Name Sonam Mishra

Question 1

Write your answer for Part A here.

The company’s profits estimated for the year 2006 (E) which is approximately 88% ($226,000) would translate to ‘cash flow from
operations’ for the same year as the net income in the year 2006 (E) is $1,534,000.

The three activities that has a major contribution to the decrease in the ‘change in cash’ by the company from 2003 to 2006 € are:

1. Change in Accounts Receivable: $-4,185,000

Reason: There’s a decreasing trend in Operating Cash Flow due to an increase in Account Receivables.

YEAR 2003 2004 2005 2006

Change in Accounts Receivable -920 -2,416 -3,465 -4,185

2. Investment in Plant Property and Equipment: $-1,398,000

Reason: There’s a decreasing trend in Investing Cash Flow due to an increase in investment in PP&E.
 YEAR 2003 2004 2005 2006
Investment in PP&E -835 -734 -1,215 -1,398

3. Retirement of Debt: $-730,000

Reason: The trend in Financing Cash flow is constant as the Retirement of Debt and Dividends are pretty similar in these years.

YEAR 2003 2004 2005 2006

Retirement of Debt -315 -352 -525 -730

Write your answer for Part B here.

The trend in cash flow from 'operating activities', 'investing activities, and 'financing activities over the years is as follows:

2003 2004 2005 2006 (E) Trends with respect to Cash Inflow
CFO 2,019 838 250 226 Decreasing

CFI -2,135 -1,836 -1,215 -1,398 Increasing

Increasing in 2003 to 2004 and decreasing in

953 1,274 1,306 969
CFF 2004 to 2006.

The reasons which resulted in the increase/decrease in each of the three categories of the cash flow statement are:

1. An increase in the Account Receivable due to less cash realization from sales resulted in a drastic decrease in Cash Inflow over the
years.
 2. An increase in the Investments in PP&E resulted in more outflow of cash for having a sizeable investment towards the company’s
future that helps to decrease the outflow gradually and increase the Inflow over the years to show an increasing trend.
3. An increase in repaying the Retirement Debt and dividends resulted in decreasing trend of CFF from 2004 to 2006 (E).

Write your answer for Part C here.

The cash flow statement of the company for the year 2006 (E) is negative.

Self-financing of investments:
As the Cashflow from Operations is higher than the sum of Cashflow from Investments and Cashflow from Financing Activities, the bar of
operating activities is higher than other activities in the graph.
(CFO > CFI + CFF)
CFO: $226,000
CFI: - $1,398,000
CFF: $969,000

Funding of Investments:
The funding of Investment as shown by the graph is done using both Cashflow from Operations and Cashflow from Financing Activities.
CFO: $226,000
CFF: $969,000
 Cash position of the company:
The cash position for the company is negative and it simply means that the company has spent more money than it generated in 2006 (E).
Cash position of the company is the sum of Cashflow from operations, Cashflow from Investments and Cashflow from Financing
Activities.
CFO+CFI+CFF
$226,000 + (-$1,398,000) + $969,000 = -$203,000

Free Cash Flow:

The free cash flow is Cashflow from operations minus the Cashflow from investments. Since the company’s cash flow in 2006 (E) is
negative, there is no free cash flow with the company in the year 2006 (E). This is also illustrated via the bar Cash at the end in the chart.

Question 2

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

Years 2002 2003 2004 2005 2006E

Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Payable 2,034 2,973 4,899 6,660 9,424
operating working capital 4,540 4,227 5,122 6,917 8,894
Write your answer for Part B here. Paste the excel sheet containing your calculations here.
Operating Working Capital Ratio = Operating Working Capital/Sales

Years 2002 2003 2004 2005 2006E

operating working capital 4,540 4,227 5,122 6,917 8,894
Sales 24,652 26,797 29,289 35,088 42,597
OWC/SALESx100 (Ratio) 18.4162 15.7742 17.4878 19.7131 20.8793

Write your answer for Part C here. Paste the Excel sheet containing your calculations here.

Days Inventory Outstanding = Inventory / Cost of goods sold per day

2002 2003 2004 2005 2006E

Inventories 3,089 2,795 3,201 3,291 3,847
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
COGS / Per Day 57 60 66 79 98
DIO 54 46 48 41 39

Days Sales Outstanding = Accounts receivables / Sales revenue per day

2002 2003 2004 2005 2006E

Accounts Receivable 3,485 4,405 6,821 10,286 14,471
sales 24,652 26,797 29,289 35,088 42,597
Sales revenue per day =
sales/360 68 74 81 97 118
DSO 51 59 84 106 122
 Days Payables Outstanding = Account payables / Cost of goods sole per day

2002 2003 2004 2005 2006E

Accounts Payable 2,034 2,973 4,899 6,660 9,424
COGS/ per day 57 60 66 79 98
DPO 36 49 74 84 97

Write your answer for Part D here.

