Name Sandeep Kumar Mishra

Question 1

A. Out of the net income of 1,534 expected to be earned in 2006, only 226 will translate
to the 'cash flow from operations' for 2006.

Out of the three categories, 'Operating Cash Flow' has contributed majorly to the
decrease in the 'change in cash' by the company from 2003 to 2006(E).

B. Operating Activities - Over the years, the cash flow from operating activities are
constantly decreasing. the reason for decrease in cash flow from operating activities is
'Increase in Accounts Receivable'.

Investing Activities - Over the years, the cash flow from investing activities are
increasing. Reason for increase in cash flow from investing activities is the decrease in
investment in land over the years.

Financing Activities - The cash flow from financing activities increased constantly from
2003 till 2005 but decreased in 2006(E). Reason for firstly increase and then decrease in
cash flow from investing activities is the increasing amount of debt issued by the
company in each year.

C. Funding of investments - The company is currently relying majorly upon issuance of

debt to fund its investment. The company has issued debt of 2,006 in 2006(E) in order to
fund its investment of PP&E of -1,398. This might lead to the company being caught in
the debt trap. Instead, the company can use its accumulated profits and reserves to fund
its investments.

Cash position of the company - The cash position of the company is not satisfactory. The
company has generated only 226 in cash flow from operating activities in 2006(E)
despite earning a net income of 1,534 in 2006(E). This has led to the negative change in
cash of cash of -203 in 2006(E)

Free cash flow –

Free cash flow (2006E) = Operating Cash Flow - Capital Expenditures

Free cash flow (2006E) = 226 - 1,398

Free cash flow (2006E) = -1,172

The free cash flow of the company in 2006(E) is negative because of the two factors,
namely increase in accounts receivable and increased investment in PP&E. The accounts
receivable increased by 4,185 which resulted in lower Operating Cash Flow and
increased investment in PP&E further reduced the free cash flow.

Question 2

Accounts Receivable 3485.00 4404.97 6820.74 10286.15 14471.37

Inventories 3089.00 2794.96 3200.61 3290.61 3846.58
Accounts Payable 2034.00 2973.36 4898.89 6659.56 9424.13
Operating Working Capital 4540.00 4226.57 5122.45 6917.20 8893.82

Operating Working Capital 4540.00 4226.57 5122.45 6917.20 8893.82

Sales 24652.19 26796.93 29289.04 35088.27 42597.16

Ratio 0.18 0.16 0.17 0.20 0.21

 2002 2003 2004 2005 2006 (E)
DIO 54.35 46.36 48.33 41.42 39.45
DSO 50.89 59.18 83.84 105.53 122.30
DPO 35.79 49.32 73.97 83.84 96.66

Based on the DSO and DPO computed, the days that the receivable are outstanding is
longer than the days payable are outstanding. In other words, it takes longer to collect
cash than to pay the suppliers. Because of this, it is possible that there will be a shortage
of cash to settle the current obligations

Question 3

Economic Balance Sheet

At December 31 2006E At December 31 2006E
Assets Liabilities & Shareholders Equity
Cash 1,955 Accounts Payable 9,424
Accounts Receivable 14,471 Current Portion of Long-term Debt 649
Inventories 3,847
Current Assets 20,273 Current Liabilities 10,074
Plant, Property, & Equipment
4,347 8,480
(net) Long-Term Debt
Other Assets 645 Shareholders Equity 9,563
Land 2,853
Non-Current Assets 7,844
Total Liabilities & Shareholders
Total Assets 28,117 Equity 28,117

Capital Employed = Total Assets – Current Liabilities=28,117-10,074=18,043

Question 4

Variable margin = (Sales revenue - cost of goods sold) / Sales

Operating margin = Operating income / sales

Return on Equity = Net Profit/Owners Equity

ROACE = Earnings after taxes before Interest/Average capital Employed

2002 2003 2004 2005 2006 (E)

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
Gross Profit 4,191 5,091 5,448 6,491 7,497
Earnings before Interest 1,641 2,338 2,408 2,836 3,018
& Taxes
Interest 187 349 440 547 658
Taxes 264 696 689 801 826

Net Income 1,191 1,293 1,279 1,488 1,534

Earnings after Taxes 1,378 1,642 1,719 2,034 2,192

before Interest

Capital Employed 8,282 10,491 12,872 15,460 18,043

Owner's Equity 5,024 6,091 7,146 8,336 9,563

Variable Margin 17.00% 19.00% 18.60% 18.50% 17.60%
Operating Margin 6.66% 8.72% 8.22% 8.08% 7.09%
Return on Equity 23.70% 21.23% 17.90% 17.85% 16.04%
ROACE 16.64% 17.49% 14.72% 14.36% 13.09%

The trend in ROE from 2002 to 2006(E) shows decreasing over the years. The reason for
decrease in ROE is the increase in owner’s equity in the company.

Net Income 1,191 1,293 1,279 1,488 1,534

Owner's Equity 5,024 6,091 7,146 8,336 9,563

Return on Equity 23.70% 21.23% 17.90% 17.85% 16.04%

The trend in ROACE from 2002 to 2006(E) shows Decreasing over years. The Drivers
for ROACE are Operating Margin and Capital Employed turnover Ratio.
 The reason for decreasing ROACE is the decrease in operating margin of the company.
Operating margin for the company is decreasing over the years. On 2003 the operating
margin was 8.72% and on 2006(E) it reduced to 7.09%.

Question 5

Pros: 1. Consistent growth in sales

2. Profits have increased by 30%

Cons: 1. Consistently decreasing operating margin

2. Funding of Investments through Debt

I’d recommend continuing with the program as it has a loyal customer base with growing
sales and profit. Although, the program should focus on reducing the DSO so that their
CFO can increase which can fund their Investments instead of getting it funded by Debt
and Shareholders.