Grammy is considering purchasing Warehouse Distribution, Inc., a small- to mediu
ID: 2495919 • Letter: G
Question
Grammy is considering purchasing Warehouse Distribution, Inc., a small- to medium-sized warehouse distributor in Nashville, Tennessee. She wants a national distribution system to deliver product to grocery stores and gas station mini-marts. Warehouse Distribution, Inc., has the capability to operate in all 50 states. Grammy sent you to meet with the owners and report back to the board of directors whether or not an acquisition should be approved. She has two primary concerns that you must satisfy before being willing to move forward. First, is the company financially viable? Second, does Warehouse Distribution operate with biblical principles? You know the owners are active in their local church, but you need to know how that impacts their business. The year of 2012 turned out to be a good year financially for the business. But in the ensuring year, 2013, the company experienced a 5.3 percent sales reduction, where sales declined from $5.7 million to $5.4 million. The downturn then led to other financial problems, including a 50 percent reduction in the company’s stock price. The share price went from $36 per share at the end of 2012 to $18 per share at the conclusion of 2013! Financial information for Warehouse Distribution, Inc., for both years is shown below, where all the numbers, except for per-share data, are shown in $ thousands. Using what you learned in this chapter and Chapter 3, prepare a financial analysis of Warehouse Distribution, Inc., comparing the firm’s financial performance between the two years. In addition to the financial information included in the case, the company’s chief financial officer, Mike Smith, has estimated the company’s average cost of capital for all its financing to be 10.5%. Based on your analysis would you recommend doing business with Warehouse Distribution, Inc., based on their financial strength? Support your recommendation because the board will want to know why? What three questions will you ask the executive leaders of Warehouse Distribution, Inc. to evaluate whether or not they operate the company based on biblical principles? What answers would give you confidence that they do operate Warehouse Distribution on biblical principles?
Warehouse Distribution, Inc., Income Statements
2012
2013
Sales
$ 5,700
$ 5,400
Cost of goods sold
(3,700)
(3,600)
Gross Profits
$ 2,000
$ 1,800
Operating expenses:
Selling and G & A expenses
(820)
(780)
Depreciation expenses
(340)
(500)
Total operating expenses
$ (1,160)
$( 1,280)
Operating profits
$ 840
$ 520
Interest expense
(200)
(275)
Earnings before taxes (taxable income)
$ 640
$ 245
Income taxes
(230)
(65)
Net Income
$ 410
$ 180
Additional information:
Number of common shares outstanding
150
150
Dividends paid to stockholders
$120
$120
Market price per share
$36
$18
Warehouse Distribution Inc.
2012
2013
ASSETS
Cash
$300
$495
Accounts receivable
700
915
Inventories
600
780
Other current assets
125
160
Total current assets
$1,725
$2,350
Gross fixed assets
$4,650
$4,950
Accumulated depreciation
(1,700)
(2,200)
Net fixed assets
$2,950
$2,750
Total assets
$4,675
$5,100
LIABILITIES (DEBT) AND EQUITY
Accounts payable
$400
$640
Short-term notes payable
250
300
Total current liabilities
$650
$940
Long-term debt
1,250
1.325
Total liabilities
$1,900
$2,265
Common equity:
Common stock
$1,100
$1,100
Retained earnings
1,675
1,735
Total common equity
$2,775
$2,835
Total liabilities and equity
$4,675
$5,100
2012
2013
Sales
$ 5,700
$ 5,400
Cost of goods sold
(3,700)
(3,600)
Gross Profits
$ 2,000
$ 1,800
Operating expenses:
Selling and G & A expenses
(820)
(780)
Depreciation expenses
(340)
(500)
Total operating expenses
$ (1,160)
$( 1,280)
Operating profits
$ 840
$ 520
Interest expense
(200)
(275)
Earnings before taxes (taxable income)
$ 640
$ 245
Income taxes
(230)
(65)
Net Income
$ 410
$ 180
Additional information:
Number of common shares outstanding
150
150
Dividends paid to stockholders
$120
$120
Market price per share
$36
$18
Explanation / Answer
Answer:
To chech whetther the company is Financially viable or not we will have to do certain Accounting Ration analysis.
1. Current Ratio = Current Assets / Current Liabilities
2012 = 1725 / 650 = 2.65 : 1
2013 = 2350 / 940 = 2.50 : 1
Even if decrease in Current ratio in 2013 i.e. current assets of the company is 2.5 times than its current liabilities It means that company will be able to meet its current liabilities when they will be due. It also shows that the margin of safety available to cover the loss on sale or realisation of non-cash current assets.
2. Debt Equity Ratio = Long term Debt / Shareholder's Fund
2012 = 1250 / 2775 = .45 : 1
2013 = 1325 / 2835 = .47 : 1
Debt equity ratio measures the contibution of lenders relative to the contribution of Owners. Debt Equity ratio is also used as a measure of debt exposure i.e. the extent to which the firm has been financed by debt. This ratio should generally be less than 1 since it will show that the claims of owners are greater than those of lenders. In the current the year 2013 the ratio is only 0.47 : 1 it means that owners have greater claim than its lender.
3. Interest Coverage Ratio = Earning Before Interest and Tax / Interst Charges
2012 = 840 / 200 = 3.82
2013 = 520 / 275 = 1.89
This ratio reflect the number of times that a company's interest cahrges are covered by its earning before interest and taxes (EBIT). It is an indicator of the long term solvency of the firm in the the sense that it shows the ability of a firm to meet its debt service cost out of current earnings.
In the present company the Interest-Coverage ratio is 1.89 it means that the compnay is able to meet its debt service cost out of current earnings.
Profitabilty Ratio:
The key interest of owner of a business is the profitability. Profitability means the return achieved through the efforts of management on the the invested by owners of the comapny.
Gross Profit ratio = Gross Profit / Net Sales x 100
2012 = 2000 / 5700 x 100 = 35.09 %
2013 = 1800 / 5400 x 100 = 33.33 %
Net Profit Ratio = Net Profit / Sale X 100
2012 = 410 / 5700 x 100 = 7.19 %
2013 = 180/5400 x 100 = 3.33 %
The Net Profit ration of the comapny is 3.33% which much lower than its Gross profit ratio 33.33% it means that the the operating expenses needs to be analysed in order to identify controllable and uncontrollable expenses to increase the Net Profit ratio.
Return on Capital Employed = EBIT/Capital Employed
2012 = 840 / 2775 x 100 = 30.27%
2013 = 520 / 2835 X 100 = 18.34%
In 2013 the company has not operated with bibilical principles resulting in failure at every front.
By analysing the above ratios it can be concluded that the company is still financially viable even performance in current year is not as good as previous years however the sales and net profit of the company needs to be improved by analysing cause of failure in 2013.
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