Name Proshanjit Dey

Question 1

Question 1A: The company’s profits have increased by ~30% from

2002 to 2006(E). How much of the profits estimated for the year
2006(E) will translate to the 'cash flow from operations' for the same
year? Which of the three categories in the cash flow statement has
contributed majorly to the decrease in the 'change in cash' by the
company from 2003 to 2006(E)? (1+1 marks)

Ans :

$ 226K profits estimated for the year 2006 (E) would translate to “cash flow from
operations” for the same year.

Investing cash flow has contributed majorly to the decrease in “change in cash” by the
company from the year 2003- 2006( E)

Year 2003 2004 2005 2006

Acct. Receivable in
-920 -2416 -3465 -4185
$K

Trend in cash flow from the “Operating Activity “is decreasing from 2003 to 2006 (E).
Reason: Due to the Increase in Accounts Receivables

2. Trend in “Investing Activity” is Decreasing from 2003 to 2006( E) Reason : Due to

investment in Property, Plant and Equipment and some Investment in land as well
Reason: Due to investment in Property, Plant and Equipment and some Investment in
land as well.

Year 2003 2004 2005 2006

Investment in property, plant

& equipment -835 -734 -1215 -1398
Investment in Land -1300 -1103

Year 2003 2004 2005 2006

Debt Issuance 1494 1850 2128 2006
Retirement of debt -315 -352 -525 -730
Dividends -226 -224 -228 -307
Financing Cash Flow 953 10274 1306

3. Trend in “Financing Activities” is constant. Reason: As Retirement of Debt and

Dividends are almost similar hence there is not much change in the Financing activities.

Question 1B: What is the trend in cash flow from 'operating activities',
'investing activities' and 'financing activities' over the years? Identify at
least one reason for the increase/decrease in each of the three
categories of the cash flow statement. Explain your answer. (Note:
Trend indicates whether the numbers are increasing/decreasing over
the years) (2+3 marks)

2003 2004 2005 2006E Trend w.r.t Cash Inflow

CFO 2,019 838 250 226 Decreasing
CFI -2,135 -1,836 -1,215 -1,398 Increasing
Increasing from 2003 to 2004
CFF 953 1,274 1,306 969 and decreasing from 2004 to
2006 €

Reason for

1. Decreasing trend of CFO is due to Increase in Account Receivable means less

cash realized from sales
 2. Increasing trend of CFI is due to Investment in PP&E shows a sizable investment
in company’s future
3. Decreasing trend of CFF from 2004 to 2006 (E) is due to increasing trend of
payment of Retirement of Debt & Dividends

Question 1C: Analyse the expected cash flow profile of the company
for the year 2006(E) and comment on any 3 of the following factors:
'self-financing of investments', 'funding of investments', 'cash position of
the company' and 'free cash flow'. (3 marks)

Ans :

The Cash Flow Profile of the company for the year of 2006( E) is Negative.

1. Self-financing of investments (Cash Flow from Operations > Cash Flow from
Investments (it is self-financed)
a. CFO ($226K) > CFI (-$1398) + CFF ($969)
Since CFO > CFI + CFF means Cash flow from the operations are high and it is
able to finance its growth the bar of operating activities is higher than the other
activities

2. Funding of Investments
a. CFO $226
b. CFF $969
The Funding of Investment as shown by the graph is done by both Cash flow
from Operations and cash flow from financing activities.

3. Cash position of the company

a. CFO + CFI + CFF
= $226 + (-$1398) + $969 = -$203
 Cash position is negative which shows the company has spent more
money than generated during the year

4. Free Cashflow
a. CFO – CFI

Since CFO – CFI is -ve thus there is no free cash flow

Question 2

Question 2A: Calculate the operating working capital of Ceres

Gardening Company for 2002–2006(E). (2 marks)

Ans:

Year 2002 2003 2004 2005 2006

Acct.
3485 4405 6821 10286 14471
Receivable
Inventory 3089 2795 3201 3291 3847
Acct. Payable 2034 2973 4899 6660 9424
Operating
Working 4540 4227 5123 6917 8894
Capital

Question 2B: Calculate the operating working capital/sales ratio of

Ceres Gardening Company for 2002 to 2006(E). (2 marks)

Ans:

Operating Working Capital= Account Receivables +Inventory- Accounts Payable

Year 2002 2003 2004 2005 2006

 Operating
Working 4540 4227 5122 6917 8894
Capital
Sales 24652 26797 29289 35088 42597
Ratio 5 6 6 5 5

Question 2C: Calculate the DIO, DSO and DPO for the company from
2002 to 2006€. (2+2+2 marks)

DIO = Inventory/ Cost of Goods Sold per day

Year 2002 2003 2004 2005 2006

Inventory 3089 2795 3201 3291 3,847
COGS/ per
57 60 66 79 98
day
DIO 54 47 49 41 39

DSO = Account Receivables / Sales Revenue per day

Year 2002 2003 2004 2005 2006

Account
3485 4405 6821 10286 14,474
Receivable
Sales revenue per
68 74 81 97 118
day = Sales/360
DSO 51 59 84 106 122

DPO = Accounts Payable / COGS per day

Year 2002 2003 2004 2005 2006

Account Payable 2,034 2,973 4,899 6,660 9,424
COGS/ per day 57 60 66 79 98
DPO 36 50 74 84 97

Question 2D: What is the implication of the long credit period given to
dealers by Ceres Gardening Limited on its working capital? Explain your
answer by specifying at least one reason. (1 mark)

Ans :
 Operating Working Capital (OWC) has gone down between Yr#2003 to Yr#2006 (E) due
to decreasing inventory which in turn indicates that the company is not converting its
inventory into cash as quickly as before. When this occurs, the company ends up having
increased storage, insurance and maintenance costs.

