CASE 2 Chem-Med Company April 9, 2008: Dr. Nathan Swan, age 40, chairman of the

Question

CASE 2 Chem-Med Company April 9, 2008: Dr. Nathan Swan, age 40, chairman of the board of directors, chief executive officer, and founder of the Chem-Med Company, sat back in his chair and wondered if he wouldn't have been better off staying in his old job of teaching biochemistry Harvard University. This business, he thought, was getting to be a headache. Just a short time ago, it seemed, he was able to spend most of his time in the company's lab comfortably working with test tubes and formulas. Lately, though, all his waking hours (or so it seemed) were taken up with columns of figures, dollars, and spreadsheets. It was true that he wanted the company to make money and grow but he had no idea that the financial end of the business, about which he knew so of hard-nosed investors that the co was capable of making a lot of mc the next few years if t ust had more money now? (Dr. Swan was puzzled by the fact that Chem-Me growing and making money, but it seemed to have enough cash.) Dr. Med's origins and the events that to today. Chem-Med began operati 1997 after Dr. Swan complete developme commercia isolation of sodium hyaluronate (he referred to as HA), a naturally occ biological fluid that is useful i surgery and other medical and vet uses. The isolation process, comple proprietary to the company, in extracting and purifying HA from i combs. Initial seed money fo enterprise came from research grant Harvard University and the Department of Agriculture (Foo Drug Admin-istration), plus contrit from Dr. Swan's colleague and asso who were now classified as the com stock- holders (254 as of April 20 closely heldot traded publicly). Swan reflected back over little, would take up so much of his time Dr. Swan was a little mystified by financial matters. How did one describe a company in financial terms anyway? How did one tell if the company was in good or bad shape? (The amount of cash in the company's checking account didn't seem to be a sufficient indicator.) What on earth would one use to convince a bunch

Explanation / Answer

1 Rate of Sales Growth:

Rate of sales growth of Chem-Med company in 2007:

Sales in 2007=$3,814

Sales in 2006=$3,053

Rate of sales growth=(3814/3053)-1=0.249263

Rate of sales growth(Percent)=24.93%

Forecasted sales growth in 2008,2009 and 2010:

Sales

Rate of Sales growth

Rate of Sales growth(Percent)

Year2007

$3,814

            24.93%

Year2008

$5,340

0.400104877

40.01%

Year2009

$7,475

0.399812734

39.98%

Year2010

$10,446

0.397458194

39.75%

.2 Net Income Growth:

Net Income growth in 2007:

Net income in 2007=$1,150

Net income in 2006=$766

Rate of Net income growth=(1150/766)-1=0.501305

Rate of Net income growth(Percent)=50.13%

Forecasted Net income growth in 2008,2009 and 2010:

Net income

Net income growth

Percent Net income growth

Year2007

$1,150

            50.13%

Year2008

$1,609

0.399130435

39.91%

Year2009

$1,943

0.207582349

20.76%

Year2010

$2,903

0.494081318

49.41%

Projected income is growing slower than projected sales in 2008 and 2009, but it is growing faster than projected sales growth in 2010

Ratio of cost of goods sold to net sales in 2007=1040/3814=0.27

This ratio in 2008 is projected =1716/5340=0.32

Ratio of cost of goods sold to net sales in 2009=2154/7475=0.29

Ratio of cost of goods sold to net sales in 2010=3054/10446=0.29

The ratio of cost of goods sold to Net sales is high in 2008.

There is scope of adjustment of cost of goods sold which will increase net income

.3. Current Ratio

Current ratio of chem.-Med in 2007=Current assets/Current Liabilities=1720/593=2.900506

Current ratio of chem.-Med in 2007=2.9(rounded)

Current ratio of chem.-Med in 2010=Current assets/Current Liabilities=3261/1647=1.979964

Current ratio of chem.-Med in 2010=2.0(rounded)

Current ratio of Pharmacia in 2007=2.8

Industry Average current ratio in 2007=2.4

Current ratio of chem.-Med in 2007 is higher than Pharmacia and the industry average

Current ratio of chem.-Med in 2010=Current assets/Current Liabilities=3261/1647=1.979964

Current ratio of chem.-Med in 2010=2.0(rounded)

The current ratio of 2010 does not meet the criteria of the bank for financing (which is minimum 2.25). It is also lower than industry average current ratio

.4 Debt to asset Ratio

Debt to asset ratio=Total Liabilities/Total Assets

Calculation of Debt to asset ratios from 2007 to 2010 are given below:

A

B

C=A/B

Total Liabilities

Total assets

Debt to asset ratio

Year2007

$614

$4,491

0.13671788

Year2008

$857

$6,343

0.13510957

Year2009

$1,212

$8,641

0.140261544

Year2010

$1,664

$11,995

0.138724469

Rounded value (two decimal) of the ratio for each year are shown below:

Debt to asset ratio

Year2007

0.14

Year2008

0.14

Year2009

0.14

Year2010

0.14

Debt to asset ratio is constant throughout the priod

Industry average debt to asset in 2007=0.52

Chem-Med had lower debt in 2007 than industry average

Sales

Rate of Sales growth

Rate of Sales growth(Percent)

Year2007

$3,814

            24.93%

Year2008

$5,340

0.400104877

40.01%

Year2009

$7,475

0.399812734

39.98%

Year2010

$10,446

0.397458194

39.75%

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