1. Why has the stock price fallen despite the fact that net income has increased over the periods under review?
The stock price has fallen because the shareholders were worried about increasing debts and liabilities, that adding two manufacturing factories created and because of how much excesses inventory was created. Both of these changes would result in interest change of 44,000 to 155,000 that the company would have to pay, that impact on the company’s future earnings hurts the company’s image to stockholders causing them to worry.
2. Tabulate your results and briefly comment on the liquidity position of the company between the two periods.
2004
2003
Absolute Liquidity
5/895 = 0.005:1
= 40/355 = 0.11:1
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Jay needs to insure them that with time as people pay the cash account will increase and the company again will have more cash on hand. Also to ease their minds he may need to show the agreements he has with people on when they are supposed to pay and how much bad debt he has anticipated from those agreements.
5. Determine the free cash flow of the firm as well as the free cash flow to creditors and shareholders and interpret your results.
Free Cash Flow= EBIT – taxes + depreciation – change in NWC – capital exp
EBIT $ 393,500 Taxes -$ 95,400
Net Working Capital -$ 415,450 Free Cash Flow =$ -117,350
Free Cash Flow to Creditors = Int Expense - increase in new LTD Int Exp $ 155,000 New LTD -$ 1,026,280 FCF to Creditors = -$ 871,280
Free Cash Flow to Stockholders = Div. – increase in new equity Div $ 42,930 New Equity -$ 100,170
FCF to Stockholders = -$ 57,240
Free cash flow for the firm is negative, which can be expected since we has a large increase in working capital a lot of money is being tied up there at the moment because of those current acquisitions. The free cash flow to
Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.
To obtain Free Cash Flow For The Firm (FCFF), I added back the D&A, less
Although the company did show an increased gross profit of $8,255,000 with $6,358,000 less Net Sales in 2013 versus 2012, that increase is due to the reduction in product Cost of Goods Sold by $14,613,000. Since increases in product price will negatively affect sales, one of management’s primary goals is to keep prices stable. This objective is achieved through implementation of cost cutting programs, investing in more efficient equipment, and automation of more steps in the production process.
Given the net sales in 2011 is still higher than 2010, we can assume the problem is most likely with its operating cost management. On the other hand, HH’s assets turnover rate dropping 0.30 from 2010 suggests an inefficiency of generating more sales with its increased assets in 2011.
Life insurance is meant to provide funds to replace a breadwinner's to protect and support dependents. Chad and Haley are dependents, not income providers. Therefore, the purchase of life insurance is unnecessary and not recommended. The Dumonts should use the money they would spend on policies for the children to increase their own coverage.
2. What do the results say about how firms in this industry can deliver strong financial returns in different ways?
y. How much it has borrowed against its credit line and free cash flow( defined as net income plus depreciation less dividend payments)
Based on information given, we established the free cash flows from operations for Torrington, for the period 1999 to 2007. We made the assumption that net working capital was 7% of sales for Torrington, based on historic patterns. From this assumption, we found “Change in Net Working Capital” for the selected years. Next, we chose a value for “Capital Expenditures”, again based on historic patterns. From this we computed the “Free Cash Flows to the Firm”.
Depreciation: Depreciation was not included in the calculation of free cash flows because net CAPX was used.
Net income is not a sufficient indicator of the financial health of an entity. It only serves as a basis of allocation of expenses from the revenues that are generated for a certain financial period. It involves “noncash expenses,” specifically “depreciation and amortization of intangible assets” that reduces its value, but have no effect on the net cash flows of the business. It also differs with cash flow under the context of timing of revenue and expense versus the actual “occurrence” of cash flows (Williams, et al.). There are other considerations that must be probed at, such as the procurement of funds from credit facilities, the ability to pay short-term and long-term financial obligations, distribution of annual dividends, cash inflow and outflow from operating, financing and investing activities. Along with the income statement, balance sheet and critical analysis of several factors, the use of cash flow statement of the company serves an important indicator of the financial health and continuous operations of the business.
2. The single most important assessment in Cash Flows in the “cash flow from financial operations” because it provides an overlook on management’s operating decisions. In this case, we can see that Reebok had reported positive cash flows from operations, for example in 1990 reported $39.2M while LA Gear reported a negative (40M) the same year. Looking closely, we can see that LA Gear was retaining huge quantities of inventory while at the same time, not collecting enough money from customers (A/R). Hence we can conclude that for Reebok, operations was a source of cash but on the other hand, LA Gear was quite the opposite: operations was a use (or drain) of cash. Turning our attention to “cash flows from financing activities” we can see that more differences. Reebok is borrowing little money, instead it is paying loans. LA Gear is borrowing huge quantities of money, for example in 1990 it borrowed $56M. As a result of this, we can see where the money to finance
We are providing below the assumptions and other calculations we used while computing the WACC and the cash flows.
Support: The inventory increase in 1997, YOY, was 58%. Additionally, the COGS to revenue ratio reduced from to 72% in 1997. This combination of increase in inventory and reduction in COGS as a percentage of revenue seems to indicate that the fixed costs may have been spread over a larger base through over production, thereby causing the COGS to reduce. This may be a cause for concern and could be a potential red flag.
The cash flow situation started falling from the end of year 12. The company should have known from this.