Case Cartwright Lumber Company

Learning Objectives
Following the Wk 1 assignment on financial ratio analysis of the historical financial statements
and making a judgment about Cartwright's business, Wk 2 forecasts the financial statements five years
into the future so you can understand the relationship between sales growth and external financing needs (EFN

Reading
The Cohen Finance Workbook replaces weekly PDFs; the chapters are the PDFs.
If your knowledge of accoounting terminology and ratios is sound, good. If not, re-read Chapters 1 & 2.
Treat accounting as a foreign language that must be mastered; without it you understand little or nothing. Kno
Chapters 1 & 2 so you can refer to them when necessary.

IT IS VITAL THAT YOU STUDY THE WK 1 SOLUTIONS TEMPLATE BEFORE PROCEEDING WITH THE WK 2 ASSIGN
The 4th & 5th tabs in this Excel file are the Wk 1 Q1 & Q2 Solutions so you don't have to switch back-and-forth
Notice that the GRAY-colored part of the FLOW DIAGRAM is what you are learning about in Wks 1 & 2.

Chapter 3 discusses the Wk 2 assignment, based on the short-form forecasting explained step-by-step
beginning on page 33. Also, pay special attention to the discussion of:
a circular reference beginning on page 41
b external financing needed beginning on page 42
c free cash flow definition on page 45

Questions
1 The short-form forecasting model (Q1 tab) shows 2003 as the base year (historical) and five forecast years, 200
The forecast assumptions are entered for you in C4.G15.
Show your understanding of the short-form forecasting model by answering the questions in the Q1 boxes.

2 Study the table on p 45 of the Cohen finance book and explanations on the pages following.
Then, as the banker, explain to Mr. Cartwright why he must reduce his sales growth rate to reduce
his external financing needs, supported by a revised forecast.
The Q2 tab includes a working (with the formulas) version of the p 45 table and the short-form forecasting
model with zeros in the assumption cells C4,G15, so you can forecast a scenario more to the banker's
liking than the scenario in the Q1 & Q2 tab.

THERE IS NO SINGLE CORRECT ANSWER TO THIS CASE.

THE PURPOSE OF THE ASSIGNMENT IS TO LEARN THE PROCESS OF
FINANCIAL STATEMENT ANALYSIS AND FORECASTING.
PERFECTION IS NOT EXPECTED. THIS IS WORK-IN-PROCESS;
NOT FINISHED PRODUCT…I.E., A LEARNING EXPERIENCE.
BUT, YOU MUST MAKE A CLEAR RECOMMENDATION BASED ON THE
RESULTS OF YOUR ANALYSIS.
 financial statements
financial statements five years
wth and external financing needs (EFN).

If not, re-read Chapters 1 & 2.

you understand little or nothing. Know the content of

PROCEEDING WITH THE WK 2 ASSIGNMENT.

u don't have to switch back-and-forth between two Excel files.
e learning about in Wks 1 & 2.

asting explained step-by-step

historical) and five forecast years, 2004-08.

ing the questions in the Q1 boxes.

he pages following.
les growth rate to reduce

le and the short-form forecasting

enario more to the banker's
INCOME STATEMENT BALANCE SHEET WORKING CAPITAL
Revenue ASSETS LIABILITIES AND EQUITY spontaneous change with revenue
Cost of sales Current assets Current liabilities ?what levels of ca, cl, s-t loans?
Gross profit Cash Trade payables CAPITAL BUDGETING
Other operating income Investments Other accruals ?what projects to accept?
Other operating expenses Trade receivables Tax liabilities FINANCING
Total cost and expenses Inventories Short-term loans, leases ?what is the debt capacity?
Operating profit (EBIT) Non-current assets Non-current liabilities
Interest, finance costs Property, plant & equipmentLoans, debt, leases due after 1 year
Profit before tax Investment property Retirement benefit obligation COST OF DEBT
Income tax Goodwill Deferred tax liabilities
Net profit after tax Total non-current liabilities
Dividends K-WACC
Reinvested in the business Stockholder's equity (Net worth)
Preferred stock
OPERATING LEVERAGE Common stock COST OF EQUITY
Additional paid-in-capital
FINANCIAL LEVERAGE Retained earnings VALUATION
CASH FLOW
Total assets Total liabilities & equity COST OF CAPITAL
ANALYSIS STEPS: FINANCING
1-HISTORICAL RATIOS
2-K-WACC HISTORICAL RATIOS I/S & B/S FORECAST EFN
3-CAPITAL BUDGETING
4-FORECAST & EFN LONG-FORM FORECAST I/S, B/S, & RATIOS
5-EQUITY VALUATION
6-FINANCING

