Name Mehar Verma

Question 1

Write your answer for Part A here.

For the year 2006(E) the Net income (expected) is $1,534 thousand out of which $226
thousand is translating to Operating cash flow. This means that 14.73% of the net
income is getting translated to operating cash flow

Out of the three categories of cash flow statement (operating cash flow, investing cash
flow and financing cash flow)Operating cash flow has contributed majorly for decrease
in ‘cash in change’ from year 2003 to 2006 (E).

Write your answer for Part B here.

For Years Ending December

31 2003 2004 2005 2006E
Operating Cash Flow 2,019 838 250 226
Investing Cash Flow -2,135 -1836 -1215 -1398
Financing Cash Flow 953 1,274 1,306 969

From the given cash flow statement we can say the following about different categories
of cash flow:

1. Operating Cash Flow: As per the data the operating cash flow is continuously
decreasing from year 2003 to 2006 (E). The main reason behind this decrease is
increase in accounts receivable.
2. Investing Cash Flow: Looking at the cash flow statement we can say that the
investing cash flow is continuously increasing from year 2003 to 2006 (E). This
 is because the company has stopped investing in land after year 2004.
3. Financing Cash Flow: According to the cash flow statement, the trend in
financing cash flow is firstly increasing from 2003 to 2005 and then decreasing
in 2006(E). The major contribution in the increasing trend is from retirement
of debt. The decreasing effect in 2006 (E) is affected from both retirement and
issuance of debt.

Write your answer for Part C here.

Self-Financing of Investments: If the company is generating enough cash from

operations to finance its investments, we can say that the company can self-finance its
investments. Here as CFO<CFI and company has very high investment requirements
which is mostly financed from financing cash fow. Thus, the company is not able to self-
finance its investments.

Cash Position of the Company: For the year 2006(E), the company has generated
negative cash flow. This means that the sum cash flow from operations, investing
activities and financing activities is less than zero (CFO+CFI+CFF). Therefore, we can
say that the company has spent more money than it has generated.

Free Cash Flow: If cash flow from Operations (CFO) is greater than Cash flow from
Investing (CFI) activities the remaining balance is known as Free cash flow. Here as
CFO<CFI, the company has no Free cash flow for the year 2006(E).

Question 2

Write your answer for Part A here. Paste the excel sheet containing your calculations
here.
Operating working capital= Accounts Receivable + Inventories – Accounts Payable

Therefore, Operating working capital for Ceres Gardening Company for 2002-2006 (E):

At December 31 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 5,123 6,917 8,894

Write your answer for Part B here. Paste the excel sheet containing your calculations
here.

Operating Working Capital to Sales ratio:

At December 31 2002 2003 2004 2005 2006E

Operating Working Capital 4,540 4,227 5,123 6,917 8,894
Sales 24,652 26,797 29,289 35,088 42,597
Operating Working Capital/Sales Ratio 18.42% 15.77% 17.49% 19.71% 20.88%

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

DIO, DSO and DPO can be calculated using following formulae:

 Days Inventory Outstanding (DIO)=Inventory/Cost of Goods Sold(COGS) per

day
 Days Sales Outstanding(DSO)=Accounts Receivable/Sales revenue per day
 Days Payable Outstanding(DPO)= Accounts Payable/Cost of Goods Sold(COGS)
per day

Assuming that the company is operational for 360 days in a year,

 Cost of Goods sold per day(COGS per day)=COGS/360

  Sales Revenue per day=Sales/360.

Using the given formulae, we have following:

At December 31 2002 2003 2004 2005 2006E

COGS 20,461 21,706 23,841 28,597 35,100
COGS per day 56.84 60.29 66.23 79.44 97.50
Sales 24,652 26,797 29,289 35,088 42,597
Sales per day 68.48 74.44 81.36 97.47 118.33
Inventories 3,089 2,795 3,201 3,291 3,847
DIO 54.3 46.4 48.3 41.4 39.5
Accounts Payable 2,034 2,973 4,899 6,660 9,424
DPO 35.8 49.3 74.0 83.8 96.7
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
DSO 50.9 59.2 83.8 105.5 122.3

Write your answer for Part D here.

The credit period to dealers under GetCeres program was extended up to 120 days. This
increased the amount of accounts receivable. This extension will increase the cash to cash
period which therefore, will increase the operating working capital.

