financial analysis

Business Finance

Question Description

You have three income statements and two balance sheets.You must conduct a complete financial analysis of the company as to its financing problem and whether the company is in good enough financial shape to obtain the AFN needed.You covered chapters in your Managerial Course that was entitled Financial Analysis, you have taken course entitled Financial Statement Analysis and Chapter 14 from pages 534 to 569 covers it again. At the end of your financial analysis should be your recommendation as to the solution to the company’s cash problem. (REMEMBER THAT THIS IS A FORECAST AND YOU ARE THE BANKER ADVISING YOUR CLIENT.)

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Cash Statement January Cash at the beginning$4.000 February $4.340 The Cash Statements March April $4.767 $3.580 May $4.273 Total Collection $18.840 Total Disbursments ($75.500) $64.260 ($78.833) $96.480 $107.460 $101.280 ($100.500) ($112.767) ($111.233) Cash at the end of the($52.660) month ($10.233) $747 ($1.727) ($5.680) Loan Necessary Interests $57.000 ($105) $15.000 ($285) $4.000 ($360) $6.000 ($380) $10.000 ($410) Cash after Loan $4.340 $4.767 $4.747 $4.273 $4.320 Cash Statement Between March 31 and September 30 Cash on March 31 Operational Activities Net Income Less Depreciation $3.580 $127.725 ($6.000) Less Increase in Account Receivable ($64.200) Increase in Inventory ($189.000) Decrease in Sales Commission payable ($3.333) Plus Decrease in Prepaid Expenses $600 Increase in Salary Payable $16.500 Increase in Power Payable $1.600 Increase in Interest Payable $2.770 Increase in Income Tax Payable$127.725 Cash Flow from Operational Activities $17.967 Financing Activities Increase in Notes Payable $99.000 Increase in Cash $116.967 June July August September $4.320 $4.120 $4.473 $4.093 $126.300 $156.120 $176.520 $197.760 ($128.500) ($167.767) ($174.900) ($192.167) $2.120 ($7.527) $6.093 $9.687 $2.000 ($460) $12.000 ($470) ($2.000) ($530) ($5.000) ($520) $4.120 $4.473 $4.093 $4.687 Easy Turn Toy Company Income Statements First Qtr. Second Qtr. 90.000 $270.000 120.000 $360.000 $5.400 $1.620 $7.200 $2.160 $262.980 $350.640 110.000 $110.000 $88.000 160.000 $160.000 $128.000 $11.000 $4.400 $6.600 $16.000 $6.400 $9.600 $6.000 $3.000 $3.000 $300 $2.700 $6.000 $3.000 $3.000 $300 $2.700 Total Factory Costs Incurred $235.000 $335.000 Less Ending Inventory @ $2.10 20.000 ($42.000) 60.000 ($126.000) Cost of Good Sold $193.000 $209.000 Selling Expenses Administration costs and expenses $45.000 $12.000 $60.000 $12.000 Total Expenses $250.000 $281.000 Net Margin from Operations $12.980 $69.640 Interest Earning before taxes $750 $12.230 $1.250 $68.390 Revenue Units Sold Gross Sales Less: Bad Debts (Provision) Discount Total Revenues Expenses Production Materals Direct Labor Factory Overhead Variable Costs Indirect Labor Power Supplies Misc. Fixed Costs Supervision Propery taxes Depreciation Insurance Miscelleneous Income taxes $6.115 $34.195 Net Profits $6.115 $34.195 Collection of Account Receivable and Disbursements be months January February 20.000 $60.000 30.000 $90.000 $19.200 $28.800 $36.000 ($360) ($540) Total Collection $18.840 $64.260 Expenses Production in Units Materals Safety Stock Direct Labor 26.667 ($26.667) ($30.000) ($10.667) 36.667 ($36.667) Indirect Labor ($1.000) Power Supplies Misc Supervision Costs ($1.600) ($1.000) Propery taxes Depreciation Insurance Miscelleneous Selling Commission ($900) ($1.667) Administration (costs & expenses) ($2.000) Total Disbursments ($75.500) Sales Units Revenue Collection Month of the Sales (32%) Next Month (60%) Second Month (8%) Discount on Sales ($14.667) ($10.667) ($1.500) ($1.000) ($1.067) ($2.200) ($1.000) ($1.000) ($900) ($2.500) ($1.667) ($2.000) ($2.000) ($78.833) Difference to find $31.200 Third Qtr. 200.000 $600.000 $12.000 $3.600 2,00% 0,60% $584.400 250.000 $250.000 $200.000 $1,00 $0,80 $25.000 $10.000 $15.000 $0,10 $0,04 $0,06 $6.000 $3.000 $3.000 $300 $2.700 $515.000 110.000 ($231.000) $284.000 $100.000 $12.000 $396.000 $188.400 $1.340 $187.060 16,67% $93.530 $133.840 $93.530 $133.840 March April May June July August September 40.000 $120.000 30.000 $90.000 40.000 $120.000 50.000 $150.000 60.000 $180.000 60.000 $180.000 80.000 $240.000 $38.400 $54.000 $4.800 $28.800 $72.000 $7.200 $38.400 $54.000 $9.600 $48.000 $72.000 $7.200 $57.600 $90.000 $9.600 $57.600 $108.000 $12.000 $76.800 $108.000 $14.400 ($720) ($540) ($720) ($900) ($1.080) ($1.080) ($1.440) $96.480 $107.460 $101.280 $126.300 $156.120 $176.520 $197.760 46.667 ($46.667) 50.000 ($50.000) 50.000 ($50.000) 60.000 ($60.000) 80.000 ($80.000) 80.000 ($80.000) 90.000 ($90.000) ($18.667) ($14.667) ($2.000) ($1.500) ($1.467) ($2.800) ($1.000) ($1.000) ($20.000) ($18.667) ($1.500) ($2.000) ($1.867) ($3.000) ($1.000) ($1.000) ($3.000) ($20.000) ($20.000) ($2.000) ($1.500) ($2.000) ($3.000) ($1.000) ($1.000) ($24.000) ($20.000) ($2.500) ($2.000) ($2.000) ($3.600) ($1.000) ($1.000) ($32.000) ($24.000) ($3.000) ($2.500) ($2.400) ($4.800) ($1.000) ($1.000) ($3.000) ($32.000) ($32.000) ($3.000) ($3.000) ($3.200) ($4.800) ($1.000) ($1.000) ($36.000) ($32.000) ($4.000) ($3.000) ($3.200) ($5.400) ($1.000) ($1.000) ($900) ($3.333) ($2.500) ($2.000) ($2.000) ($900) ($2.500) ($3.333) ($2.000) ($2.000) ($900) ($3.333) ($2.500) ($2.000) ($2.000) ($900) ($4.167) ($3.333) ($2.000) ($2.000) ($900) ($5.000) ($4.167) ($2.000) ($2.000) ($900) ($5.000) ($5.000) ($2.000) ($2.000) ($900) ($6.667) ($5.000) ($2.000) ($2.000) ($100.500) ($112.767) ($111.233) ($128.500) ($167.767) ($174.900) ($192.167) The Balance Sheet Easy Turn Toy Company Balance Sheet on September 30 Assets Cash in the Bank $116.967 Account Receivable $158.400 Allowance for Uncollectibles ($24.600) $133.800 Inventories Safety Stock Finished Goods $30.000 $231.000 Prepaid Insurance $261.000 $1.500 Plant and Equipment$190.000 Allowance for Depreciation ($9.000) $181.000 Total Assets $694.267 Liabilities Factory wages and salaries Sales Commission and expense Admistration Costs Accrued Property Taxes Accrued Accounts payable (Power) Interest Payable Income Tax Payable Notes Payable Total Liabilities $40.000 $6.667 $2.000 $3.000 $3.600 $3.520 $133.840 $149.000 $341.627 Equity Capital Stock Retained Earnings Total Equity $250.000 $133.840 $383.840 Total Liabilities and Equity $725.467 The Finanvial Analysis Gross Profit Gross Sales Total Assets EBIT Net Income Total liabilities 100770 230000 520000 103020 50385 481500 Profitability Ratio Gross Margin 0,4381304 Operating Margin 0,4479130 Net Margin 0,2190652 Asset Turnover 0,4423077 Market Equity 250000 Bank Management Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Bank Management 8e Timothy W. Koch University of South Carolina S. Scott MacDonald Southern Methodist University Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Bank Management, Eighth Edition © 2015, 2010 Cengage Learning Timothy W. Koch and S. Scott MacDonald WCN: 02-200-203 Vice President, General Manager: Balraj S. Kalsi Product Director: Joe Sabatino Product Manager: Clara Goosman Content Developer: Theodore Knight Senior Product Assistant: Adele Scholtz Marketing Manager: Heather Mooney Managing Media Developer: Scott Fidler Manufacturing Planner: Kevin Kluck Intellectual Property Analyst: Christina Ciaramella Project Manager: Betsy Hathaway Art and Cover Direction, Production Management, and Composition: Integra Software Services Pvt. Ltd. Cover Image: © Tijana Lubura/Dreamstime.com ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher. For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706. For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions. Further permissions questions can be e-mailed to permissionrequest@cengage.com Library of Congress Control Number: 2014940665 ISBN: 978-1-133-49468-3 Cengage Learning 20 Channel Center Street Boston, MA 02210 USA Cengage Learning is a leading provider of customized learning solutions with office locations around the globe, including Singapore, the United Kingdom, Australia, Mexico, Brazil, and Japan. Locate your local office at: www.cengage.com/global. Cengage Learning products are represented in Canada by Nelson Education, Ltd. To learn more about Cengage Learning Solutions, visit www.cengage.com. Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com. Printed in the U nited States of America Print N umber: 01 Print Year: 2014 Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Dedication To Susan, Michala and Andy for all the joys of family. Timothy W. Koch To my family, Becky, Cassy, Erin, Jeff and Weston for their never-ending support and encouragement. S. Scott MacDonald Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xx Chapter 1 Banking and the Financial Services Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Global Financial Crisis of 2007–2009 2 How Do Banks Differ? 