CAPITAL BUDGETING OP & CAP NATCF, NPV, IRR, PAYBACK

VALUATION ENTERPRISE VALUE USING FREE CASH FLOW

MARKET MULTIPLES: P/E, MV/BV, REV, EBIT

 DEBT EQUITY
DEBT

EQUITY
EBIT CHART

income risk control mktblty flexblty timing

K-WACC
 A B C D E F G H I J K L M N O P Q
1 Do not let line length overflow a box. Hit ENTER when the number of characters fills the row.
2
3 Q1: ROE, ROA, ROIC are given for Cartwright Lumber and Apex Lumber.
4
5 Read the Cohen Finance Workbook chapters 1 & 2, concentrating on the how-to's of ratio analysis in chapter 2.
6 If you need it, chapter 1 acts as an accounting refresher.
7
8 Cartwright Lumber Apex Lumber
9 Interest rate 6.0% 8.0%
10 Income tax rate 17.0% 17.0%
11
12 Debt 585 100
13 Equity 348 833
14 TOTAL LIAB+EQUITY 933 933
15
16 EBIT 86 86
17 - Interest expense 35.1 8
18 Earnings before tax 50.9 78
19 - Income tax 8.7 13.3
20 Earnings after tax 42.2 64.7
21
22 Ratio Fraction Ratio Fraction Numerator Denominator
23 ROE 12.1% 42.2/348 7.8% 64.7/833 RETURN ON EQUITY Earnings after tax Equity
24 ROA 4.5% 42.2/933 6.9% 64.7/933 RETURN ON ASSETS Earnings after tax Total Liab+Eq
25 ROIC 7.7% 86*.83/933 7.7% 86*.83/933 RETURN ON INVESTED CAPITAL EBIT * (1-Tax rate) Total Liab+Eq
26
27 1a: Why is Cartwright ROE higher than Apex ROE? Is it better? Why? Why not? Write answer in box.
28 Parsing the numerator and denominator, for Cartwright earnings after tax is 42.2, lower than Apex 64.7, BUT, Cartwright equity is much lower at
29 348 than Apex at 833. The numerator and denominator reveal the essence of financial leverage, Cartwright has higher
30
31
32 Higher leverage (debt to equity) means higher ROE. No indication of better or worse is implied. Depends on other info.
33 Think of DuPont equation - profitability X efficiency X leverage = ROE …..higher leverage, higher ROE - direct relationship
34 Higher leverage means greater default risk - is it bad? - maybe, maybe not….will be unraveled later in the course…always somewhat subjective. see formulas in cells.
35 Depends on analysis of business risk (green-coded) and financial risk (red-coded) on IS/BS Model.
36 When EBIT is predictably stable and high enough to cover interest expense, default risk may be lower, justifying higher leverage. 6 points for citing specifics about the trends
37 Interest expense is increasing, which means that debt is increasing, substantially, increasing financial risk. 6 points for citing coverage ratio in addition to debt ratio
38 1b: Why is Cartwright ROA lower than Apex ROA? What does it tell you about the two companies? Write answer in box.
39 is classified in the balance sheet as short-term borrowing - not included in the ratios on row 32 & 33.
40 No implication that one is better or worse than another.
41
42 Parsing the numerator and denominator, numerators are the same as in the ROE metric above, denominators are identical,
43 1c: Using the ratios below, appraise the trend (2001-03) of Cartwright's asset use (efficiency). Cite specific ratios to justify your analysis.
44
45
46
47
48
49 1c: How do the Cartwright & Apex ROICs compare? What does this suggest about the two companies? Write answer in box.
50 The benefit of the ROIC measure of return is that the impact of leverage is removed, both are 7.7%
