actually spent on fixed assets is 1000 + 1400 =

2400 million. So statement of cash flows

Microhard Corporation

2014 Statement of Cash Flows (numbers in millions)

Cash, beginning of year

Operating activity

Net income

Plus:

Depreciation

Increase in accounts payable

Decrease in accounts

receivable

Less:

Increase in inventory

Net cash from operating

activity

Investment activity

Fixed asset acquisitions

Net cash from investment

activity

Financing activity

Change in notes payable

Decrease in long-term debt

Dividends paid

Increase in common stock

Net cash from financing

activity

Net increase in cash

Cash, end of year

3000

9804

1400

200

100

-200

11304

-2400

-2400

0

-500

-9000

1097

-8404

500

3500

Dividend payout ratio = Cash dividends/Net income

= 9000/9804

= 0.92

= 0.08

ROA = Net Income/Total Assets

= 9804/19600

= 0.50

Internal Growth Rate = (ROA * b) / (1- ROA * b)

Where b is the plowback or retention ratio

= (0.50 * 0.08)/(1-(0.5*0.08))

= 0.04/0.96

= 0.0417

Internal Growth Rate = 4.17%

ROE = Net Income/Total Equity

= 9804/12700

= 0.77

Sustainable Growth Rate = (ROE * b) / ( 1- ROE * b)

= (0.77 * 0.08)/ (1 (0.77 * 0.08))

= 0.06/ 0.9384

= 0.0656

Sustainable Growth Rate = 6.56%

2) Evaluate the financial position of Microhard in areas of liquidity, solvency,

profitability and asset management. Write a paragraph summarizing your

evaluation as supported by ratio analysis that you have performed.

Short-term solvency, or liquidity, ratios

Current ratio = Current Assets/ Current Liabilities

= (238,700 + 37,500 + 136,600)/ (28,200 + 73,200)

= 412800 / 101400

Current ratio = 4.07

Quick ratio = (Current assets Inventory) / Current liabilities

= (412800 136600) / 101400

Quick ratio = 2.72

Cash ratio = Cash/ Current Liabilties

= 238700/101400

Cash ratio = 2.35

Net working capital to total assets = Networking capital/total assets

= (Current Assets Current Liabilities)/ Total

Assets

= (412800 101400)/ 1359900

= 311 400/ 1359900

Net working capital to total assets = 0.23

Long-term solvency, or financial leverage, ratios

Total debt ratio = Total assets -Total equity/total assets

= (1359900 1163500) / 1359900

= 0.14

Debtequity ratio = Total debt/Total equity

= 196400/ 1163500

= 0.17

Equity multiplier = Total assets/Total equity

= 1359900/1163500

= 1.17

Long-term debt ratio = Long-term debt/ Long-term debt + Equity

= 95000/ (95000 + 1163500)

= 0.08

Times interest earned ratio = EBIT/ interest earned

= (Sales COGS Depreciation)/ 5700

= 1435178/ 5700

= 251.79

Cash coverage ratio = EBIT + Depreciation / Interest

= (1435178 + 94710)/ 5700

= 268.4

Asset management, or turnover, ratios

Inventory turnover = Cost of goods sold/ Inventory

= 1869863/ 136600

= 13.69

Days sales in inventory = 365/ Inventory turnover

= 365/ 13.69

= 26.66

Receivables turnover = Sales/ Accounts Receivable

= 3399750/ 37500

= 90.66

Days sales in receivables = 365/ Receivables turnover

= 365/90.66

= 4.03

NWC turnover = Sales / NWC

= 3399750/311400

= 10.92

Fixed asset turnover = Sales/ Net Fixed Assets

= 3399750/947100

= 3.59

= 3399750/1359900

= 2.5

Profitability ratios

Profit margin = Net Income/Sales

= 1072108/3399750

= 0.32

Return on assets (ROA) = Net Income/Total Assets

= 1072108/1359900

= 0.79

Return on equity (ROE) = Net Income/Total Equity

= 1072108/1163500

= 0.92

Also ROE = Net Income/ Total Sales * Sales/ Assets * Assets/Equity

Ratios at a glance

Liquidity Ratios

Quick ratio = 2.72

Cash ratio = 2.35

Net working capital to total assets =

0.23

Days sales in inventory = 26.66

Receivables turnover = 90.66

Days' sales in receivables = 4.03

NWC turnover = 4.03

Fixed Asset turnover = 3.59

Total Asset turnover = 2.5

Total Debt ratio = 0.14

Debt-Equity ratio = 0.17

Equity multiplier = 1.17

Long term debt ratio = 0.08

Times interest earned ratio = 251.79

Cash coverage = 268.4

Profitability Ratios

Profit Margin = 0.32

Return on Assets (ROA) = 0.79

Return on Equity (ROE) =0.92

Since the quick ratio of Microhard is half of its current ratio, we can see that

Microhard carries a lot of inventory. The company carries a smaller amount of debt

compared to equity. So the company is heavily financed by equity (owner financed)

compared to debt. It has a high cash coverage and times interest earned ratio, so it

is well placed to pay its interests on the debts it has borrowed. The company has a

relatively high inventory turnover though it has a high inventory. It means that it is

selling off its products quickly and that is a good sign. The receivable turnover ratio

is very high, which indicates that the company is really good with collecting the

cash on sales. Microhards asset turnover ratios are all high which means that it is

generating more from its assets. The profitability ratios focus on net income.

Microhards profit margin of 32% is desirable. Higher the ROA and ROE, the better.

Microhards ROE and ROA are very high which is great. From the ratios, Microhard

seems like a highly profitable company.

Using the ratios, we were able to analyze the companys performance but we

had to limit our analysis since we dont know how Microhards competitors are

performing and the industry in which it is in. All of the above ratios are based on

accounting numbers, so calculating the market ratios would also give us some

valuable information on the state of Microhards operations.

3) Given depreciation and interest cost will grow at 50% of sales growth (given as

20%), so growth in depreciation and interest cost = 10%.

Pro Forma Income Statement 2015

Millions

Cost of Goods Sold (60% of sales as in

2014)

Depreciation (10% increase)

EBIT

Interest Cost (10 % increase)

EBT

Taxes @30% of 16974

Net Income

Dividends (same divident payout ratio

as 2014)

Addition to Retained Earnings

47,040

28,224

1,540

17,276

303

16,974

5,092

11,881

10,

907.64

974

Given assets and current liabilities will grow at same rate as sales 20% and long

term debt will grow at 50% of sales growth = 10%

Millions

2014

Assets

Cash

Accounts Receivable

Inventory

Net Fixed Assets

Total

Liabilities & Equity

Notes Payable

Accounts Payable

Long-Term Debt

Total Liabilities

Common Stocks

Accumulated Retained Earnings

2015

3500.0

400.0

1700.0

14000.0

19600.0

4200

480

2040

16800

23520

300.0

1100.0

5500.0

6900.0

360

1320

6050

7730

10596.

5

3077.3

1

13673.

8

21403.

8

2116.2

10596.5

2103.5

Total Equity

12700.0

Total

EFN

19600.0

Change

20

20

20

20

%

%

%

%

growth

growth

growth

growth

20 % growth

20 % growth

10 % growth

Adding 974

RE

So External Financing Need = 2116.2 which is the amount the company has to

borrow.

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