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Silver river manufacturing company

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Uniglobe College, Kathmandu, Nepal …

Uniglobe College, Kathmandu, Nepal
MBA-II trimester

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  • 1. PRESENTATION ON SILVER RIVER MANUFACTURING COMPANYGROUP MEMBERSGrisha YadavKohinoor ThapaliyaKrishna ChaliseManisha BaralMani ManandharNetra Bdr. KhatriPawan Kawan
  • 2. INTRODUCTION OF Silver River Manufacturing Company (SRM) SRM is a large regional product of farm and utility trailers specialized lives stock carriers and mobile home chassis. More than 85% of SRM’S sales come from the south eastern part of the united state SRM is a major client of MCNB. SRM whose products are totally based on latest technology and it holds several patent with which it can partially offsets some of the risk.
  • 3. Question 1(a) Prepare a statement of changes in financial position for 2005 (sources and uses of funds statement) or complete Table 6.
  • 4. Table 6: Silver River Manufacturing CompanyStatement of Changes in Financial Position Year Ended December 31(thousands of dollars) Particulars 2004 2005 Sources of funds Net income after taxes 6, 351.70 755.02 Depreciation 1, 657.50 2, 040.00 Funds from operation 8, 009.20 2, 795.02 Long term loan 3, 187.50 0 Net decrease in working capital 428.26 Total sources 11, 196.70 3, 223.26 Application of funds Mortgage change 267.75 261.38 Fixed assets change 2, 339.62 2, 773.13 Dividends on stock 1, 587.93 188.76 Net increase in working capital 7, 001.40 0 Total uses 11, 196.70 3, 223.27 Analysis of changes in working capital Increase (decrease) in current assets Cash change (1, 145.83) (96.71) AR change 1, 364.25 10, 894.86 INV change 14, 095.12 13, 629.75 CA change 14, 313.54 24, 427.9 Increase(decrease) in current liabilities AP change 3, 742.13 9, 492.38 NP change 1, 912.50 13, 132.5 ACC change 1, 657.50 2, 231.28 CL change 7, 312.13 24, 856.16 Net increase(decrease) in working capital 7, 001.41 (428.26)
  • 5. Question 1(b) Calculate SRM’s key financial ratios for 2005 and compare them with those of 2003, 2004, industry average, and contract requirement or complete Table 7.
  • 6. Table 7: Silver River Manufacturing Company Ratio Analysis Year Ended December 31Particulars 2003 2004 2005 Industry Comment AverageLiquidity ratios:Current ratio 3.07 2.68 1.75 2.5 PoorQuick ratio 1.66 1.08 0.73 1 OKLeverage ratios:Debt ratio(%) 40.46 46.33 59.8 50 High(Risky)Times interest earned 15.89 7.97 1.48 7.7 Very PoorAsset Managementratios:Inventory turnover(Cost) 7.14 4.55 3.57 5.7 PoorInventory turnover(selling) 9.03 5.59 4.2 7 PoorFixed assets turnover 11.58 11.95 12.1 12 OkTotal asset turnover 3.06 2.6 2.03 3 LowAverage collection period 36 35.99 53.99 32 High
  • 7. Table 7: Silver River Manufacturing Company Ratio Analysis Year Ended December 31 Particulars 2003 2004 2005 Industry Comment Average Profitability ratios Profit margin(%) 5.5 3.44 0.38 2.9 Poor Gross profit margin(%) 20.89 18.7 14.86 18 Poor Return on total assets 16.83 8.95 0.78 8.8 PoorReturn on owners equity 28.26 16.68 1.95 17.5 Poor Potential failure indicator: Altman Z Factor 3.1130 2.6305 2.0423 1.81/2.99 Zone of ignorance
  • 8. Question 2 Based on the case data and the results of your analysis in Question 1, what are the SRM,s strengths and weakness? What are the causes thereof? (Use of the Du Pont system and Altman Z factor would facilitate analysis and strength your answer.)
  • 9. Du pont systemDu pont system - basically designed: To improve the overall performance of the firm. It’s actually used in order to evaluate the profit margin on sales, the assets turnover ratio, and the implications of debt interact in order to determine the rate of return on equity.
  • 10. Du pont systemThe three most important things which affects ROE are as follows: Operating efficiency as measured by profit margin Asset use efficiency as measured by total assets turnover Financial leverage as measured by equity multiplier Weakness in either operating or asset use efficiency or both will lead to lower ROE. If ROE is unsatisfactory then it will tell us where to start looking for the reasons.