51 because they have the same EBIT and total liabilities plus equity.
52 If one has higher business risk (higher fixed cost ratio, riskier industry, more volatility in sales year-to-year…comparison weakens.
53 If ratios reflect long-run situation, interpretation strengthens. If ratios reflect transitory events, interpretation weakens.
54
55 Overall, different ratios measure different things. Look carefully at numerator and denominator before you interpret the meaning of the metric and
56 beware of generalizations.
57
58
59
60
61
62 Scoring Rubric
63 a. 9 points for knowing that leverage drives ROE, minus 2 for lack of specificity
64 b. 9 points - same as b, minus 2 as above.
65 c. 9 points for knowing that ROIC removes impact of leverage, minus 2 as above.
66
67 TOTAL 27 points of 100 points for Wk 1
 A E F G H I J K L M N O P Q
1 Do not let line length overflow a box. Hit ENTER when the number of characters fills the row.
2
3 Q2: FINANCIAL STATEMENT ANALYSIS WITH RATIOS
4
5 Read the Cartwright Lumber Company case study.
6 First, read the first and last paragraphs of the case.
7 Discern what the case is about, the issues, and the decision to be made.
8 Next, peruse the case exhibits and preliminarily digest what they tell you.
9 Then, read the assignment questions so you know what you have to do for the assignment.
10 Finally, read the rest of the case.
11 Cohen Finance Workbook chapter 2 goes with this assignment. It explains ratio analysis in detail.
12
13 Cartwright's financial statements are below for your convenience.
14 Financial ratios are automatically calculated in the panels below the financial statements - at row 180.
15 Examine the cell contents to learn how the ratio calculations work in Excel. Later, when you need to do
16 calculations in Excel, you will know how. Never type-in in calculations done outside of Excel.
17 Wk2 continues with a forecast of Cartwright's financial statements and external financing needs.
18
19 1a: Using the ratios below, appraise the trend (2001-03) of Cartwright's liquidity. Cite specific ratios to justify your analysis. SCORING RUBRIC
20 Current ratio 1.8 1.6 1.5 -19.4% always be aware of numerator and denominator
21 Quick ratio 0.9 0.7 0.7 -24.0% and how they change…extent of change in numerator
22 Days sales in receivables 36.8 40.3 42.9 16.8% and extent of change in denominator…think analytically
23 Days cost of sales in inventory 71.4 82.8 78.2 9.6%
24 Days cost of sales in payables 37.0 48.8 47.9 29.4% Excel HINT: Copy ratios from below row 180 using copy,
25 then Paste Special, VALUES.
26 Liquidity is in decline for all ratios above. Quick ratio decline exceeds current ratio decline because days in rec increased more
27 than increase in inventory. Customers are taking longer to pay. Is it Cartwright's choice or customers'? 6 points for citing general decline
28 Day payables increased the most - indicating trouble in paying suppliers on time. 3 points each for citing specific sources of decline
29 TOTAL 12 points minus 2 if trend not discussed
30
31 1b: Using the ratios below, appraise the trend (2001-03) of Cartwright's leverage. Cite specific ratios to justify your analysis.
32 Long-term debt to total capital 19.2% 15.8% 12.6% -34.4% calculate %age change in Col H as
