Name Kamal Sarathy

Question 1

A.

1. The estimated profit for 2006 (E) is defined as 'cash from operations of $226k'.
2. Operating Cash Flow and Investment, Cash flow was the primary factor for the company's drop in
'cash flow' from 2003 to 2006 (E).

B. The cash flow statement is divided into three categories. These are broken down to give analysts a clear
idea of the total cash flow generated by the company’s activities:

a. Cash Flows from Operating Activities: As accounts receivable grows, throughput drops. In
addition, when accounts payable expand, lenders finance the accounts.
b. Cash Flows from Banking Operations: The tendency is decreasing since the initial investment in
land has already been made, and only PP&E is currently being invested to expand output, resulting in
an increasing trend in sales and cash generation.
c. Income from financing activities: This while growing compared to returns due to increasing lending
to long-term lenders.

C.

Self-financing of investments: Analyzing the cash flows indicates that the business enterprise sells some of

its property and deducts the investments to invest in other belongings.

Funding of investments: The company has some coins within the shape of reserves and surplus that may be

used to shop for belongings instead of borrowing and incurring similarly debt.
 Free Cash Flow: Free coins go with the flow is the quantity of cash that may be taken from a enterprise

without interfering with its everyday operations and sports if the corporation has bad cash flow due to the

requirement to shop for property and offer everlasting and emergency running capital growth outpaced cash

float from cutting-edge activities and started out to make contributions to unfastened coins waft.

Question 2

A. Operating working capital (OWC) is the quantity of current property essential to keep a organisation's
operations.

OWC = Accounts receivables + Inventory – Accounts payables

Year Accounts Receivable (AR) Inventories (I) Accounts Payable (AP) Operating Working Capital
2002 3485 3089 2034 4540
2003 4405 2795 2973 4227
2004 6821 3201 4899 5123
2005 10286 3291 6660 6917
2006E 14471 3847 9424 8894

B. To determine the OWC/sales ratio, divide the OWC by the sales for the same year.

OWC/Sales Ratio = OWC / Sales

Years Ending 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
Sales Revenue 24,652 26,797 29,289 35,088 42,597
Operating Working Capital / Sales 18.42% 15.77% 17.49% 19.71% 20.00%
C.

1. DIO (Days Inventory Outstanding):

1. Average Inventory for each year.

2. Cost of Goods Sold (COGS) per day for each year.

DIO = Inventory/Cost of goods sold per day

Year Inventories Cost of Goods Sold Cost of Goods Sold per day DIO (in Days)
2002 3,089 20,461 56.84 54.35
2003 2,795 21,706 60.29 46.36
2004 3,201 23,841 66.23 48.34
2005 3,291 28,597 79.44 41.43
2006E 3,847 35,100 97.5 39.46

2. DSO (Days Sales Outstanding):

1. Accounts Receivable balance for each year.

2. Sales Revenue per day for each year.

DSO= Account Receivables / Sales Revenue per day

Year Account Receivables Sales Revenue Sales Revenue per day DSO (in Days)
2002 3,485 24,652 68.48 50.89
2003 4,405 26,797 74.44 59.18
2004 6,821 29,289 81.36 83.84
2005 10,286 35,088 97.47 105.53
2006E 14,471 42,597 118.33 122.3

3. DPO (Days Payable Outstanding):

1. Accounts Payable balance for each year.

2. Cost of Goods Sold COGS per day.
 DPO= Account Payables/Cost of goods sold per day

Years Ending December 31 2002 2003 2004 2005 2006E

Account Payables 2,034 2,973 4,899 6,660 9,424
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
Cost of Goods Sold per day 56.84 60.29 66.23 79.44 97.5
DPO (in Days) 35.79 49.31 73.98 83.84 96.66

D. Operating cash flow has increased but cash flow has decreased which we can see based on DSO and DIO
Payment terms have been defined for the next accounting period to exhaust free cash flow.

Question 3

A. Economic balance sheet for Ceres Gardening Company and the capital employed

Capital Employed
2002 2003 2004 2005 2006E
Accounts Receivable 3,485 4,405 6,821 10,286 14,472
Inventories 3,089 2,795 3,201 3,291 3,847
Plant, Property, & Equipment 2,257 2,680 2,958 3,617 4,347
Other Assets 1,095 2,396 3,498 3,498 3,498
Accounts Payable 2,034 2,974 4,899 6,659 9,424
Capital Employed 7,892 9,302 11,579 14,033 16,739

Capital Invested
2002 2003 2004 2005 2006E
Shareholder Equity 5,024 6,091 7,146 8,336 9,563
Current Portion of Long Term Debt 315 353 525 731 650
Long Term Debt 3,258 4,400 5,726 7,123 8,481
Cash 705 1,542 1,818 2,157 1,955
Invested Capital 7,892 9,302 11,579 14,033 16,739
Question 4

A. Ratio Calculations:

 Variable margin: Variable Margin = (Sales - COGS ) / Sales

 Operating Margin: Operating Profit / Net Sales * 100
 Return on Equity: Net Income / Shareholders Equity
 Return On Average Capital Employed: EBITA/Average total Assets - L

Years Ending December 31 2002 2003 2004 2005 2006E

Variable Margin (%) 17% 19% 19% 19% 18%
Operating Margin (%) 7% 9% 8% 8% 7%
Return On Equity (%) 24% 21% 18% 18% 16%
Return On Avg Capital Employed (%) 17% 19% 16% 16% 14%

B. The ROE is dropping because the share of higher payouts in the dividend is growing year after year,
despite declining profits. ROE stands for Return on Equity.

 ROE = Net Income / Shareholders Equity.

C. ROACE stands for Return on Average Capital Employed. ROACE falls owing to increase in EBIT
compared to decreased capital expenditure. This might indicate that the firm is unable to deliver a significant
return on investment, even if earnings before interest taxes are high.

Question 5

A.

Pros of GetCeres program:

1. Increased sales at a very high rate of growth.

2. increasing revenues and profits.
Cons of GetCeres program:

1. Increased costs
2. cash flow decreases

I do not recommend continuing the program due to high cost and decrease in cash flow thus affecting
working capital as well. The business does not generate sufficient work from its operations and instead uses
cost financing. This process is straining the overall resources of the company and increasing the chances of
bankruptcy in the near future. Therefore, I do not recommend continuing the policy to stabilize the growth of
the company.