Post on 03-Apr-2018
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Balance Sheet is Stock (as of)
Other Statements are Flow(through time)
When analyzing, keep unusualevents in mind
NOTES
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What effect did the expansion haveon net operating working capital
(NOWC)?
NOWC98 = ($7,282 + $632,160 +$1,287,360)
- ($524,160 + $489,600)
= $913,042.
NOWC97 = $793,800.
= -Non-
interestbearing CA
Non-
interestbearing CL
NOW
C
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What effect did the expansion have
on capital used in operations?
= NOWC + Net fixed assets.
= $913,042 + $939,790
= $1,852,832.
= $1,138,600.
Operatingcapital98
Operatingcapital97
Operatingcapital
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Did the expansion create additionalnet operating profit after taxes
(NOPAT)?
NOPAT = EBIT(1 - Tax rate)
NOPAT98 = -$690,560(1 - 0.4)
= -$690,560(0.6)
= -$414,336.
NOPAT97= $125,460.
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What is your initial assessment ofthe expansions effect on
operations?
1998 1997
Sales $5,834,400 $3,432,000NOPAT ($414,336) $125,460
NOWC $913,042 $793,800
Operating capital$1,852,832 $1,138,600
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What effect did the companys
expansion have on its net cash flowand operating cash flow?
NCF98 = NI + DEP = -
$519,936 + $116,960= -$402,976.NCF97= $87,960 + $18,900 =
$106,860.OCF98 = NOPAT + DEP
= -$414,336 + $116,960= -$297,376.OCF97= $125,460 + $18,900
= $144,360.
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What was the free cash flow (FCF)
for 1998?
FCF = NOPAT - Net capital investment
= -$414,336 - ($1,852,832 -$1,138,600)
= -$414,336 - $714,232
= -$1,128,568.
How do you suppose investorsreacted?
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What is the companys EVA?
Assume the firms after-tax cost ofcapital (COC) was 11% in 1997and 13% in 1998.
EVA98 = NOPAT- (COC)(Capital)= -$414,336 -
(0.13)($1,852,832)= -$414,336 - $240,868
= -$655,204.EVA97 = $125,460 - (0.11)($1,138,600)
= $125,460 - $125,246= $214.
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Would you conclude
that the expansion increased ordecreased MVA?
MVA = - .
During the last year stock pricehas decreased 73%, so marketvalue of equity has declined.Consequently, MVA has declined.
Equity capitalsuppliedMarket valueof equity
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Probably not.
A/P increased 260% over thepast year, while sales increasedby only 70%.
If this continues, suppliers maycut off trade credit.
Does the company pay its suppliers
on time?
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No, the negative NOPAT showsthat the company is spendingmore on its operations than it
is taking in.
Does it appear that the sales price
exceeds the cost per unit sold?
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1. The company offers 60-day creditterms. The improved terms arematched by its competitors, sosales remain constant.
What effect would each of these
actions have on the cash account?
A/R wouldCash would
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2. Sales double as a result of thechange in credit terms.
Short-run: Inventory and
fixed assets to meetincreased sales. A/R , Cash. Company may have to seekadditional financing.
Long-run: Collectionsincrease and the companyscash position would improve.
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The expansion was financedprimarily with external capital.
The company issued long-termdebt which reduced its financial
strength and flexibility.
How was the expansion financed?
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Would external capital have been
required if they had broken even in1998 (Net income = 0)?
Yes, the company would stillhave to finance its increase in
assets.
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What happens if fixed assets are
depreciated over 7 years (as opposedto the current 10 years)?
No effect on physical assets.Fixed assets on balance sheet
would decline.
Net income would decline.Tax payments would decline.
Cash position would improve.
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Does the companys positive stockprice ($2.25), in the face of largelosses, suggest that investors are
irrational?
Common stock has limited liability.Therefore, it can never have a negative
value. If it is expected to producefuturecash flows, it will have a positive value.
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Why did the stock price fall
after the dividend was cut?
Management was signaling thatthe firms operations were in
trouble.
The dividend cut loweredinvestors expectations for future
cash flows, which caused the stockprice to decline.
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What were some other sources of
financing used in 1998?
Selling financial assets: Shortterm investments decreased by$48,600.
Bank loans: Notes payableincreased by $520,000.
Credit from suppliers: A/Pincreased by $378,560.
Employees: Accruals increased by
$353,600.
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What is the effect of the $346,624
tax credit received in 1998.
This suggests the company paid at least
$346,624 in taxes during the past 2years.
If the payments over the past 2 yearswere less than $346,624 the firm would
have had to carry forward the amountof its loss that was not carried back.
If the firm did not receive a full refund
its cash position would be even worse.
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