Question 3

Write your answer for Part A here. Also, paste the economical balance sheet prepared by
you here.
 Economical Balance Sheet (in $ thousand, some numbers are rounded)

At December 31 2002 2003 2004 2005 2006E

Capital Employed
Plant, Property, & Equipment (net) 2,257 2,680 2,958 3,617 4,347
Land 450 1,750 2,853 2,853 2,853
Other Assets 645 645 645 645 645
Non Current Assets 3,352 5,075 6,456 7,115 7,845
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 5,123 6,917 8,894
Total Capital Employed 7,892 9,302 11,579 14,032 16,739
Invested Capital
Shareholders’ Equity 5,024 6,091 7,146 8,336 9,563
Total Shareholder Equity 5,024 6,091 7,146 8,336 9,563
Long-Term Debt 3,258 4,400 5,726 7,123 8,480
Current Portion of Long-term Debt 315 352 525 730 649
Cash(-) -705 -1542 -1818 -2158 -1955
Net Debt 2,868 3,210 4,433 5,695 7,174
Total Invested Capital 7,892 9,301 11,579 14,031 16,737

Question 4

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

The Formulae used for calculation are following:

1. Variable Margin (as a % of sales)={(Sales-COGS)/Sales}*100

2. Operating Margin(%)=(EBIT/Sales)*100
3. 3 .Return on Equity(%)=Net Income/Shareholders’ equity
4. Return on Average Capital Employed(RoACE)(%)= Earnings after tax before
interest/{(Opening capital employed + closing capital employed)/2}

2002 2003 2004 2005 2006E

Sales 24,652 26,797 29,289 35,088 42,597
COGS 20,461 21,706 23,841 28,597 35,100
Variable Margin 17.00% 19.00% 18.60% 18.50% 17.60%
EBIT 1,641 2,338 2,408 2,836 3,018
Operating Margin 6.66% 8.72% 8.22% 8.08% 7.09%
Net Income 1,191 1,293 1,279 1,488 1,534
Shareholders’ Equity 5,024 6,091 7,146 8,336 9,563
RoE 23.71% 21.23% 17.90% 17.85% 16.04%
Tax 264 696 689 801 826
Earnings before interest after tax 1,377 1,642 1,719 2,035 2,192
Opening Capital Employed 7,892 7,892 9,302 11,579 14,032
Closing Capital Employed 7,892 9,302 11,579 14,032 16,739
RoACE 17.45% 19.10% 16.46% 15.89% 14.25%

Write your answer for Part B here.

The trend in Roe is continuously decreasing from 2002 to 2006 (E). The reason for the
decreasing trend is high interest paid on debts by the company.

2002 2003 2004 2005 2006E

Closing Capital Employed 7,892 9,302 11,579 14,032 16,739
RoCE 20.79% 25.13% 20.80% 20.21% 18.03%
Earnings before Taxes 1,454 1,989 1,968 2,289 2,360
EBIT 1,641 2,338 2,408 2,836 3,018
Interest 88.60% 85.07% 81.73% 80.71% 78.20%
Closing Capital Employed 7,892 9,302 11,579 14,032 16,739
Shareholders Equity 5,024 6,091 7,146 8,336 9,563
Financial Leverage 157.09% 152.72% 162.03% 168.33% 175.04%
Net Income 1,191 1,293 1,279 1,488 1,534
Earnings before Taxes 1,454 1,989 1,968 2,289 2,360
Tax Implications 81.91% 65.01% 64.99% 65.01% 65.00%
RoE 23.71% 21.23% 17.90% 17.85% 16.04%

Write your answer for Part C here.

RoACE is affected by two components- margin and efficiency. Here, RoACE in trend is
slightly decreasing as both margin and efficiency are decreasing. By comparison, it is
affected more by decrease in efficiency as compared to decrease in margin.

2002 2003 2004 2005 2006E

Margin(Tax adjusted) 0.056 0.061 0.059 0.058 0.051
Efficiency(Sales/Capital Employed) 3.12 3.12 2.81 2.74 2.77
RoACE 17.45% 19.10% 16.46% 15.89% 14.25%

Question 5

Write your answer for Part A here.

After analyzing the implications of GetCeres program for Ceres Gardening Company, we
can list down following pros and cons of the same:

Advantages:

 GetCeres program has successfully bolstered sales to $42million out of which

80% is from sales to dealers and has increased market share by attracting new
dealers.
 The program has increased the company’s brand recognition in the organic
gardening market by increasing the new shelf space for the Ceres gardening
product by extending the credit line for the dealers.

Drawbacks:

 On the downside, the extended credit line has increased the company’s accounts
receivable, thus increasing the working capital requirement of the company
exerting pressure on the cash flow generated resulting in a negative cash flow
from 2006(E).
 The company is relying excessively on debt issuance to finance their operations
as there is a lack of positive cash flow generated and company is not able to
generate any free cash flow in current scenario as its operating cash flow is much
less than the company’s investing requirement and has to highly depend on
 external funding from bank debts and extended payment terms from its supplier.

Looking at the above pointers and the company’s financial statements, I would not
recommend going further with GetCeres program in its current form and take
cautions consideration in building a strategy. It needs a thorough assessment of its
financial implications and long term sustainability.

The company may want to explore alternative avenues for expanding its retail business,
such as merging with a cash-generating enterprise, refining its distribution system, or
diversifying its product range.