Operating working capital has gone down between 2003 to 2006 (E) due to decreasing inventory which in turn indicates that the company
is not converting its inventory into cash as quickly as it was doing before. This resulted in the company’s increased storage, insurance, and
maintenance costs. Also, the increase in the credit period will result in an increase in accounts receivable and this will give rise to more
working capital requirements in the future.

Question 3

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

Economic balance sheet (in $ thousand, some numbers are rounded)

Year 2002 2003 2004 2005 2006E
Operating
Plant, Property, &
2,257 2,680 2,958 3,617 4,347
Equipment (net)
Other Assets 645 645 645 645 645
 Land 450 1,750 2,853 2,853 2,853
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Payable 2,034 2,973 4,899 6,660 9,424
capital employed 7892 9301 11578 14032 16738
Financing
Current Portion of
315 352 525 730 649
Long-term Debt
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
Cash 705 1,542 1,818 2,158 1,955
invested capital 7892 9301 11578 14032 16738

Question 4

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

Years 2002 2003 2004 2005 2006E

Sales 24,652 26,797 29,289 35,088 42,597
Net Income 1,191 1,293 1,279 1,488 1,534
Earnings before Interest & Taxes 1,641 2,338 2,408 2,836 3,018
EBITDA ratio 1988 2750 2863 3393 3687
Net Profit Ratio 4.83 4.83 4.37 4.24 3.60
Operating Profit Ratio 6.66 8.72 8.22 8.08 7.09
EBITDA Ratio 8.06 10.26 9.77 9.67 8.66
Write your answer for Part B here.

The trend in ROE is decreasing since there is not much rise in net income against the Shareholder’s equity.

The Key factors that drives ROE are:

1. Operating Margin
2. Operating Efficiency
3. Tax
4. Interest
5. Financial Leverage

Years 2002 2003 2004 2005 2006E

Shareholders Equity 5,024 6,091 7,146 8,336 9,563

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

ROE 23.70 21.23 17.90 17.85 16.04

Write your answer for Part C here.

The trend in RoACE is constant from 2003 and drivers of Operating Margin Ratio are constant but the efficiency ‘EBIT/(1-T)*100’ will be
the earnings after taxes before interest / (CE beginning + CE Ending)/2 resulting in RoACE of the company which is increasing and thus
reflecting an increase in the efficiency of the company.

Key Drivers of RoACE are:

 1. Operating Margin
2. Efficiency

Year 2002 2003 2004 2005 2006E

capital employed 7892 9301 11578 14031 16738
EAT 1,191 1,293 1,279 1,488 1,534
Interest 187 349 440 547 658
EBIAT 1,378 1,642 1,719 2,034 2,192
ROACE 17 18 15 14 13
Sales 24,652 26,797 29,289 35,088 42,597
Net Income 1,191 1,293 1,279 1,488 1,534
Earnings before Interest &
1,641 2,338 2,408 2,836 3,018
Taxes
EBITDA ratio 1988 2750 2863 3393 3687
Net Profit Ratio 4.83 4.83 4.37 4.24 3.60
Efficiency 6.66 8.72 8.22 8.08 7.09
EBITDA Ratio 8.06 10.26 9.77 9.67 8.66

Question 5

Write your answer for Part A here.

Below are the Pros and Cons of GetCeres™ program for Ceres Gardening Company.

Pros:
 1. GetCeres program sales had increased to $35.1 million in 2005 to $42.6 million in 2006, approximately 80% of sales were done to
dealers.
2. The Company were very excited as it had done well with financial visibility with the break-even point approximately $30 million of
revenues under the current cost structure.
3. Being an early entrant in the organic gardening industry, the company was able to build a strong direct business when the industry
was in its nascent stages, which helped the company to develop a loyal customer following.

Cons:

1. Regardless of the payment terms given to the dealers, payments were delayed by the customers to 120 days resulting in a drastic
effect on the business directly. Many dealers did not pay until they sold the products.
2. The higher price point of the organic seedling meant even more money would be tied up in the inventory which dealers were
reluctant to oblige to.
3. Increase working capital requirement due to credit policy.