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Case: Ravi Bose, an NSU business graduate with few years' experience as an equities analyst, was recently brought in as assistant to the
chairman of the board of Microdrive Industries, a manufacturer of computer components. During 2016, Microdrive had doubled its plant
capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Ravi was assigned to
evaluate the impact of the changes in in 2016 & 2017. In fact, a large loss occurred in 2016, rather than the expected profit. As a result, its
managers, directors, and investors are concerned about the firm’s survival. Ravi must prepare an analysis of where the company is now, what
it must do to improve its financial health, and what actions to take. Your assignment is to help him answer the following questions, using the
recent financial information shown below. Please provide clear explanations (maximum 100 words for each the following 10 questions)
What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance
Q1 sheet? What effect did it have on liabilities and equity?
Both sales and net profitability benefited from the growth. Sales climbed by $1,201,200, while net income increased by $348,720. Total
current assets increased by $733,310, while total current liabilities and shareholders' equity decreased by $289,160. Following the
expansion, total assets, total liabilities, and total equity grew by $ 630,360. In 2017, both debt and money were reduced in comparison to
2016.
Q2 What do you conclude from the statement of cash flows?
Cash flow from expansion increased by a net of $6,718. The operational expenses of the firm increased from $5,816,960 to $6,532,960,
suggesting a downward trend. Negative cash flow was generated through investing and running operations.
In 2016, net income had a negative cash flow, but increased significantly in 2017. Thus, operational operations generate a positive cash
flow. Financing operations declined from $1,185,568 to $245,936, implying a fall in cash flow. As a result, cash flow is negatively
impacted in 2017 compared to 2016.
Q3 What can you say about the company’s liquidity position in 2015, 2016, and 2017?
The corporation's liquidity has fluctuated throughout time. However, the current asset ratio grew in 2017 compared to 2016. All of the
company's ratios are more than one, which is a favorable sign. Due to the fact that the firm's assets and liabilities dropped in 2016, the
current ratio indicates that the company is managing these assets and liabilities correctly. While they have fallen short of the industry
average, they are nevertheless outperforming expectations in 2017. In 2016 and 2017, the company's quick ratio was less than one. The
quick ratio was 0.93 in 2017, which is fairly close to the industry average.
Q4 How does Microdrive's asset management performance, esp. the utilization of assets stack up against that of other firms in its industry?
According to the ratio analysis, Microdrive does not appropriately manage its assets. If Inventory Turnover is lower than the industry
average, this suggests that sales are behind, and excess inventory may be colloquially referred to as overstocking. This might result from
a flaw in the products being sold, or it could be the result of inadequate advertising. Receivable Days (Days Sales Outstanding) and
Payable Days are also above industry averages, suggesting they are not being paid on time. If they continue to act in this manner, both
internal and external investors will suffer.
Q5 How does Microdrive compare with the industry with respect to financial leverage? What can you conclude from these ratios?
In 2017, the firm outperformed the industry as a whole. While the industry average was 0.32, the debt-to-equity ratio of the firm was 0.23
in 2017. As a consequence, the corporation may be seen as having little financial risk and handling its duties well. However, company
suffered mightily in 2016 due to a debt ratio of 0.42, which was far higher than the industry norm. As a result, despite a challenging year
in 2016, the business was able to expand its leverage in 2017 and outperform industry norms after the expansion.
Q6 Comment on the profitability ratios of Microdrive compared to the industry average. Also, comment on the trend that Microdrive followed.
. In 2017, the firm is doing better financially than it was in 2016, when it suffered a loss. The 2017 returns on assets and equity, at 7.21
percent and 12.83 percent, respectively, were likewise much higher than the sector norms of 9 percent and 17.90 percent. While time
series analysis illustrates improvement, cross section analysis indicates that the corporation needs do considerably more in terms of
resource management, asset management, and equity management. Profit margins and operational profit margins, on the other hand,
indicate how well the business performs over time and across various segments of the data set.
Q7 Please refer to the 'market value ratios'. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
Earnings per share are computed using the analysis ratio. Microdrive experienced a significant loss in 2016, yet its earnings per share
plummeted 207.95 percent to 0.95. However, in 2017, profits per share increased by 222.65 percent to 1.01. Investors should be positive
and have a favorable impression of the firm while examining market ratios.
Q8 What happened to Microdrive’s MVA and EVA? Should Microdrive management be concerned about the trend in MVA and EVA? Explain.
As previously stated, MVA and EVA quantify the impact of management choices and capital investments on a business. In 2016, the
market value stayed constant. However, both values decreased dramatically, as the company's capital and loan capital rose, and its
investment capital was also high about after-tax net operating income. However, both MVA and EVA increased significantly in 2017,
showing that the firm is generating a positive return on investment, and its market value has increased.
Q9 Please refer to the common size analysis (vertical & horizontal). What do these analyses tell you about Microdrive?
The balance sheet and profit and loss statement were displayed as percentages showing the change in full-scale analysis. The horizontal
study revealed differences from 2015 to 2016 and from 2016 to 2017. While overall assets rose, total liabilities climbed as well. Along
with the fall in sales in 2016, Micro motors raised its pre-tax profit in 2017. According to both horizontal and vertical analyses, micro
motors are regaining momentum in 2017 and will perform even better in the following years.
Q10 What are some potential problems and limitations of financial ratio analysis?
