Introduction to Business

Spring 2024

Assignment (3)
Look at the financial statements excerpted from the Foundation FastTrack and answer
the following questions, explaining the reasons and justification for your answers.

1) Look at the cash flow statement survey.

a) Which companies got an emergency loan? How much? (4 points)
Andrews -> $ 17,102
Chester -> 2,833

b) For each company you mentioned in (a) explain why it got an emergency loan (8
points)
Both companies ran out of cash. Chester got an emergency loan because it had an
excessive amount of inventory (-$11,084). That’s not all, it was making losses in the
investing activities (-$4,200) because it bought automation or capacity. At the same time,
Andrews got an emergency loan because it was making huge losses in the operating
activities as it had an excessive amount of inventory (-$24,718) and many accounts
receivables (-$2,280). What’s more, they have high variable costs, selling and
administration expenses, and interest expenses.

c) How could each company you mentioned in (a) and (b) have avoided the

emergenc

y loan?

For the companies to avoid the emergency loan they should have established suitable
sales forecast and examine their Performa carefully. At the same time, they should have
not produced more than needed so they won’t have excessive inventory. That’s not all;
they could have raised enough capital through loans and equity. For the company Andrews
they could have decreased the variable costs and selling and administration costs.
d) For the rest of the companies (those that did not get an emergency loan) evaluate
how well each
company is managing its cash by looking at the following: (24 points)

• Ending cash position (BS)

Baldwin: $4,671 Digby: $4,127 Erie: $5,289 Ferris: $7,628 The Ending cash position of all
four companies is good. On the other hand, the Company Ferris has a little higher Ending
Cash position and this means that the company should have used the cash in a more
efficient way by retiring stocks.
• Net change in cash position (CF)
Baldwin: $4,671 Digby: ($3,952) Erie: ($6,707) Ferris: $1,561 Digby and Erie have a
Negative Net Change in Cash Position which is not good because this means that the
company is not able to manage its finance well. However, Baldwin and Ferris have a good
Net change in cash position because they are positive.
• Compare investment with financing (CF)
All of the Companies Baldwin, Digby, Erie, and Ferris have the financing activities greater
than the investment activity as all the four companies made plant improvement and they
financed them by either taking a long term loan or issuing stocks.
• Net Income (CF)
Baldwin: $3,273 Digby: $3,524 Erie: $3,242 Ferris: $2,189 All companies have a very good
Net Income. The highest Net Income is Digby (3,524) and the lowest Net Income is Ferris
(2,189).
• Any huge cash outflow/inflow (CF)
Baldwin: The plant improvement was a huge cash outflow. Ferris: The plant improvement
was a huge cash outflow. Digby: The plant improvement was a huge cash outflow, the
largest. The financing activities were a huge inflow, and this means that the company’s
investments were mainly leveraged. Net cash from operations was negative because of
the inventory overstock. Erie: The plant improvement was a huge cash outflow, the
company ended up with a negative net change in cash position.
• Compare ending cash balance (BS) with Sales (IS) (is this a good cash
buffer?)
Ending Cash Balance/ Sales Baldwin: Sales: $55,483 Ending Cash Balance: $4,671
=8.4% Digby: Sales: $73,457 Ending Cash Balance: $4,127 =5.62% Erie: Sales: $54,580
Ending Cash Balance: $5,289 =9.7% Ferris: Sales: $68,594
Ending Cash Balance: $7,628 =11.1% All companies have a good ending cash position
comparing to their sales. It is not too much that the company does not invest, or too little
that the company would have to take an emergency loan.

2) Which company has the largest asset base? How big? (Hint: look at the BS)

The Company with the largest asset base is Digby which is $70,012. (2 points)
3) Evaluate the capital structure of the company you picked in (2) above. Calculate
the leverage ratio (Assets/Equity) and the percentage of equity to debt in the
company’s assets.
Comment on your findings.
Leverage Ratio: Assets / Liabilities =$70,012/$36,829 = 1.9 The percentage of equity
to debt: Equity/Debt = $36,829 / $33,128 = 1.11 Equity/Assets = $36, 829 /
$70,012 =52.60% Debt/Assets =$33,128 / $70,012 =47.32% Based on the
leverage ratio, Digby has assets almost twice the liabilities, which means that it has
a good asset base. Based on the benchmark of the leverage ratio, that is 1.5- 3, the
ratio (1.9) falls within the range, which means it is good. Based on the percentage of
equity to debt, Digby seems to be financed equally by both equity and debt, which is
approximately (50%-50%). This is good because both of them did not exceed their
limit, which is (70%) (6 points)
Hint:
A company with too much debt (over 70% of assets) is too risky as it may not be able to
pay back all of this debt and its interest. For banks, this company is a risky borrower –
very few banks will be willing to lend it and those that do will charge a very high interest
rate to match the risk of the company.
On the other hand, a company with too much equity (over 70% of assets) is at risk of
being taken over (i.e. bought out by another company). The company is an attractive
target for acquisition because there is an opportunity for whoever acquires this
company to borrow debt easily using all the equity as collateral, and to use all of this
borrowing to expand the company and make more profits. The fact that the current
management is not making use of this opportunity indicates that current management is
out of profitable growth ideas. If the company is acquired, the top management will
normally be fired.

Total points (50

points)

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Financial Summary: Cash Flow Statement

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Financial Summary: Balance Sheet

Financial Summary: Income Statement

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