Background:
You have been retained by the professional services firm, Dewey
Cheatum & How to provide financial expertise to their client, Creative
Services, Inc. The company lacks any financial expertise and would
like some feedback on several different issues facing the company.
In additional to the financial information attached, the following may
be helpful. The company currently has 1,000,000 shares of stock issued
and outstanding. The company has bonds payable and notes payable to
the bank at an annual rate of 6%. Additionally, the company has
several long-term lease arrangements at a rate of 9%.
The company provides commercial services that require significant
labor and materials to complete the sales. The owners do not suspect
any foul play and have their books audited annually.
Issue # 1:
Since the company has had no formal financial expertise afforded them,
they would like for you to assess their financial performance and
stability. With your experience in financial statement analysis,
discuss at least four financial ratios or performance indicators and
their significance to the organization. In your discussion, determine
whether you feel these are ?good? or ?bad? even though you lack any
specific industry comparisons. You may use comparisons from year to
year or create hypothetical scenarios such as ?if A/R turnover goes to
X, you will experience Y?.
Issue #2:
Miguel, the president has become concerned that little attention is
focused on cash management. His two biggest concerns are 1.)
Collections are slower that he would like to see, since many of his
customers are from outside of the area and as far away as California,
Texas, Maine and Florida. 2.) When cash collections are slow, he
simply does not pay his bills to vendors on time and he never takes
advantage of cash discounts on his accounts payable (which are often
extended at 2/10, net 30). Provide Miguel some insight and solutions
into how he can improve his collections and disbursement practices, so
as to more efficiently manage his cash.
Issue #3:
Miguel is happy with the current investments his company has
undertaken. Scotia, a new operations manager has proposed a new cost
savings piece of equipment for Miguel to consider. The initial cost of
the equipment is $50,000 with no salvage value and a five year life
(straight-line depreciation). The equipment is expected to generate
$14,000 of savings per year for the next five years (the life of the
equipment). Miguel has the cash to invest but would like for you to
make the final recommendation. Use capital budgeting practices to
determine whether or not Miguel should accept Scotia?s offer. The
owners have always required an 11% required return.
Issue #4
The current stock price is $12.50 based upon an estimated dividend in
the coming year of $1.25 per share and a growth rate of 6%. The risk
free rate for the market currently stands at 4% and the risk premium
the market places on stocks in this industry is 8%. Using the dividend
pricing model, calculate Creative Services, Inc.?s expected rate of
return. With this expected rate of return, calculate the Beta for
Creative Services, Inc. relative to its market. What does this beta
tell you about the company?s riskiness compared to the industry?
Creative Services, Inc (figures in 000?s)
Cash__________________________$_____1,242_____$_____5,3 13
Accounts Receivable___________$___174,645_____$____111,756
Inventory_____________________$____19,450_____$_____26,452
Total Current Assets__________$___195,337_____$____143,521
Furniture & Fixtures__________$____57,700_____$_____18,531
Equipment_____________________$___143,887_____$_____99,769
Trucks________________________$___157,914_____$_____74,000
Less: Depreciation____________$___(98,294)____$____(36,093)
Total Net Fixed Assets________$____261,207____$____156,207
Goodwill______________________$_____2,450_____$_____2,450
Total Assets__________________$___458,994_____$___302,178
Accounts Payable______________$___125,966_____$____115,403
Sales Tax Payable_____________$_____1,873_____$________552
Payroll Taxes Payable_________$____15,882_____$_____14,056
Total Current Assets__________$___143,721_____$____130,011
Bonds Payable_________________$_____32,582__$__________- -
Long Term Notes Payable_______$_____62,436__$_______83,707
Lease Payable_________________$____129,652__$_______48,945
Total Long-Term Payables______$____224,670__$______132,652
Common Stock__________________$_____1,175___$________1,175
Retained Earnings_____________$____38,340___$_______17,668
Dividends ____________________$____(1,400)__$______(1,200)
Net Income____________________$____52,488___$_______21,872
Total Stockholders' Equity____$____90,603___$_______39,515
Total Liabilities and Equity__$____458,994___$______302,178
Sales_________________________$__1,660,566___$____1,166,464
Cost of Goods_________________$__1,135,330___$______809,025
Gross Margin__________________$____525,236___$______357,439
Selling, General & Admin______$____388,673___$______292,192
Earnings before Interest/Taxes$___136,563____$_______65,247
Interest______________________$_____8,752____$________1,814
Depreciation__________________$____62,201____$_______36,093
Earnings Before Tax___________$____65,610____$_______27,340
Tax (20%)_____________________$____13,122____$________5,468
Earnings After Tax____________$____52,488____$_______21,872 |