Ratio analysis does not account for human factors; it fully disregards the firm's qualitative characteristics. It can only be used to compare
to other businesses of comparable size and kind. It makes no allowance for inflation-related pricing fluctuations. Occasionally, it is difficult
to compare businesses because they may be unwilling to give information or may alter their year-end figures to reflect favorable ratio
measures. It concentrates only on the data and makes no mention of causality. Finally, it is based on the leaders' ratio rather than the
industry average.
MicroDrive Inc's December 31 Balance Sheets Ratio Analysis
Expenses/COGS excluding
depr. and amort. $ 2,864,000 $ 4,980,000 $ 5,800,000 Return on Assets
Depreciation and
Amortization $ 18,900 $ 116,960 $ 120,000 Return on Equity
Other operating expenses $ 340,000 $ 720,000 $ 612,960 Market Value Ratios
Total operating expenses $ 3,222,900 $ 5,816,960 $ 6,532,960 Earnings per share
EBIT $ 209,100 $ 17,440 $ 502,640 Price-to-earnings ratio
Interest Expense $ 62,500 $ 176,000 $ 80,000 Cash flow per share
EBT $ 146,600 $ (158,560) $ 422,640 Price-to-cash flow ratio
Taxes $ 58,640 $ (63,424) $ 169,056 Book Value per share
Net Income available to
common stockholders $ 87,960 $ (95,136) $ 253,584 Market-to-book ratio
# of common shares
outstanding 100,000 100,000 250,000 Net operating working capital
EPS $ 0.88 $ (0.9514) $ 1.0143 Op long term assets
DPS $ 28.00 $ 0.11 $ 0.22 Total net operating capital
Tax rate 40% 40% 40% ROIC
WACC 10% 10% 10%
Lease Payment $ 40,000 $ 40,000 $ 40,000 Market value of equity
Total Debt $523,432 $1,720,000 $800,000 Book value of equity
Market cap $850,000.00 $600,000.00 ### MVA
Market to Book Ratio
EVA
Net investment in operating
capital
FCF=
2016
2017
(Industry
2015 2016 2017 Average) Operating activities
2.33 1.46 2.58 2.7 Net Income ###
0.85 0.50 0.93 1 Non cash adjustment
Depreciation & Amortization ###
4.03 3.96 3.45 6.1 WC adjustment
9.77 9.23 8.01 10.2 Change in Accounts Receivables ###
19.80 15.73 16.45 15.1 Change in Inventories ###
18.43 23.20 22.18 24.2 Net cash provided (used) by operating activities ###
127.90 131.74 151.38 95.6 Investing activities
109.47 108.54 129.20 71.4 Cash used to acquire Fixed Assets ###
9.95 6.21 8.41 9.5 Change in short‐term investments ###
2.34 2.02 2.00 2.1 Net cash provided (used) by investing activities ###
Financing activities
0.36 0.60 0.23 0.32 Change in notes payable ###
0.79 3.08 0.40 0.50 Change in bonds ###
0.38 0.74 0.21 0.19 Change in common stocks $0.00
54.81% 80.68% 43.78% 50% Payment of common and preferred dividends $11,000.00
3.35 0.10 6.28 6.2 Net cash provided (used) by financing activities ###
2.61 0.81 5.52 8.1 Net cash provied (used) -$1,718.00
Cash and securities at beginning of the year $9,000.00
2.56% -1.63% 3.60% 3.60% Cash and securities at end of the year $7,282.00
6.09% -2.72% 6.01% 8.20%
16.55% 14.64% 17.56% 20%
### ###
### ###
2017
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$6,718.00
$7,282.00
###
MicroDrive Inc's December 31 Balance Sheets MicroDrive Inc's December 31 Balanc
Assets 2015 2016 2017 Assets
Cash and cash equivalents $ 9,000 $ 7,282 $ 14,000 Cash and cash equivalents
Short-term investments $ 48,600 $ 20,000 $ 71,632 Short-term investments
Accounts Receivable $ 351,200 $ 632,160 $ 878,000 Accounts Receivable
Inventories $ 715,200 $ 1,287,360 $ 1,716,480 Inventories
Total current assets $ 1,124,000 $ 1,946,802 $ 2,680,112 Total current assets
Gross fixed asets $ 491,000 $ 1,202,950 $ 1,220,000 Gross fixed asets
Less: Accumulated depreciation $ 146,200 $ 263,160 $ 383,160 Less: Accumulated depreciation
Net plant and equipment $ 344,800 $ 939,790 $ 836,840 Net plant and equipment
Total assets $ 1,468,800 $ 2,886,592 $ 3,516,952 Total assets
Liabilities and equity Liabilities and equity
Accounts payable $ 145,600 $ 324,000 $ 359,800 Accounts payable
Notes payable $ 200,000 $ 720,000 $ 300,000 Notes payable
Accruals $ 136,000 $ 284,960 $ 380,000 Accruals
Total current liabilities $ 481,600 $ 1,328,960 $ 1,039,800 Total current liabilities
Long-term bonds $ 323,432 $ 1,000,000 $ 500,000 Long-term bonds
Total liabilities $ 805,032 $ 2,328,960 $ 1,539,800 Total liabilities
Common stock $ 460,000 $ 460,000 $ 1,680,936 Common stock
Retained Earnings $ 203,768 $ 97,632 $ 296,216 Retained Earnings
Total common equity $ 663,768 $ 557,632 $ 1,977,152 Total common equity
Total liabilities and equity $ 1,468,800 $ 2,886,592 $ 3,516,952 Total liabilities and equity
Industry
Drive Inc's December 31 Income Statements composite
2015 2016 2017 2017
100.00% 100.00% 100.00%