Business Finance Homework Problem - Chapter Five.

Business Finance

Homework Problem - Chapter Five. This is a comprehensive problem that provides a review of the material covered in the course to date (particularly chapters 3,4, and 5).

Branson Bowling Equipment Company

Balance Sheet - December 31, 2011

Assets

Liabilities and Stockholder's Equity

Cash

$70,000

Accounts Payable

$3,080,000

Marketable Securities

Accrued Expenses

Accounts Receivable

4,200,000

Notes Payable (Due 9/26/12

Inventory

Bonds (10%)

Gross Plant and Equipment

Common Stock (2,380,000

Shares, par value $1.00

Accumulated Depreciation

Retained Earnings

1,652,000

Total Assets

$11,382,000

Total Liabilities and Stockholder's Equity

$11,382,000

Income Statement - 2011

Sales (All credit sales)

$9,800,000

Fixed Costs1

2,940,000

Variable Costs (0.60)

5,880,000

Earnings Before Interest and Taxes

980,000

Less: Interest

350,000

Earnings Before Taxes

$630,000

Less: Taxes @ 36%

226,800

Earnings After Taxes

403,200

Dividends (40% payout)

161,200

Increased Retained Earnings

$241,800

1 Fixed costs include both lease expenses of $280,000 and depreciation of $700,000

The table below shows selected ratios for the firms in this industry.

Profit margin

5.75%

Return on assets

6.90%

Return on equity

9.20%

Receivables turnover

4.35X

Inventory turnover

6.50X

Fixed asset turnover

1.85X

Total asset turnover

1.20X

Current ratio

1.45X

Quick ratio

1.10X

Interest coverage (TIE)

5.35X

Fixed charge coverage (FCC)

4.62X

Questions:

a) Use ratio analysis to analyze Branson Bowling Equipment company. Compute all of the ratios and compare them to the industry averages. Discuss the ratios in terms of the weaknesses and strengths. What recommendations can you make to improve Branson's performance. Note: Your analysis should go a bit beyond simply stating which ratios are lower or higher than the industry averages. Try to think about what these ratios mean.

Profit Margin: 403,200 / 9,800,000 = 4.11%

ROA: 630,000 / 11,382,000 = 5.53%

ROE: 403,200 / 2,380,000 = 16.94%

Rec. Turnover: 9,800,000 / 4,200,000 = 2.33

Inv. Turnover: 9,800,000 / 1,400,000 = 7

Fixed Asset Turnover: 9,800,000 / (8,400,000 -- 2,800,000) = 1.75

Total Asset: 9,800,000 / 11,382,000 = 0.86

Current Ratio: (70,000 + 112,000 + 4,200,000 + 1,400,000) /

(3,080,000 + 210,000 + 560,000)= 1.5

Quick Ratio: (70,000+112,000+4,200,000) / (3,080,000+210,000+560,000)= 1.14

Interest Coverage: 980,000 / 350,000 = 2.8

Fixed Charge Coverage: (980,000 + 280,000) / (280,000 + 350,000) = 2

The firm is currently operating with a net profit margin that is roughly 71.5% of its benchmarked competitors, indicating the firm is either not as financially or operationally strong, or both, as its competitors.

Misalignment of the receivables turnover rate, in comparison to benchmarked competitors, indicates that the firm's is lax on collecting on its receivables. Noting that the 100% of the firm's revenues are on credit, demonstrates that the firm may experience cash flow issues.

The firm's return on assets is below its competitors, however the higher profit margin may compensate for this disparity. If the profit margin were roughly equivalent to the benchmarks, then the lower return on assets would be cause for greater concern.