33 Long-term debt to equity 23.7% 18.8% 14.4% -39.4% (ending amount-beginning amount)/beginning amount-
34 Times interest earned 3.8 3.1 2.6 -32.2% see formulas in cells.
35 Full burden coverage 3.2 2.5 2.2 -32.9%
36 6 points for citing specifics about the trends
37 Interest expense is increasing, which means that debt is increasing, substantially, increasing financial risk. 6 points for citing coverage ratio in addition to debt ratio
38 Row 32 and 33 debt ratios show long-term debt decreasing, which is true…but, the debt increase TOTAL 12 points minus 2 if trend not discussed
39 is classified in the balance sheet as short-term borrowing - not included in the ratios on row 32 & 33.
40
41
42
43 1c: Using the ratios below, appraise the trend (2001-03) of Cartwright's asset use (efficiency). Cite specific ratios to justify your analysis.
44 Fixed asset turnover 13.5 14.4 17.2 27.4%
45 Total asset turnover 2.9 2.7 2.9 1.1%
46 8 points for citing general increase
47 Fixed asset turnover is healthy, indicating that fixed assets (growing little) drive increased sales. 4 points for distinguishing the two ratios
48 Total asset turnover changes little, because receivables and inventory are increasing as sales increases. TOTAL 12 points minus 2 if trend not discussed
49
50
51
52
53
54
55 1d: Using the ratios below, appraise the trend (2001-03) of Cartwright's profitability. Cite specific ratios to justify your analysis.
56 Gross margin (GM) 28.0% 28.6% 27.6% -1.3% 0.5 point
57 Operating profit margin (OPM) 2.9% 3.0% 3.2% 8.3% 0.5 point
58 Return on sales (ROS) 1.8% 1.7% 1.6% -10.6% 0.5 point
59 Return on total assets (ROTA) 5.2% 4.6% 4.7% -9.6% 0.5 point
60 Return on equity (ROE) 11.5% 11.2% 12.6% 10.1% 0.5 point
61 Return on invested capital (ROIC 7.1% 6.9% 7.7% 8.5% 0.5 point
62 Small 1.3% gross margin decrease indicates small increase in cost of sales. Good 8.3% increase in operating profit margin 4 points distinction between IS and BS ratios
63 indicates costs are well controlled and decreasing in face of rising sales - excellent performance. Big 10.6% drop on 5 points ROIC removes impact of leverage
64 sales driven by interest expense (financial), not operations which are sound; same for return on assets decline. Total 12 points minus 2 if trend not discussed
65 ROE increase driven by leverage increase-a negative. Solid ROIC increase driven by solid operating performance.
66
67 1e: Interpret the DuPont Formula ratios by explaining if its four ratios are a valid substitute for the ratios in Q1a-1d above. Cite specifics.
68 Profitability 1.8% 1.7% 1.6% -10.6%
69 Efficiency 2.9 2.7 2.9 1.1%
70 Leverage 2.2 2.4 2.7 21.9%
71 ROE Check 11.5% 11.2% 12.6% 10.1%
72 Profitability and efficiency ratios are the same; profitability is ROS and does not reveal GM or OPM. 4 points no liquidity ratio
73 Leverage uses unique numerator & denominator, no coverage ratio included, nothing on liquidity ratios, days in rec,invn,pay. 4 points no coverage ratio
74 Substantial ROE growth driven by large, significant 21.9% increase in leverage (financial risk) and small insignificant 4 points otherwise comprehensive
75 1.1% increase in efficiency and significant 10.6% decrease in profitability. Total 12 points
