Just need Questions 5 and 6 answered and explained. CASE 2 Chem-Med Company Apri
ID: 2564137 • Letter: J
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Just need Questions 5 and 6 answered and explained.
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 bunchExplanation / Answer
5. Average Accounts receivables collection period= 365/Accounts receivables turnover ratio where, accounts receivables turnover ratio= Net credit sales/(Average Accounts receivables) and average accounts receivables=( Opening a/cs. receivables+Closing a/cs. receivables)/2 Accordingly, Year 2007 2008 2009 2010 Net credit sales--------1 3814 5340 7475 10466 Av. Accounts receivables---2 (409+564)= (564+907)= (907+1495)= (1495+2351)= 973 1471 2402 3846 Accounts receivables turnover ratio ----3=-----1/2 3814/973= 5340/1471= 7475/2402= 10466/3846= 3.92 3.63 3.11 2.72 Collection period--365 days/(Item 3) 93 101 117 134 The period is getting longer from the years 2007- 2010. It means that receivables are pending collections from customers this longer no.of days -- consequently cash inflow to the company is hindered& the company may have to borrow funds for operations from outsiders at costlier rates. 6 ROE= Net Income/Total equity (Chem-Med) 1150/3877= 29.66% Pharmacia 29.56% Industry average 12.29% As per Du-Pont equation: ROE=Profit Margin* AssetT.O./(1-Debt to Assets) (Chem-Med) Net Income/Sales*Sales/Total Assets/(1-Debt/Total Assets) (1150/3814)*(3814/4491)/(1-(614/4491)) 0.3015*0.8493/(1-0.1367) 29.66% Pharmacia ROE= Return on sales*Total assets turnover*/(1-total debt to assets) ie. 7%*1.9/(1-0.55) 0.2955556 29.56% Profit margin Assets T.o. Debt to assets ROE Chem-Med 30.15% 0.85 0.14 29.66% Pharmacia 7% 1.9 0.55 29.56% Analysis of the Du-Pont equation for ROE Net profit margin is very high for Chem-Med compared to Pharmacia $ sales generated per $ of assets empoyed is more for Pharmacia--ie. It uses its assets more efficiently than Chem-Med. Debt finances only 14% of the total assets(balance by equity funds) of Chem -Fed whereas, debt finances 55% of the total assets & balance 45% is funded by equity,in Pharmacia. Concluding, Sources of ROE is the higher net income for Chem-Med Sources of ROE is the better asset utilisation ,ie. Generation of more sales for Pharmacia Chem-Med is actually doing well with good operating results.
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