Question 3

Prepare and present the economic balance sheet for Ceres Gardening
Company and calculate the capital employed by the company.

2002
Financing Operating

Capital Invested Amount Capital Employed Amount

Equity 5,024 Fixed Assets 3,352

Operating Working
Debt 3573 4540
Capital (OWC)
Less Cash 705

Total CI 7,892 Total CE 7,892

2003
Financing Operating
Capital Invested Amount Capital Employed Amount
Equity 6091 Fixed Assets 5075
Operating Working
Debt 4752 4,227
Capital (OWC)
Less Cash 1,542

Total CI 9,301 Total CE 9,301

2004
Financing Operating
Capital Invested Amount Capital Employed Amount
Equity 7146 Fixed Assets 6456
 Operating Working
Debt 6251
Capital (OWC) 5,122
Less Cash 1818

Total CI 11579 Total CE 11,578

2005
Financing Operating
Capital Invested Amount Capital Employed Amount
Equity 8336 Fixed Assets 7,115
Operating Working
Debt 7,854 Capital (OWC) 6,917
Less Cash 2158

Total CI 14,032 Total CE 14,032

2006
Financing Operating
Capital Invested Amount Capital Employed Amount
Equity 9563 Fixed Assets 7844
Operating Working
Debt 9,129
Capital (OWC) 8,894
Less Cash 1955

Total CI 16,737 16,738

Question 4

Question 4A: Calculate the key profitability ratios for the years 2002 to
2006(E). (8 marks, 2 for each key ratio)

Ans :

Key Profitability Ratios 2002 2003 2004 2005 2006

(Sales Revenue -
Variable Margin COGS)/Sales x 6% 5% 5% 5.4% 5.6%
100
Operating
Operating Margin 15% 11% 12% 12% 14%
Income/Sales
 Return on Equity PAT/Equity 0.24 0.21 0.18 0.18 0.16
EBIT/{(Opening
Capital
Return on Avg. Capital
Employed + 9.7% 10.4% 13.24% 13.84% 20.4%
Employed
Closing Capital
Employed)/2}

Question 4B: What is the trend in RoE from 2002 to 2006(E)? List
down at least one reason for the increase/decrease in RoE by
assessing the drivers of RoE. Explain your answer in not more than 30
words. (1+1 marks)

Ans:

The trend in ROE is decreasing

Due to the Increase in Equity of the shareholders from 2003 -2006 the company’s Return
of Equity is decreasing which is not good and to Leverage the Finances the company
needs to borrow from the banks and get an optimum leverage which will decrease the
shareholders equity to keep a balance between the bank and the shareholders

ROE = PAT/ Equity x 100 (increasing/decreasing)

Key Drivers of ROE

1. Operating Margin (EBIT/Sales)

2. Efficiency (Sales/CE)
3. Financial Leverage (CE/Equity)
4. Interest (EBT/EBIT)
5. Tax (PAT/EBT)
 Question 4C: What is the trend in RoACE from 2002 to 2006(E)? List
down at least one reason for the increase/decrease in RoACE by
assessing the drivers of RoACE. Explain your answer in not more than
30 words. (1+1 marks)

Ans :

The trend in RoACE is constant from 2003 onwards and the drivers of the Operating
Margin Ratio the margins of the company are constant but the efficiency which is
calculated as EBIT/ (1-T)*100 this will be the earnings after the taxes before interest/
(capital employed beginning+ capital employed ending)/2 this is RoACE of the company
which is increasing thus reflecting the efficiency of the company.

Key drivers of RoACE is

1. Operating Margin (EBIT/Sales)

2. Efficiency (Sales/CE)

2002 : 6.6% ; 2003 : 8.7% ; 2004 : 8.20% ; 2005 : 8%; 2006 : 8%

Question 5

List down at least two pros and two cons of the GetCeres program for
Ceres Gardening Company. Would you recommend continuing with the
program? Justify your answer.

Ans :

Pros :
 1. Get Ceres program sales had increased to $35.1 million dollars in 2005 to
$42.6million in 2006, approximately 80% of sales were to dealers.
2. The Company was very excited as it had done well with financial viability with
the break-even point approximately $30 million of revenues under the current cost
structure

Cons :

1. Regardless of the payment terms given to the dealers, the payment were delayed
by the customers to 120 days which affected the business drastically. Many
dealers did not pay until they sold the product
2. Higher the price point of the organic seedling meant even more dollars would be
tied up in the inventory which the dealers were reluctant to do so

Recommendation: Though The Idea of Get Ceres program is exciting but I would not
recommend to continue with this program and find an alternative model since the
long term debt taken by the company will land the company paying higher interest
and will affect the profit margins and the account receivables of the company which
is already increasing in a negative manner due to which it is expected to incur major
losses and the dealers in turn would face significant problems in managing the
inventory levels as the sales would be seasonal thus affecting the dealers to invest.