76 Note that decrease in profitability is caused by increased interest expense, not operations…because operating profit
77 margin increased 8.3%.
78
79 1f: Based on Cartwright's 2001-03 performance, make a qualitative summary judgment about it.
80 Operations excellent, good customer relationships, good supplier relationships in spite of slow payment period. 4 points operations - top of IS
81 Growth rapid, but requires increasing financing of working capital (receivables and inventory). 4 points financing - bottom of IS
82 Increased interest expense on financing drags down profits (difference between EBIT and net profit) and weakens 4 points weak balance sheet
83 ratios. ROE growth misleading, driven by financial leverage more than operating performance. 1 points connect hi growth to hi debt
84 Use of temporary financing (short term) puts Cartwright under control of bank - no loan - no business. Temporary Total 13 points
85 financing of permanent needs is a dangerous plight for him to be in.
86 Q2 total 73 points of 100 for Wk 1
87 Summary judgment: solid operating performance, underfinanced due to rapid growth increasing receivables and
88 inventory, requiring increased borrowing from bank and suppliers…the segue to Wk 2 forecast.
89
90 CARTWRIGHT LUMBER COMPANY (000 omitted)
91
92 INCOME STATEMENTS GO TO ROW 222…FIND 2 SUPPLEMENTARY QUESTIONS-ANSWERS
93 ABOUT 'BUSINESS RISK' AND 'FINANCIAL RISK'
94 PERIOD -2 -1 0 THIS WILL BE IMPORTANT GOING FORWARD
95 JANUARY 1-DECEMBER 31 2001 2002 2003
96
97 Revenue 1697.0 2013.0 2694.0
98 Cost of sales 1222.0 1437.0 1950.0
99 Gross profit 475.0 576.0 744.0
100 Other operating income 0.0 0.0 0.0
101 Distribution costs 425.0 515.0 658.0
102 Administrative costs 0.0 0.0 0.0
103 Depreciation & amortization exp 0.0 0.0 0.0
104 Other operating costs 0.0 0.0 0.0
105 Restructuring costs 0.0 0.0 0.0
106 Total operating costs 1647.0 1952.0 2608.0
107 Profit from operations (EBIT) 50.0 61.0 86.0
108 Interest, financing expense 13.0 20.0 33.0
109 Income from investments 0.0 0.0 0.0
110 Disposal of operations 0.0 0.0 0.0
111 Profit before tax 37.0 41.0 53.0
112 Income tax 6.0 7.0 9.0
113 Profit after tax 31.0 34.0 44.0
114 Minority interest 0.0 0.0 0.0
115 Other 0.0 0.0 0.0
116 Net profit 31.0 34.0 44.0
117 Dividends 0.0 0.0 0.0
118 Other 0.0 0.0 0.0
119 Reinvested in the business 31.0 34.0 44.0
120
121 PER SHARE DATA
122 Market price € 0.00 € 0.00 € 0.00
123 Extraordinary items per share #DIV/0! #DIV/0! #DIV/0!
124 Earnings per share - primary #DIV/0! #DIV/0! #DIV/0!
125 Earnings per share - fully diluted € 0.00 € 0.00 € 0.00
126 Dividends per share #DIV/0! #DIV/0! #DIV/0!
127 Price/earnings ratio #DIV/0! #DIV/0! #DIV/0!
128 Common shares outstanding 0.00 0.00 0.00
129
130 BALANCE SHEETS
131
132 PERIOD -2 -1 0
133 AS OF DECEMBER 31 2001 2002 2003
134 ASSETS
135 Current assets:
136 Cash & equivalents 58.0 48.0 41.0
137 Investments 0.0 0.0 0.0
138 Trade receivables 171.0 222.0 317.0
139 Inventory 239.0 326.0 418.0
140 Other 0.0 0.0 0.0
141 Total current assets 468.0 596.0 776.0
142 Non-current assets:
143 Property, plant & equipment-gros 126.0 140.0 157.0
144 Accumulated deprec. & amort. 0.0 0.0 0.0
145 Property, plant & equipment-net 126.0 140.0 157.0
146 Investment property 0.0 0.0 0.0
147 Goodwill 0.0 0.0 0.0
148 Other 1 0.0 0.0 0.0
