Name Kumar Rajatdiwang

Question 1

1A.

For the year 2006, the overall cash flow from operations will be $2,26,000.

Furthermore, the company's account receivable climbed rapidly from $920000 to $4185000 between 2003 and
2006, showing that the company is selling more on credit than in cash, which has impacted cash inflow. During
the same time period, cash flow from operations decreased from $2109000 to $226000, a nearly 10-fold decline
in cash flow from operations and a significant reduction in cash on hand. The decrease in change in cash to the
extent of cash flow from activities has not been aided by the other heads. As a result, operating cash flow has
been a significant contributor to the company's success.

Q1 B)

Operating cash flow and investment cash flow both show a downward trend, with cash flows falling from $2109
to $226 and $-2135 to $-1398, respectively. The financing cash flow climbed for the first two years before
declining to 969 in the fourth year, demonstrating that the corporation has reduced its cash flow from operations
while also lowering its investment spending over time. In addition, because it was unable to generate enough
income from operations, the corporation had to raise capital through debt and equity to satisfy its investing needs.

Reason:

1) Operating Cash Flow: From 2003 to 2006, Accounts Receivable climbed from $3485 to $14471, contributing
significantly to the rise or decrease in operating cash flow.

2) Cash Flow from Investing: Since 2004, the Company has stopped investing in land, resulting in a significant
reduction in cash outflow from investing activities.

3) Cash Flow Financing: The corporation had to finance its expansion through the issuing of debt and shares.
Borrowing money through debt financing has resulted in a rise in the amount of money coming in from financing
operations in the second and third years. In comparison to 2004 and 2005, the corporation borrowed funds and
retired more of its debt for the fourth year, resulting in a lower cash inflow. As a result, debt issuance has resulted
in a significant change in cash flow for financing activities.

1C.

Because the net inflow from operating activities ($226) is smaller than the net outflow from investing activities
($-1398), the company will be unable to fund its growth entirely through operating activities. The corporation will
need to invest more than $ 226 in order to finance its growth, whether through equity or debt. The company is not
self-funding its investments since it is unable to cover all of its financing needs through operating activity inflow.

Furthermore, because the company does not self-finance its investment, it must rely on a combination of
operating and financing cash flows to fund it. In this scenario, or in the year 2006, the company is expected to
create $226 in operating cash flows. Its outflow from investing activities, on the other hand, is $1398. As a result,
the company's balance has been raised through financing activity.

Furthermore, the company has a negative change in of $203, indicating that it has not earned any excess cash.
Instead, it has spent more money than it has made.

Furthermore, free cash flow is the balance in operating cash flow after all of the company's investment needs have
been met. The corporation has invested more than it has generated from operating cash flows in this instance. As
a result, it has no free cash flows.
Question 2

2A.

The Operating income from 2002 – 2006 is $29700.

Operating
Year Income
2002 4539
2003 4227
2004 5123
2005 6917
2006 8894
Total $29700

2B.

The Working capital/sales ratio are given below in tabular form.

Header 2002 2003 2004 2005 2006 Total

Working capital 4539 4227 5123 6917 8894 29700
Sales 24652 26797 29289 35088 42597 158423
Working capital/sales 0.18412 0.1749
ratio 3 0.157742 12 0.197133 0.208794 0.187473

2C.

DSO

Year
Header
2002 2003 2004 2005 2006
Accounts
3485 4405 6821 10286 14471
Receivable
Sales 24652 26797 29289 35088 42597
Daily sales 68.47777778 74.43611111 81.35833333 97.46666667 118.325
DSO 50.89242252 59.17826622 83.83898392 105.5335157 122.299

DIO

Year
Header
2002 2003 2004 2005 2006
Inventories 3089 2795 3201 3291 3847
 Cost of Goods
20461 21706 23841 28597 35100
Sold
Daily sales 56.83611111 60.29444444 66.225 79.43611111 97.5
DIO 54.34924979 46.35584631 48.33522084 41.42952058 39.4564

DPO

Year
Header
2002 2003 2004 2005 2006
Accounts
2034 2973 4899 6660 9424
Payable
Cost of Goods
20461 21706 23841 28597 35100
Sold
Daily sales 56.83611111 60.29444444 66.225 79.43611111 97.5
DPO 35.78710718 49.30802543 73.97508494 83.84096234 96.6564

2D.

The implication of long-term credit limit given to dealers by company indeed increases in accounts receivable
resulting in less cash inflow. If suppose we have given credit to dealer for longer period over the period time
account receivable increases.
Question 3

3.

Economic Balance sheet.

Year 2002 2003 2004 2005 2006

Accounts Receivable 3485 4405 6821 10286 14471
Inventories 3089 2795 3201 3291 3847
Plant, Property, & Equipment
2257 2680 2958 3617 4347
(net)
Land 450 1750 2853 2853 2853
Accounts Payable -2034 -2973 -4899 -6660 -9424
Capital Invested Total $7247 $8657 $10934 $13387 $16094
Year 2002 2003 2004 2005 2006
Other Assets -645 -645 -645 -645 -645
Cash -705 -1542 -1818 -2158 -1955
Current Portion of Long-term
315 352 525 730 649
Debt
Long-Term Debt 3258 4400 5726 7123 8480
Shareholders’ Equity 5024 6091 7146 8336 9563
Total $7247 $8657 $10934 $13387 $16094

Capital Employed.

Year 2002 2003 2004 2005 2006

Current Assets 7279 8742 11839 15735 20273
Current Liabilities 2349 3325 5423 7390 10074
Capital Employed $4930 $5417 $6416 $8345 $10199
Question 4

4A.

Profitability ratio:

Profitability Ratios 2002 2003 2004 2005 2006

Variable Margin 17% 19% 19% 18% 18%
Operating Margin 7% 9% 8% 8% 7%
Return on Equity 24% 21% 18% 18% 16%
Return on Average Capital
Employed 13% 11% 9% 8% 7%

4B.

Return on Equity is decreasing on yearly basis. It is observed that the company’s net profit is decreasing which is
resulting in equity share holders pumping money into the company every year. This has resulted in the increase in
share holders fund and the decrease in net income has ultimately leading to decrease on yearly basis.

4C.

ROACE is decreasing on yearly basis, The two factors affecting ROACE is Operating margin and Capital
employed turnover ratio. Also, CE turnover ratio is decreasing over the period of time (yearly basis) indicating
that the conversion capacity of capital employed to sales is decreasing, indicating that the company is not using its
capital employed efficiently.
Question 5

5.

Pros:

1) The company's sales increased.

2) The company's gross profit has increased as a result of increased sales.

Cons:

1) The increase in credit period has resulted in a fall in cash inflow for the company, resulting in a reduction in the
company's cash position.

2) Increased debt financing has resulted in a fall in net profit for the company, affecting shareholder returns.

Furthermore, from 2002 to 2006, the business's asset turnover ratio was more than 4 times, which is a positive
sign, showing that the company is earning strong returns on its asset investments. However, the financial leverage
for 2006 was 1.08 times, indicating that the company is riskier. Additionally, the operating leverage is lower
below industry standards. As a result, if the corporation cannot improve the ratios in a 2-3 year, according to my
study, the project should be abandoned.