Name PRANAY JAIN

Question 1

Write your answer for Part A here.

Pat 1: 226(i.e., 14.7%) out of Profits estimated for the year 2006E (i.e., 1534) will
translate into Cash Flow from Operations.

Part 2: Cash flow from Investing has majorly contributed to the decrease in the 'change in
cash' by the company from 2003 to 2006(E).

Write your answer for Part B here.

1. Cash Flow from Operating Activities follows a decreasing trend over the years.
2. Cash Flow from Investing Activities follows a decreasing trend for first 3 years and
follows an increasing trend in the last year.
3. Cash Flow from Financing Activities follows an increasing trend for first 3 years
and follows negative trend for the last year.
 Operating Activities: Change in Accounts Receivables is the main reason for a
decreasing trend in Cash flow from Operating Activities.
 Investing Activities: Investment in PP&E is the main reason for a decreasing
trend in initial years of Cash flow from Investing Activities, and due to no
Investment in Land in the last years it followed an increasing trend in the final
year.
 Financing Activities: Debt Issuance contributed to Increasing trend for the initial
years and retirement of Debt lead to decreasing trend in the final year.
Write your answer for Part C here.

Self-financing of investments: It can be extracted out of Cash Flow Statement of Ceres

Gardening Company that it used Mostly Debt for funding its investments hence there is
no or negligible self-financing of investments.

Cash position of the company: By going through books of Ceres Gardening Company, at
the end of Year 2006(E), it does hold a negative value that clearly indicates that it does
not meet its cash flow for the year 2006(E) and hence cash position of company is not at
all good.

Funding of investments: Ceres Company Limited Used Debt as the primary tool for
funding all of its investments, might be to control cost of capital.

Question 2

Write your answer for Part A here. Paste the excel sheet containing your calculations
here.

2002 2003 2004 2005 2006E

(A) Accounts Receivable 3,485 4,405 6,821 10,286 14,471
(B) Inventories 3,089 2,795 3,201 3,291 3,847
(C) Accounts Payable -2,034 -2,973 -4,899 -6,660 -9,424
Operating Working Capital (A) +
(B) - (C) 8,608 10,173 14,920 20,236 27,742

Write your answer for Part B here. Paste the excel sheet containing your calculations
here.

2002 2003 2004 2005 2006E

Operating Working Capital 8608 10173 14920 20236 27742
Sales 24,652 26,797 29,289 35,088 42,597
Operating Working Capital/ Sales
Ratio 1/3 3/8 1/2 4/7 2/3
 Write your answer for Part C here. Paste the excel sheet containing your calculations
here.

2002 2003 2004 2005 2006E

Sales 24,652 26,797 29,289 35,088 42,597
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
DSO 50.89 59.18 83.84 105.53 122.30
DPO 35.79 49.32 73.97 83.84 96.66
DIO 54.35 46.36 48.33 41.42 39.45

Write your answer for Part D here.

The long credit period given to dealers by Ceres Gardening Limited has very negative
effect on its working capital as the DSO is increasing at a very high-rate year on year and
hence resulting in a 120 days of credit cycle to dealers. Hence cash required will be very
high.

Question 3

Write your answer for Part A here. Also, paste the economical balance sheet prepared by
you here.

The capital employed by the company is: 16,738

 Economic Balance Sheet
CATIPAL EMPLOYED 2006E INVESTED CAPITAL 2006E
Plant, Property, & Equipment (net) 4,347 Long-Term Debt 8,480
Other Assets 645 Shareholders Equity 9,563
Land 2,853 Current Portion of Long-term Debt 649
Accounts Receivable 14,471 Cash (1,955)
Inventories 3,847
Accounts Payable (9,424)
16,738 16,738

Question 4

Paste the excel sheet containing the final answers for Part A here.

2002 2003 2004 2005 2006E

Return on Equity 0.24 0.21 0.18 0.18 0.16

Variable Margin 17% 19% 19% 19% 18%

Operating Margin 7% 9% 8% 8% 7%

ROACE 15% 15% 12% 12% 10%

Write your answer for Part B here.

ROE from 2002 to 2006(E) follows a negative or decreasing trend and the main reason is
Increase in Shareholders Equity at a higher rate than increase in Net Income.

Write your answer for Part C here.

 ROACE over years follows a decreasing/negative trend and the main factor contributing
to it is inducing capital in company at a higher rate than increase in Net Income.

Question 5

Write your answer for Part A here.

Two pros about the GetCeres program are:

1. The Program has resulted into positive growth. This can be seen by an increasing
trend in the sales (Company sales in 2005 are $35.1m and the estimated sale for
2006 is $42.6), the sales are higher than the $30m breakeven point which denotes
that the company is in a good position.
2. With the help of this program the company is able to get into a more aggressive
market share, and have gained and strengthen the competitive position in the retail
market.

Two Cons about the GetCeres program are:

1. The company has extended the receivable credit cycle to 120 days and is also
offering discounts up to 15%. Further to support this credit term, they are into a
line of credit.
2. To protect the credit margins, they have increased the prices for there products as
well. This cannot be fruitful and suitable in the long run and can also be a reason
for a decline in the future sales.

I personally believe the program should not be continued given the credit line extension.
As per the industry practice, the extension is 75-90 days, but as per this program, it has
now become 120 days, which has led to increase in prices. This cannot be suitable in the
long run and growth for the company. This growth in AR is financed by revolving credit
facility. In case of bad debts, the company will have to face huge losses to cover this
credit facility.