149 Other 2 0.0 0.0 0.0
150 Total non-current assets 126.0 140.0 157.0
151 Total assets 594.0 736.0 933.0
152
153 LIABILITIES AND EQUITY
154 Current liabilities:
155 Trade & other payables 124.0 192.0 256.0
156 Retirement benefit obligation 0.0 0.0 0.0
157 Tax liabilities 0.0 0.0 0.0
158 Leases due in 1 year 0.0 0.0 0.0
159 Loans, debt due in 1 year 112 153 240
160 Other 24.0 30.0 39.0
161 Total current liabilities 260.0 375.0 535.0
162 Non-current liabilities:
163 Retirement benefit obligation 0.0 0.0 0.0
164 Deferred tax liabilities 0.0 0.0 0.0
165 Finance leases due after 1 year 0.0 0.0 0.0
166 Loans, debts due after 1 year 64.0 57.0 50.0
167 Other 0.0 0.0 0.0
168 Total non-current liabilities 64.0 57.0 50.0
169 Total liabilities 324.0 432.0 585.0
170 Stockholder's equity:
171 Preferred stock 0.0 0.0 0.0
172 Common stock 0.0 0.0 0.0
173 Paid-in surplus 0.0 0.0 0.0
174 Other 0.0 0.0 0.0
175 Retained earnings 270.0 304.0 348.0
176 Total equity 270.0 304.0 348.0
177 Minority interest 0.0 0.0 0.0
178 Total liabilities & equity 594.0 736.0 933.0
179
180 FINANCIAL RATIOS
181 PERIOD -2 -1 0
182 YEAR 2001 2002 2003
183 Liquidity Ratios
184 Current ratio 1.8 1.6 1.5
185 Quick ratio 0.9 0.7 0.7
186 Days sales in receivables 36.8 40.3 42.9
187 Days cost of sales in inventory 71.4 82.8 78.2
188 Days cost of sales in payables 37.0 48.8 47.9
189
190 Leverage Ratios
191 Long-term debt to total capital 19.2% 15.8% 12.6%
192 Long-term debt to equity 23.7% 18.8% 14.4%
193 Times interest earned 3.8 3.1 2.6
194 Full burden coverage 3.2 2.5 2.2
195
196 Asset-Use (Efficiency) Ratios
197 Fixed asset turnover 13.5 14.4 17.2
198 Total asset turnover 2.9 2.7 2.9
199
200 Profitability Ratios
201 Gross margin 28.0% 28.6% 27.6%
202 Operating profit margin 2.9% 3.0% 3.2%
203 Return on sales 1.8% 1.7% 1.6%
204 Return on total assets 5.2% 4.6% 4.7%
205 Return on equity (ROE) 11.5% 11.2% 12.6%
206 Return on invested capital (ROIC) 7.1% 6.9% 7.7%
207
208 DuPont Formula - ROE 11.5% 11.2% 12.6%
209 Profitability 1.8% 1.7% 1.6%
210 Efficiency 2.9 2.7 2.9
211 Leverage 2.2 2.4 2.7
212 ROE Check 11.5% 11.2% 12.6%
213
214 Compound Annual Growth Rates
215 Revenues #DIV/0! 18.6% 33.8%
216 Gross profit #DIV/0! 21.3% 29.2%
217 Operating profit (EBIT) #DIV/0! 22.0% 41.0%
218 Total assets #DIV/0! 23.9% 26.8%
219
220
221
222 Appraise Cartwright's 'business risk'.
223 Cartwright's business risk driven by changes in sales and changes in operating expenses, which drive changes in EBIT. BUSINESS RISK is coded GREEN on IS/BS Model,
224 On the operating expense side, business risk is low because of cost control and efficient operations - controllable by linking IS and BS. It is analogous to OPERATING LEVERAGE;
225 Mr. Cartwright. variation in EBIT driven by variations in sales and operating expenses.
226 On the sales side, he has less control, subject to economic forces and competition. His customer and supplier relationsh Always consider degree of fixed cost in interpreting business risk - higher
227 are good. He uses generous credit terms to build sales - but his customers (small builders) likely have cash flow problem percentage of fixed cost to total cost, higher business risk.
228 of their own - so quality of receivables is low - bad debt risk. See Cohen Finance Workbook pps 29-32