  • 11. DU Pont System:Particulars Return = × × On Equity (R.O.E)2003 28.29%2004 16.69%2005 1.9757%Industry 17.5% 2.9 3.00Average
  • 12. Altman Z factor: Z=Where, = working capital/total assets (working capital is current assets less current liabilities) = retained earnings/total assets = earnings before interest and taxes/total assets = market value of equity/book value of total debt (market value of equity includes both preferred and common shares, and debt includes and long term liabilities) = sales/total assets.
  • 13. Altman Z factor: Z2003=3.114 Z2004=2.632 Z2005=2.044
  • 14. • Z2003=3.114• Z2004=2.632• Z2005=2.044
  • 15. Strengths of SRM: Fixed assets turnover ratio Altman Z factor is compatible
  • 16. Weakness of SRM: Profitability Ratios Liquidity ratios Asset management ratios Financial Leverage Ratios
  • 17. Question 3 If the bank were to maintain the present credit lines and grant an additional $7,012,500 short-term loan at a 16 percent rate of interest effective from January 1, 2006, would the company be able to retire all short-term loans existing on December 31, 2006? (Assume that all of White’s plans and predictions concerning sales and expenses materialize. In these calculations cash is the residual balancing figure, and SRM’s tax rate is 48 percent. Assume that SRM pays no cash dividends during the year.) Complete tables 9 and 10 included as worksheets to facilitate analysis.
  • 18. Table 9: Silver River Manufacturing Company Pro Forma Income Statements (Projected) Worksheet for Year End 2007 (Thousands of Dollars)Particulars 2005 2006 2007 Projected ProjectedNet sales 215,305 228,223 249,904Cost of goods sold 183,307 188,284 199,923 Gross profit 31,998 39,939 49,981Administrative and selling 18,569 18,258 18,743Depreciation 2,244 2,665 2,006Miscellaneous expenses 6,297 3,994 3,124 Total operating expenses 27,110 24,917 23,873 EBIT 4,888 15,022 26,108Interest on short-term loans 2,006 4,331 4,331Interest on long-term loans 1,052 1,052 1,052Interest on mortgage 233 210 189 Net income before tax 1,597 9,429 20,536Taxes 767 4,526 9,857 Net income 830 4,903 10,679Dividends on stock 208 - -Additions to retained earnings 622 4,903 10,679
  • 19. Table 10: Silver River Manufacturing Company Pro Forma Balance Sheets (Projected) Worksheet for Year End 2007 (Thousands of Dollars)Particulars 2005 2006 2007 Projected ProjectedAssetsCash 4,296 39,666 49,528Accounts receivable 32,293 20,286 22,214Inventory 51,324 33,032 35,074 Current assets 87,913 92,984 106,815Land, building, plant, and equipment 25,161 32,173 33,139Accumulated depreciation (7,363) (10,028) (10,939) Net fixed assets 17,798 22,145 22,200Total assets 105,711 115,129 129,015Liabilities and equitiesShort-term bank loans 20,056 27,068 27,068Account payable 21,998 17,594 18,474Accruals 8,064 10,231 12,789 Current liabilities 50,118 54,893 58,331Long-term bank loans 10,519 10,519 10,519Mortgage 2,574 2,314 2,083 Long-term debt 13,093 12,833 12,602 Total liabilities 63,211 67,726 70,933Common stock 25,596 25,596 25,596Retained earnings 16,904 21,807 32,486 Owners’ equity 42,500 47,403 58,082Total capital 105,711 115,129 129,015
  • 20.  Projected cash balance on 2006 = $39666400 Projected short term loan = $27068000 Difference = $12598400 Minimum cash balance to be maintained = 5% of projected sales of 2006 = $11411165 Hence, company cash balance is adequate for the payment of the short term loan. Also the company is able to retire all short term loan existing on Dec 31, 2006 with the maintenance of present credit lines and grant a $7012500 short term loan
  • 21. Question 4 Compute projected financial ratios for 2006 and 2007 (or complete Table 11). Compare these ratios with 2005 along with industry average and analyze improvement or deterioration in financial condition
  • 22. Liquidity RatiosParticulars 2005 2006 2007 Industry Average Projected Projected (IA)Current Ratio 1.75 1.69 1.83 2.50Quick Ratio 0.73 1.09 1.23 1.00
  • 23. Leverage RatiosParticulars 2005 2006 2007 Industry Projected Projected Average (IA)Debt Ratio (%) 59.8 58.83 54.98 50.00Times Interest Earned 1.49 2.69 4.69 7.70
