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Yes, the company can retire all short-term loans existing on 31st December 2006, if the bank were to maintain the present credit lines and grant an additional $6,375,000.00 short-term loan at a 16% interest effective from 1st January 2006, assuming that SRM doesnt pay any cash dividends during the year and the tax rate at 48%. The criteria that the company should meet are: 1. Projected cash balance> Projected short term loan. 2. Maintaining minimum cash balance of 5% of sales. From Table 10, Projected cash balance for 2006 Projected short term loan for 2006 Projected sales for 2006 $36,450.26 $24,607.50 $207,475.53
Here, Projected cash balance> Projected short term loan Or, $36,450.26 > $24,607.50 Therefore, the company has enough cash balance to pay off short-term loans existing till 31st December 2006. Also, from the case, it is known that the company has a system of maintaining minimum cash balance as 5 percent of sales. Thus, the cash balance maintained after paying short-term loans is: = $36,450.26 - $24,607.50 =$ 11,842.76 And, the percentage of remaining cash balance to total sales is: = $ 11,842.76/$207,475.53 = 5.7% Since the cash balance maintained after paying the short-term loan is higher than the minimum requirement, the company can pay the due short-term loans under the given condition.
Particulars
Net Sales Cost of Goods Sold Gross Profit Administrative and Selling Depreciation Miscellaneous Expenses Total operating expenses EBIT Interest on short-term loans Interest on long-term loans Interest on mortgage Net income before tax Taxes Net income Dividends on stock Additions to retained earnings
2005
95731.63 166642.58 29089.05 16880.96 2040.00 5724.72 24645.68 4443.25 1823.25 956.25 211.90 1451.94 696.94 755.02 188.76 566.27
2006 Projected
207475.53 171167.31 36308.22 16598.04 2422.50 3630.82 22651.32 13656.9 3937.20 956.25 190.54 8572.91 4115 4457.91 4457.91
2007 Projected
227185.70 181748.56 45437.14 17039.00 1823.00 2839.82 21701.82 23735.32 3937.20 956.25 171.52 18670.35 8961.77 9708.58 9708.58
Price/Earnings Ratio
4.6
5.5
6.5
Particulars
Assets Cash Accounts Receivables Inventory Current Assets Land, building, plant and equipment Accumulated Depreciation Net fixed assets Total assets Liabilities and equities Short-term bank loans Accounts payable Accruals Current liabilities Long-term bank loans Mortgage Long-term debt Total liabilities Common stock Retained earnings Owners equity Total capital
2005
3095.77 29356.86 46658.62 79921.26 22873.5 -6693.75 16179.75 96101.01 18232.5 19998.39 7331.28 45562.17 9562.50 2339.62 11902.12 57464.29 23269.00 15367.72 38636.72 96101.01
2006 Projected
36450.26 18442.27 29639.36 84531.89 29248.50 -9116.25 20132.25 104664.14 24607.50 15994.88 9301.13 49903.51 9562.50 2103.75 11666.25 61569.76 23268.75 19825.63 43094.38 104664.14
2007 Projected
45451.52 20194.28 32455.1 98100.98 30125.96 -10939.20 19186.76 117287.74 24607.50 16794.62 11626.41 53028.53 9562.50 1893.75 11456.25 64484.78 23268.75 29534.21 52802.96 117287.74
Particulars
Liquidity Ratios Current Ratio Quick Ratio Leverage Ratios Debt Ratio (%) Times interest earned Asset management ratios Inventory turnover (cost) Inventory turnover (selling) Fixed asset turnover Total asset turnover Average collection period Profitability ratios Profit margin (%) Gross profit margin (%) Return on total assets Return on owners equity
2005
1.75 0.73 59.79 1.48 3.57 4.2 12.09 2.04 53.99 0.38 14.86 0.79 3.24
2006 Projected
1.39 1.1 58.82 2.69 5.77 7 10.3 1.98 32 2.14 17.5 4.25 10.34
2007 Projected
1.85 1.23 54.97 4.69 5.7 7 11.84 1.93 32 4.27 20 8.27 18.38
Industry Average
2.50 1.00 50.00 7.70 5.70 7.00 12.00 3.00 32.00 2.90 18.00 8.80 17.50
Remarks
Poor Good Poor Poor Good Good OK Poor Good Good Good OK Good
Analysis
Current Ratio: The current ratio for both 2006 and 200 7 are below than the industry standard. Therefore, they are very poor. However, it shows that the ratio is in improving trend as it is higher in 2007 than in 2005. Quick Ratio: The above table shows that quick ratio is good as it exceeds the industry standard and shows improvement from 2005. This also shows that the company is able to pay short-term loans to its creditors. Debt Ratio: Higher debt ratio means more risky financial situation. The company projects that the debt ratio will show improvement in 2006 and 2007. However, since they are still higher than the industry standard, the company still has financial risks. Times interest earned: Times interest earned ratio is expected to increase from 1.48 to 2.69 in 2006 and 4.69 in 2007. This shows improving trend, however, since the values are below the industry average, they are still poor and hence, the company needs to focus on increasing this ratio. Fixed Asset Turnover: The fixed asset turnover will be poor in 2006 as it is below the industry standard. However, it is expected that it will improve in 2007 and come close to industry standard.
Total Asset Turnover: Total asset turnover is expected to perform poorly during 2006 and 2007. Net Profit Margin: The net profit margin is expected to increase in 2006 and come close to the industry standard and exceed the industry standard in 2007. This shows that the company expects to make significant profit in 2006 and 2007. Gross Profit Margin: The company expects that the gross profit margin will improve in 2006 (coming close to the industry standard) and exceed the industry standard by 2007. Return on Total Assets: The company projects that return on total assets will increase in 2006 and come close to the industry standard by 2007. Return on Owners Equity: The company projects that return on owners equity will show signs of improvement and 2006 and exceed the industry standard by 2007.
Also,
For 2007,
Also,
For both years, above equations show that net profit margin, total assets turnover and return on assets should be improved to get higher return on equity.
X1 = Working Capital/Total Assets X2 = Retained Earnings/Total Assets X3 =EBIT/Total Assets X4 = Market Value of Equity/Total Debt = Net Income X Price Earning Ratio/Total Debt X5 = Sales/Total Assets