Question 1.

 

b). From the information provided about dividends and earnings and from the Cash flow statement and Balance sheet, comment on long term and short sources of finance that Super Cheap Auto has used to expand the business from 2006 to 2007.

c)Calculate a ratio that will tell you how many times a year Super Cheap Auto turns over its inventory in 2007 (or, calculate the ratio that tells you the number of days it takes to turn over inventory). Comment on this aspect of working capital management.

d)Do you think Super Cheap should borrow more money to expand faster?
   Why? Explain you reasoning.

e). Assuming a share price of $4.50, calculate a Price Earnings (PE) ratio and a Dividend Yield ratio for Super Cheap Auto. Interpret these ratios and comment on the value of shares in Super Cheap Auto, given that sector average PE is 16.7 and sector average dividend yield is 3.7%. What does this tell us about the market’s expectations about growth in Super Cheap Autos share price?

Question 2.                                   

a) List 4 different types (groups) of people who are users of general purpose financial statements.

b) Select 2 different groups from your list in part (a) then compare and contrast their financial information needs. Discuss the benefits they would gain by reading and analyzing the financial statements. What limitations might each group find with this source of information?

c) For each of the following items, state whether it is either.

 

Answer 1.

Requirement a:

The following table exhibits that current ratio of the company is 1.72, whereas, its quick ratio is 0.20. The industrial benchmarks for current ratio and quick ratio are 1.76 and 0.78. It indicates that the company maintains sufficient current assets to cover all the current liabilities as per the industry benchmark. On the other hand, as the industry quick ratio is 0.78, the highly liquid assets of the company should cover almost 78% of the total liabilities. However, due to the shortage of cash funds and other highly liquid assets, the company can pay off only 20% of total liabilities through its highly liquid assets.

Liquidity Ratio:
Particulars	Super Cheap Ltd.	Industrial Benchmark
Current Assets	180742
Inventories	159880
Current Liabilities	105064
Current Ratio	1.72	1.76
Quick Ratio	0.20	0.78

It can be stated that though the company holds sufficient amount of current assets, the major portion of current assets are covered by inventories. It would create problem if the company would require cash or cash equivalent items to pay the current liabilities immediately. It can pay off all its current liabilities only when it would convert its inventories to sales.

Requirement b:

The table, given below, shows that in 2007, the company has financed its higher amount capital for operating business from short term funding than long term funding. The short-term funds are raised both from internal and external sources, but the long term funds are only raised through external debts.

Finance in 2007:
Particulars	Amount	Amount
Short Term Finance:
External:
Current Liabilities in 2007	105064
Add: Current Liabilities in 2006	75129	29935
Internal:
Profits Attributable	22332
Less: Dividends Paid	9579	12753
Total Short Term Finance		42688
Long Term Finance:
External:
Proceeds from Borrowings in 2006	264266
Less: Payments in 2006	259000
Balance Broowings in 2006	5266
Add: Brrowings in 2007	255950
Less: Payments in 2007	243750	17466
Internal:
Issue of Shares		0
Total Long Term Finance		17466
Total Finance in 2007		60154

Requirement c:

The inventory turnover ratio, calculated below, depicts that the company takes almost 143 days to convert its inventories into sold products. For this higher turnover period, the working capital of the company cannot rotate quicker. Therefore, the company should lower down the turnover period to improve its working capital management so that it can generate higher returns from faster rotation of working capital.

Inventory Turnover in Days:
Particulars	Amount
Inventories in 2007	159880
Inventories in 2006	135021
Average Inventory	147451
Cost of Sales of Goods	376733
Inventory Turnover Ratio	2.55
Inventory Turnover in Days	142.86

Requirement d:

It can be stated from the above table that debt-to-asset ratio and debt-to-equity ratio, both, have increased in 2007 from 2006. The debt-to-equity ratio is higher than 1 and debt-to-asset ratio is also above 0.5. It explains that the company is financing its capital more from debt funds. Further borrowings would increase the interest expense and lead the company bankruptcy. Hence, it should not borrow further capital for expansion.

Financial Leverage Ratio:
Particulars	2007	2006
Total Assets	314608	269476
Total Liabilities	190082	156546
Total Equity	124526	112930
Debt-to-Equity Ratio	1.53	1.39
Debt-to-Asset Ratio	0.60	0.58

Requirement e:

The following table depicts that the as per industry average the company should provide 16.7% earnings on the market price of stocks. However, the company uses to provide 42.86% earnings growth to its investors. Hence, from the perspective of P/E ratio, the company has outperformed the industry benchmark.

However, the dividend yield rate of the company is lower than the industrial benchmark. It denotes that the company has earned comparatively higher than the industry average, but has paid lower amount of dividend in comparison to industrial benchmark.

Market Performance:
Particulars	Super Cheap Ltd.	Industrial Benchmark
Share Price	$4.50
Earnings per Share	$0.105
Dividends paid per Share	$0.08
P/E Ratio	42.86	16.7
Dividend Yield Rate	1.78%	3.70%

Answer to Question 2:

Requirement a:

The four different types of people, who are users of general purpose financial statements, are listed below:

• Owners & Investors
• Employees
• Trade Creditors
• Consumers

Requirement b:

Details	Owners & Investors	Customers
Financial Information	Stockholders require information related to profitability and potentiality of the business.	The customers need information regarding company's ability to exist in the future and continue the operation.
Benefits	The information helps to evaluate the return generating capacity of the company.	The customers can evaluate whether the company would supply the product or service steadily in the future.
Limitations	Financial statements do not provide the market scenarios for the stocks.	Customers cannot estimate the change in future selling price from the financial statements.

Requirement c:

1) Assets

2) Equity

3) Asset

4) Expense

5) Liability

6) Asset

7) Asset

8) Liability

9) Asset

10) Liability

11) Revenue

12) Revenue

13) Equity

14) Expense

15) Expense

16) Liability

Bibliography:

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education