FIN 610 Module Three Case Study Review: Koala Fun To respond to the following questions, you will need to review the Koala Fun case study on pp. 226-228 of your textbook,Working Capital Management: Applications and Case Studies; the questions were adapted from the same section of the textbook. Respond in complete sentences as appropriate. 1.Using the data in exhibits C2.1 and C2.3, calculate and analyze the firm's 2012 and 2013 ratios. Enter the ratios in the table below in the 2012 and 2013 columns, respectively: Ratio Type20122013 Current (times)3.733.43 Quick (times)2.391.83 Debt (%)37.66%35.32% Times interest earned (times)8.5111.62 Inventory turnover (times)6.404.80 Total asset turnover (times)2.782.71 Average collections period (days)54.9650.99 Return on equity (%)11.60%10.81% 2.Part of Owen's evaluation will consist of comparing the firm's ratios to the industry as shown in Exhibit C2.3 of the text. Discuss the limitations of such a comparative financial analysis. In view of these limitations, why are such industry comparisons so frequently made? (Note: Sales are forecast to be $8.25 million in 2014). Type a three- to four-sentence response below. a.As our textbook states, the main difficulty in using financial statement data is that each business has its unique characteristics, and when aggregated into an industry, data can lose meaning (CITATION). Companies can be strong in some ratios while weak in others, making it difficult to tell the company's overall strength. Another problem is that the choice of actual fiscal year-end closing is at the discretion of the management. Balance Sheets are published on an "as of" date. Industry comparisons are frequently made because financial ratios provide a standardized method with which to compare companies and industries. It helps level the playing field, making the information strictly about performance and not the size of the company or what their market share is. It is by no means a perfect formula, but it provides a baseline. 3.Owen thinks that the profitability of the firm has been hurt by Tessa's reluctance to use much interest-bearing debt. Is this a reasonable position? Explain. Type a three- to four-sentence response below. a.I think that the profitability of the firm has been hurt by Tessa's reluctance to use interest-bearing debt. The debt financing would bring in needed cash to not only help cover their current obligations (especially since their accounts receivable are constantly delayed) but to help expand the business without giving up equity in the company. While the debt must be repaid, the lender has no claim on the future profits of the
company; Tessa and Owen would receive a larger portion of the rewards since they didn't give up equity to receive the same financing, thus helping the profitability of the firm. 4.The case mentions that Tessa rarely takes trade discounts, which are typically 1½/10, net 30. Does this seem like a wise financial move? Explain. Type a three- to four-sentence response below. a.I do not think that it is a wise financial move for Tessa to not take the trade discounts. Tessa states "She wants to hold on to the cash for as long as possible". Regardless, she is going to have to pay the obligation. Getting into the habit of paying in the first 10 days will help the company save 1.5%; while that amount doesn't seem significant standalone, over time it will add up, creating seemingly new cash for the business. Additionally, Tessa should start offering these terms to her customers to receive cash quicker, lower the accounts receivable, and improve cash flow. 5.Is the estimate of $35 to $40 for Owen's shares a fair evaluation? Explain. Type a three- to four- sentence response below. a.I would say that the $35 to $40 for Owen's share is a fair evaluation. In 2012, when we take the total equity (common stock and retained earnings) price of $1,472,000 and divide it by 62,000 common shares, we get $23.74 per share. In 2013, taking the total equity of $1,862,600 and dividing it by 62,000 common shares, we got $0.04 per share. To fairly compensate Owen, he should receive a sum larger than the current share price he had as a founding partner. It should also be taken into consideration that sales are expected to increase to $8.25 million in 2014, making the company more valuable. This would make a share price of $35-40 a fair value.
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