Katie’s Construction provides general contractor services and infrastructure ser
ID: 2342539 • Letter: K
Question
Katie’s Construction provides general contractor services and infrastructure services. From its inception until 2 years ago, the company had a steady record of growth in sales, assets, and profits. During the second half of 2006 the company experienced a drop in demand for its services. 2007 continued to be a poor year and, despite intense marketing efforts that included high discounts and extended credit, sales barely increased. Inventories ballooned and the company’s payments to suppliers slowed considerably.
However, in January 2008, Katie and her finance manager were reviewing the prospects for 2008. Katie anticipated a surge in demand for construction services in the coming years. She felt that her facilities needed to be expanded in order to meet future demand. She anticipated that if steps were initiated immediately, the expansion program could be completed by the middle of 2008. By then, the company’s bulging inventories could be brought down. In order to finance the expansion, she proposed to obtain a $1 million loan from the company’s bank. She instructed her finance manager to prepare a forecast for 2008 EXCLUDING the expansion plan. The projections for 2008 in the data below already assume the following:
o Increase in sales and cost of goods sold10%
o Selling and administrative expenses11% of sales
o Average collection period45 days
o Inventory (days sales) 72 days
o Accounts payable75% of the 2007
Part - A. In an Excel spreadsheet, common size the attached data for 2006, 2007 and 2008 projections for the:
a. Income statement
b. Balance sheet
Part - B.Calculate case ratios for 2006, 2007 and 2008.
Including the following:
Quick ratio
Current Ratio
Inventory Turnover
Average Collection Period
Return on Equity
Debt to total assets (Debt Ratio)
Times Interest earned
Income Statements Thousands of Dollars Katie's Construction Peer Com. Size 2006 2007 Net Sales Cost of goods sold Gross Profit 81,950 66,000 15,950 83,875 70,950 12,925 Proj. 2008 101,488.75 85,849.5 15,639.25 100.00 S & A Expenses Depreciation Operating Profit 8,360 1,100 6,490 9,997.9 902 2,025.1 11,163.762 3,430.488 1,125.3 2,305.188 775.5 Interest Expense Pre-Tax Profit 1,322.2 702.9 1,942.93 3,771.57 238.986 463.914 783.764 1,521.424 After Tax profit Dividends Retained Earnings 165 298.914 660 861.424 2,394.37 No. of Shares Stock Price/Share 1,450 1,450 1,450 Balance Sheets housands of Dollars Katie's Construction Peer Com. Size 2006 Proj. 2008 1,760 1,427.8 13,200 20,900 35,527.8 1,760 Accounts Receivable Inventory Total Current Assets 14,609.1 24,509.1 15,381.3 28,691.3 7,156.6 42,684.4 6,832.1 Net Fixed Assets Total Assets 8,760.4 37,451.7 Accounts Payable Notes Payable Accruals Total Current Liabilities 4,620 2,256.1 2,255 8,800 8,250 3,242.8 20,292.8 4,290 3,567.08 14,457.08 5,380.1 Long Term Debt Total Liabilities 5,262.4 25,555.2 5,148.704 19,605.784 16,830 31,341.2 17,129.2 42,684.4 17,845.916 Common Equity Total Liabilities & EquityExplanation / Answer
Quick ratio=(Current assets-Inventories)/Current liabilities 2006 2007 2008 Current assets 24509.1 35527.8 28691.3 Less: inventories 14609.1 20900 15381.3 9900 14627.8 13310 Current liabilities 9131.1 20292.8 14457.08 Acid-test ratio 1.08 0.72 0.92 Current ratio=Current asset/Current liabilities 2006 2007 2008 Current assets 24509.1 35527.8 28691.3 Current liabilities 9131.1 20292.8 14457.08 Current ratio 2.68 1.75 1.98 Inventory turnover=Sales/ inventory 2006 2007 2008 Net sales 81950 83875 101488.75 Inventory 14609.1 20900 15381.3 Inventory turnover ratio 5.61 4.01 6.60 Average collection period=365/Accounts receivable turnover ratio Accounts receivable turnover ratio=Sales/ accounts receivable 2006 2007 2008 Net sales 81950 83875 101488.75 Accounts receivable 8140 13200 11550 Receivable turnover ratio 10.07 6.35 8.79 No.of days 365 365 365 Average collection period 36.26 57.44 41.54 Return on equity=Net income /Total equity 2006 2007 2008 Net income (a) 3771.57 463.914 1521.424 Total equity (b) 16830 17129.2 17845.916 Return on equity (a)/(b) 22.41% 2.71% 8.53% Debt to total assets=Long-term debt/Total assets 2006 2007 2008 Long-term debt 5380.1 5262.4 5148.704 Total assets 31341.2 42684.4 37451.7 Debt to total assets 0.17 0.12 0.14 Times interest earned=EBIT/Interest 2006 2007 2008 EBIT (Operating profit) 6490 2025.1 3430.488 Interest expense 775.5 1322.2 1125.3 # of times interest earned 8.37 1.53 3.05
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