7 Organizational Structure 15 Financial Services Business Models 18 Too Big to Fail Banks 23 Different Channels for Delivering Banking Services Summary 26 Questions 27 Activities 28 References 28 25 Chapter 2 Government Policies and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Historical Bank Regulation 32 Goals and Functions of Depository Institution Regulation 32 Ensure Safety and Soundness and Provide an Efficient and Competitive System New Charters 35 Shortcomings of Restrictive Bank Regulation 44 Maintaining Monetary Stability and the Integrity of the Payments System 44 Efficient and Competitive Financial System 50 Too Big To Fail 60 Summary 63 Questions 64 Activities 65 References 65 34 Chapter 3 Analyzing Bank Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Commercial Bank Financial Statements 69 The Relationship between the Balance Sheet and Income Statement The Return on Equity Model 91 Managing Risk and Returns 100 Financial Statement Manipulation 131 Summary 134 Questions 134 Problems 136 References 137 Appendix 139 90 vi i Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. viii Contents Chapter 4 Managing Noninterest Income and Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . 159 Noninterest Income 164 Noninterest Expense 169 Which Lines of Business and Customers Are Profitable? Summary 184 Questions 185 Activity 186 References 186 174 Chapter 5 The Performance of Nontraditional Banking Companies . . . . . . . . . . . . . . . . . . . . . . 189 The Disappearance of Large Investment Banks 191 Goldman Sachs Group, Inc., and Goldman Sachs Bank USA 193 The Financial Performance of Mutual of Omaha Bank 202 The Financial Performance of BMW Financial Services and BMW Bank of North America Summary 209 Questions 210 Activities 210 References 211 205 Chapter 6 Pricing Fixed-Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 The Mathematics of Interest Rates 214 Simple versus Compound Interest 217 The Relationship between Interest Rates and Option-Free Bond Prices 219 Duration and Price Volatility 224 Recent Innovations in the Valuation of Fixed-Income Securities and Total Return Analysis Money Market Yields 233 Summary 236 Questions 237 Activities 239 References 240 229 Chapter 7 Managing Interest Rate Risk: GAP and Earnings Sensitivity . . . . . . . . . . . . . . . . . . . 241 Measuring Interest Rate Risk with GAP 245 Earnings Sensitivity Analysis 263 Income Statement GAP 272 Managing the GAP and Earnings Sensitivity Risk Summary 275 Questions 276 Activities 279 References 281 274 Chapter 8 Managing Interest Rate Risk: Economic Value of Equity . . . . . . . . . . . . . . . . . . . . . . . 283 Measuring Interest Rate Risk with Duration Gap 285 Economic Value of Equity Sensitivity Analysis 295 Earnings Sensitivity Analysis versus EVE Sensitivity Analysis: Which Model Is Better? 298 Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Contents ix A Critique of Strategies for Managing Earnings and Economic Value of Equity Sensitivity Yield Curve Strategies 303 Summary 305 Questions 305 Activity 307 References 307 301 Chapter 9 Using Derivatives to Manage Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 Characteristics of Financial Futures 310 Speculation versus Hedging 319 Microhedging Applications 327 Macrohedging Applications 330 Using Forward Rate Agreements to Manage Rate Risk Basic Interest Rate Swaps as a Risk Management Tool Interest Rate Caps and Floors 342 Summary 357 Questions 357 Activities 361 References 364 333 335 Chapter 10 Funding the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 The Relationship between Liquidity Requirements, Cash, and Funding Sources Characteristics of Retail-Type Deposits 370 Characteristics of Large Wholesale Liabilities 379 Electronic Money 390 Check 21 392 Measuring the Cost of Funds 395 The Average Historical Cost of Funds 396 Funding Sources and Banking Risks 403 Summary 405 Questions 406 Problems 408 References 409 366 Chapter 11 Managing Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 Meeting Liquidity Needs 414 Reserve Balances at the Federal Reserve Bank 418 Required Reserves and Monetary Policy 418 Meeting Legal Reserve Requirements 421 Liquidity Planning 427 Traditional Aggregate Measures of Liquidity Risk 433 Basel III and the Liquidity Coverage Ratio 436 Longer-Term Liquidity Planning 437 Contingency Funding Plans 442 Summary 445 Questions 445 Activity 447 References 447 Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. x Contents Chapter 12 The Effective Use of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 Why Worry about Bank Capital? 450 Risk-Based Capital Standards 451 What Constitutes Bank Capital? 458 Tangible Common Equity 461 What Is the Function of Bank Capital? 463 How Much Capital Is Adequate? 466 The Effect of Capital Requirements on Bank Operating Policies Characteristics of External Capital Sources 471 Contingent Convertible Capital 472 Capital Planning 474 Depository Institution Capital Standards 478 Changes to Capital Standards Under Basel III 478 Summary 481 Questions 481 Problems 483 References 484 467 Chapter 13 Overview of Credit Policy and Loan Characteristics . . . . . . . . . . ...
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