229
230 Business risk is moderate, not on cost side, but on possibility of sales decline and collection of receivables.
231
232
233
234 Appraise Cartwright's 'financial risk'.
235 it is increasing - and highly risky. FINANCIAL RISK is coded RED on IS/BS Model,
236 Most of his debt (82.8%) is short term debt, not revealed in the ratio analysis. linking IS and BS. Interest expense is a fixed cost, the driver
237 short term debt 240 debt 290 behind FINANCIAL LEVERAGE.
238 long term debt 50 debt+equit 638 See Cohen Finance Workbook, pps 109-11
239 equity 348 ratio 45.5%
240 st debt to 82.8%
241 If the bank does not roll over the short-term loan, and Cartwright can't find another lender, he would be forced
242 to liquidate the business to repay the loan, or face bankruptcy.
243 New equity is off the table because Cartwright recently bought out his equity partner - he does not want a partner.
244
 A B C D E F G H I J
1 ENTER DATA IN BLUE-COLORED CELLS
2 Year 2004 2004 2005 2006 2007 2008
3 Net Sales $2,694
4 Growth rate in net sales 33.6% 20% 20% 20% 20%
5 Cost of goods sold/net sales 72.4% 72.4% 72.4% 72.4% 72.4%
6 GS&A expenses/net sales 24.4% 24.4% 24.4% 24.4% 24.4%
7 Long-term debt $ 50 $ 43 $ 37 $ 30 $ 23
8 Current portion long-term debt $ 7 $ 7 $ 7 $ 7 $ 7
9 Interest rate 8.0% 8.0% 8.0% 8.0% 8.0%
10 Tax rate 35.0% 35.0% 35.0% 35.0% 35.0%
11 Dividend/earnings after tax 0.0% 0.0% 0.0% 0.0% 0.0%
12 Current assets/net sales 28.8% 28.8% 28.8% 28.8% 28.8%
13 Net fixed assets $ 157 $ 160 $ 163 $ 166 $ 168
14 Current liabilities/ net sales 11.2% 11.2% 11.2% 11.2% 11.2%
15 Owner's equity (net worth) $348
16
17 INCOME STATEMENT
18 Equations Forecast
19 Year 2004 2004 2005 2006 2007 2008
20 Net sales =B3+(B3*C4) $3,600 $4,320 $5,184 $6,220 $7,464
21 Cost of goods sold =C5*C20 2,606 3,127 3,752 4,502 5,403
22 Gross profit =C20-C21 994 1,193 1,432 1,718 2,061
23 GSA expense =C6*C20 879 1,055 1,266 1,519 1,823
24 EBIT =C22-C23 115 138 165 199 238
25 Interest expense =(C7+C8)*C9 5 4 4 3 2
26 Earnings before tax =C24-C25 110 134 162 196 236
27 Tax =C10*C26 39 47 57 68 83
28 Earnings after tax =C26-C27 72 87 105 127 153
29 Dividends paid =C11*C28 0 0 0 0 0
30 Additions to retained earnings =C28-C29 72 87 105 127 153
31
32 BALANCE SHEET
33 Current assets =C12*C20 1,037 1,244 1,493 1,792 2,150
34 Net fixed assets =C13 157 160 163 166 168
35 Total assets =C33+C34 1,194 1,404 1,656 1,958 2,318
36
37 Current liabilities =C14*C20 404 484 581 697 837
38 Long-term debt =C7 50 43 37 30 22
39 Equity =B15+C30 420 507 612 739 893
40 Total liabilities and =C37+C38+C3 873 1,034 1,230 1,466 1,751
41 shareholder's equity
42 EXTERNAL FUNDING REQUIRED=C35-C40 $321 $370 $426 $491 $567
43
44
45 Q1a
46 Discuss how the interest expense (row 25) calculation works and whether or not it includes the
47 short term borrowing on the Cartwright balance sheet. HINT: What is the source of
48 the data used in the ratio on row 14?
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65 Q1b
66 How much does Cartwright need to borrow and when? Explain by citing specifics from the forecast.
67
68
69
70
71
72
73
74
75
76
77
78
79
80 Q1c
81 Does Cartwright have the ability to pay the interest expense? Explain by citing specifics from the forecast.
82
83
84
