Name Nikhil Hooda

Question 1

Part A- 1534

Part B

1. Operating Cash in flow decreased due to accounts receivable increasing year

after year.
2. Operating cash out flow decreased accounts payable increased
3. Investing cash inflow – Zero
4. Investing cash out flow – Increased due to PPE which has gone up from 835 in
2003 to
5. Financing cash Inflow – Increased due to fund raised from debt issuance. In 2003
it was 1494 and it increased to 2006 in 2006
6. Financing cash out flow decreased. As company paid off debts and dividends
were also paid every year due to which the cash flow decreased. In 2003 it was
226 and by the end of 2006 it was 307
Financing cash out flow – Decreased. paid off debts every year in 2003 it was 315 by the
end of 2006 it was art 730. Dividends were also paid every year due to which the cash
flow decreased. In 2003 it was 226 and by the end of 2006 it was 307
2006
Financing cash out flow – Decreased. paid off debts every year in 2003 it was 315 by the
2006
Financing cash out flow – Decreased. paid off debts every year in 2003 it was 315 by th

Part C

1. Self-Financing of investments –
> CFO was 226
>CFI was -1398
>CFF was 969
Gives a negative cash flow of -203 i.e. self financing is not possible and the company has
to raise funds to run its operations for the coming year.

2. Free Cash Flow – There is no free cash flow in the company. Its negative.

CFO was 226, CFI was -1398 = Free cash flow -1172

3. Funding of Investments – Financing helped company to invest through debt issuance.

> Financing cash flow is at +969.

4. Cash Position of the company – cash position of the company is negative.

CFO – 226, CFI – -1398, CFF – 969 = -203

Question 2

Part A

Year 2002 2003 2004 2005 2006

Operating working capital (AR+Inv-
AP) 1451 4227 5122 6917 8894

Part B

Year 2002 2003 2004 2005 2006

Operating working capital

ratioe = OWC/sales 6 16 17 20 21

Part C

DIO
Year 2002 2003 2004 2005 2006
Inventory 3089 2795 3201 3291 3847
COGS 20461 21706 23841 28597 35100
DIO= (Inventory/COGS)*360 54 46 48 41 39

DSO
 Year 2002 2003 2004 2005 2006
Acc Rec 3485 4405 6821 10286 14471
Sales 24652 26797 29289 35088 42597
DSO= (Acc Rec/Sale)*360 51 59 84 106 122

DPO
Year 2002 2003 2004 2005 2006
Acc Rec 2034 2973 4899 6660 9484
Sales 20461 21706 23481 28597 35100
DPO= (Acc Pay/COGS)*360 36 49 75 84 97
DIO
Year 2002 2003 2004 2005 2006
Inventory 3089 2795 3201 3291 3847
COGS 20461 21706 23841 28597 35100
DIO= (Inventory/COGS)*360 54 46 48 41 39

Part D.

Long credit period given helped the inventory to get cleared. It has come down from 54
to 39 but the accounts receivable has gone up from 51 to122 by the end of 2006.

Working capital has declined due to the longer credit period given which resulted in
negative cash flow, thus the company has to take raise money via debt to continue its
operations.

Question 3

Part A

Capital employed for each year is highlighted in yellow in the below table.

Economic Balance sheet

  2002 2003 2004 2005 2006
Capital Employed          

Accounts Payable (2,034) (2,973) (4,899) (6,660) (9,424)

Accounts receivable 3,485 4,405 6,821 10,286 14,471
PPE 2,257 2,680 2,958 3,617 4,347
 Inventory 3,089 2,795 3,201 3,291 3,847
Other Assets 645 645 645 645 645
Land 450 1,750 2,853 2,853 2,853
Capital Employed 7,892 9,301 11,578 14,032 16,738
           
Invested Capital          

Cash (705) (1,542) (1,818) (2,158) (1,955)

Long-Term Debt 3,258 4,400 5,726 7,123 8,480
Shareholders Equity 5,024 6,091 7,146 8,336 9,563
Current Portion of Longterm
Debt 315 352 525 730 649
Invested Capital 7,892 9,301 11,578 14,032 16,738

Question 4

Part A

2002 2003 2004 2005 2006

Variable Margin = Sales Revenue - cogs/sales
Sales 24,652 26,797 29,289 35,088 42,597
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
Variable Margin 17.0% 19.0% 18.6% 18.5% 17.6%

Operating Margin = Operating Income/Sales

Operating Income 1,641 2,338 2,408 2,836 3,018
Sales 24,652 26,797 29,289 35,088 42,597
Operating Margin 6.7% 8.7% 8.2% 8.1% 7.1%

ROE = Net Profit/owners Equity

Net Profit 1,191 1,293 1,279 1,488 1,534
Owners Equity 5,024 6,091 7,146 8,336 9,563
ROE 23.7% 21.2% 17.9% 17.9% 16.0%

ROACE = EBIAT/Avg Capital Employed

EBIAT 1377.7 1641.6 1719.1 2034.4 2192.2
Avg Capital Employed 7892.0 9301.0 11578.0 14032.0 16738.0
ROACE 17.5% 17.6% 14.8% 14.5% 13.1%

Part B

Trend of ROE is downwards from 2002 to 2006. It decreased from 23.7% in 2002 to 16%
in 2006.
 Reason being no consistent increase in operating margin. There was a rise in 2003-05
but then it fell again back to 7. This is due to increasing COGS.

Part C

Trend of RoACE is downwards from 2002 to 2006. It decreased from 17.5% in 2002 to
13.1% in 2006.

This is due to the decreasing in operating margin hence decreasing earnings before
interest after tax. One of the major factor was increase in COGS year after thus resulting
in reduction in EBITDA.

Question 5

Pros
 Increased sales and operating income after starting the new program
 Increase in operating margin after starting the new program

Cons –
 Rise in credit period resulting in low cash flow
 No consistent increase in variable margin

I would go suggest to go ahead with the program as this business looks promising
through when it scales up and will give returns on longer run. Increase in sales and
optimizing operating expense through economy of scale will play a major factor that
will attract the investors.