  • 24. Asset Management RatioParticulars 2005 2006 2007 Industry Projected Projected Average (IA)Inventory Turnover (Cost) 3.57 5.70 5.70 5.70Inventory Turnover (Selling) 4.20 6.91 7.12 7.00Fixed Asset Turnover 12.1 10.31 11.26 12.00Total Assets Turnover 2.04 1.98 1.93 3.00Average Collection Period 54.0 32.00 32.00 32.00
  • 25. Profitability RatiosParticulars 2005 2006 2007 Industry Projected Projected Average (IA)Profit Margin (%) 0.39 2.15 4.27 2.90Gross Profit margin (%) 14.86 17.5 20 18.00Return on Total Assets (%) 0.79 4.25 8.28 8.80Return on Equity (%) 1.96 10.34 18.39 17.50
  • 26. Interpretation In comparison of SRM projected financial ratios of year 2006 and 2007 with financial ratios of 2005, the financial position of SRM is improved. In comparison of SRM projected financial ratios of year 2006 and 2007 with industry average, the financial position of SRM is deteriorated.
  • 27. Question 5 If all short-term bank loans are repaid towards the end of the first half of 2006, do you think that company is still able to pay regular dividends and maintain minimum cash balance? Revise the tables 9, 10, 11 (or complete the tables 12, 13 and 14). Do you find any situations developing that may indicate poor financial policy? What should be the impact of such situations on the ratios for the company, and are such impacts necessarily either good or bad? Why?
  • 28. Assumption in Table 9, 10 and 11 Sales Growth: 6% in 2006 and 9.5% in 2007 COGS: 82.5% in 2006 and 80% in 2007 of sales Administrative and selling Expenses: 6% in 2006 and 9.5% in 2007 of sales Miscellaneous Expenses: 8% in 2006 and 7.5% in 2007 of sales Average collection Period: 32days (Industry Level)
  • 29. Assumption in Table 9, 10 and 11 Average Industry Level: 5.7 (Industry Level) No changes in level of Interest Rates over two year period Tax: 48% of Net Income before tax MCNB will charge 16% for the short term loan Dividend: 25% of Net Income (through back dated calculation)
  • 30. Comparison of Cash Balance25000 22263 Amount in ‘0002000015000 12217 12495 11411 Minimum Balance10000 Actual Balance 5000 0 2006 2007
  • 31. Ratios
  • 32. Ratios:
  • 33. Question 6: SolutionOn the basis of our analyses companys forecasted future marketgrowth is favorable.Demanding immediate repayment won’t be in the best interest forboth the company and the bank.The bank should extend the existing short and long term loanswithout granting the additional loan.
  • 34. Analysis of following ratio shows thatoption B is better Debt ratio- It determines the degree of company relying onoutside fund.
  • 35. Cont… Times Interest Earned ratio It is the measure of the company’s ability to make interest payments on time Current ratio It shows how much of current assets it has to pay the currentliabilities.
  • 36. Cont… Quick Ratio The company ability to meet the short term debts without having to sell off receivables  Profit Margin It shows how much profit the firm is earning to know that it can pay the short term and long term loan easily or not.
  • 37. The conditions/safe guards the bankshould impose to protect itself on theloans are listed below Security Mortgage Guarantee Loan Covenants • Restriction on Disposal of Certain Assets • Barring or Limiting the Grant of Dividend • Requiring A Minimum Net Worth Of The Business • Limitation on Use of The Funds Loaned Monitoring Insurance
  • 38. Question 7 If the bank decides to withdraw the entire line of credit and to demand immediate repayment of the two existing loans, what alternatives would be open to SRM?
  • 39. Solution: Converting the cash equivalent assets into cash which includes: Decreasing Account Receivable: Minimize Inventory: Delay Accounts Payable Period: Minimum cash balance policy: Selling/Issue of Common Stock: Hold back dividend Payment: Sale of Assets:
  • 40. Lesson Learnt To analyzed the case of the company. To calculate the financial ratios and know its interpretation Learn to compare the financial ratios with industry average Learn to compute and analysed du pont system