85
86
87
88
89
90
91
92
93
94
95 Q1d
96 Does Cartwright have the ability to repay the loan principal? Explain by citing specifics from the forecast.
97
98
99
100
101
102
103
104
105
106
107
 A B C D E F G H I J K
1 ENTER DATA IN BLUE-COLORED CELLS
2 Year 2004 2004 2005 2006 2007 2008
3 Net Sales $2,694
4 Growth rate in net sales 0.0% 0% 0% 0% 0%
5 Cost of goods sold/net sales 0.0% 0.0% 0.0% 0.0% 0.0%
6 GS&A expenses/net sales 0.0% 0.0% 0.0% 0.0% 0.0%
7 Long-term debt $ 50 $ 43 $ 37 $ 30 $ 23
8 Current portion long-term debt $ 7 $ 7 $ 7 $ 7 $ 7
9 Interest rate 0.0% 0.0% 0.0% 0.0% 0.0%
10 Tax rate 35.0% 35.0% 35.0% 35.0% 35.0%
11 Dividend/earnings after tax 0.0% 0.0% 0.0% 0.0% 0.0%
12 Current assets/net sales 0.0% 0.0% 0.0% 0.0% 0.0%
13 Net fixed assets $ 157 $ 160 $ 163 $ 166 $ 168
14 Current liabilities/ net sales 0.0% 0.0% 0.0% 0.0% 0.0%
15 Owner's equity (net worth) $348
16
17 INCOME STATEMENT
18 Equations Forecast
19 Year 2004 2004 2005 2006 2007 2008
20 Net sales =B3+(B3*C4) $2,694 $2,694 $2,694 $2,694 $2,694
21 Cost of goods sold =C5*C20 0 0 0 0 0
22 Gross profit =C20-C21 2,694 2,694 2,694 2,694 2,694
23 GSA expense =C6*C20 0 0 0 0 0
24 EBIT =C22-C23 2,694 2,694 2,694 2,694 2,694
25 Interest expense =(C7+C8)*C9 0 0 0 0 0
26 Earnings before tax =C24-C25 2,694 2,694 2,694 2,694 2,694
27 Tax =C10*C26 943 943 943 943 943
28 Earnings after tax =C26-C27 1,751 1,751 1,751 1,751 1,751
29 Dividends paid =C11*C28 0 0 0 0 0
30 Additions to retained earnings =C28-C29 1,751 1,751 1,751 1,751 1,751
31
32 BALANCE SHEET
33 Current assets =C12*C20 0 0 0 0 0
34 Net fixed assets =C13 157 160 163 166 168
35 Total assets =C33+C34 157 160 163 166 168
36
37 Current liabilities =C14*C20 0 0 0 0 0
38 Long-term debt =C7 50 43 37 30 22
39 Equity =B15+C30 2,099 3,850 5,601 7,352 9,104
40 Total liabilities and =C37+C38+C3 2,149 3,893 5,638 7,382 9,126
41 shareholder's equity
42 EXTERNAL FUNDING REQUIRED=C35-C40 ($1,992) ($3,733) ($5,475) ($7,216) ($8,958)
43
44
45
46 FROM P 45 IN COHEN FINANCE WORKBOOK:
47 FOR EACH $1 CHANGE IN REVENUE:
48 Assumptions:
49 revenue 2694
50 net profit margin 1.6%
51 CHANGE IN ASSETS (USES OF FUNDS) CHANGE IN LIABILITIES+EQUITY (SOURCES OF FUNDS)
52 cents cents
53 CURRENT ASSETS CURRENT LIABILITIES
54 RECEIVABLES 317 PAYABLES 256
55 INVENTORY 418 OTHER ACC 39
56 CA/SALES 27.3 CL/SALES 11.0
57
58 FIXED ASSETS LONG-TERM DEBT 0
59 PLANT
60 PROPERTY EQUITY
61 EQUIPMENT INCR IN RET EARN/S 1.6
62 FA/SALES 0.0
63 TOTAL FORECASTED SOURCES 12.6
64
65 EXTERNAL FINANCING NEEDED 14.7
66
67 TOTAL FORECASTED USES 27.3 ADJUSTED TOTAL FORECASTED 27.3
68
69
70 Q2a
71 Explain how the p 45 table from the Cohen Finance Workbook, shown above starting on row 47, works and its
72 significance to Cartwright's (and most other businesses too) external financing needs problem.
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89 Q2b
90 Revise the short-form forecast model from Q1, using the 'input cells zeroed' model at the top of this tab.
91 As the banker, assume a lower growth rate in sales, and explain, showing specifics from the revised forecast,
92 how it helps Cartwright solve his external financing needed problem. Enter revised data in the blue cells, using your judgment.
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112