Name Debangana Baruah

Question 1

1 A. The expected profit for 2006E is 1534. Net profit is the difference between revenue and expenditure
earned by the firm over the year, whether cash or accrual. The cash flow statement, on the other hand,
displays how much money the firm has created. The real amount of cash created through cash flow from
operations is 226 percent of the net profit.

The company's cash flow statement reveals that total cash earned has been declining since 2003. Heavy
investment in fixed assets and giving long-term loans to borrowers are the causes of this downturn. As a
result, the drop is mostly due to cash flow from operations and cash flow from investment activities.

1 B. Cash flow from operational activities: In this part, the amount of change in accounts receivable has
increased over time, indicating that the debtor's processing time is too long and that the bulk of the
transactions are credit. Aside from that, the firm's current obligations are increasing, indicating that the
corporation has been relying on creditors to support its operations. Over time, the cash flow from operating
operations has decreased.

Increases in accounts receivable result in a drop in cash flow, whereas increases in accounts payable result in
a rise in cash flow. As a result, the significant variation in cash in and outflow may be attributed to changes in
working capital.
The company has been spending extensively in property, facilities, and equipment over the years, resulting in
cash outflow. This type of investment will be helpful in the future and may result in cash inflow. Because the
firm must invest considerably in fixed assets in the first year and this type of asset is employed for many
years, the cash outflow is decreasing year by year.

1 C. Cash Position: At the end of the year, the overall cash balance was negative, indicating that the firm did
not have enough cash to cover its operational needs. Current assets, on the other hand, can be liquidated to
generate cash.

Self-Financing of Investments: In this strategy, the corporation sells old assets in order to purchase new ones,
hence minimizing the company's cash outflow. The corporation can keep its existing assets while replacing
them with new ones.

Investment funding: Instead of issuing debt or borrowing money, the management might invest using the
reserve and surplus. This will assist the organisation maintain a positive cash flow by lowering the cost of
financing.

Question 2

2 A. Operating Working Capital

2002 2003 2004 2005 2006

Current Assets 7,279.00 8,742.00 11,839.00 15,735.00 20,273.00

Current Liabilities 2,349.00 3,325.00 5,423.00 7,390.00 10,074.00

Operating Working Capital 4,930.00 5,417.00 6,416.00 8,345.00 10,199.00

2 B. Operating Working Capital/Sales Ratio

2002 2003 2004 2005 2006

Operating Working Capital 4,930.00 5,417.00 6,416.00 8,345.00 10,199.00
Sales 24,652.00 26,797.00 29,289.00 35,088.00 42,597.00
Operating Working Capital/ Sales
Ratio 20% 20.21% 21.91% 23.78% 23.94%

2 C. Days Inventory Outstanding (DIO)

2002 2003 2004 2005 2006

Inventories 3,089.00 2,795.00 3,201.00 3,291.00 3,847.00
20,461.0 21,706.0 23,841.0
COGS 0 0 0 28,597.00 35,100.00
# Of days in a year 365 365 365 365 365
DIO 55 47 49 42 40

Days Sales Outstanding (DSO)

2002 2003 2004 2005 2006
Accounts Receivable 3,485.00 4,405.00 6,821.00 10,286.00 14,471.00
Sales 24,652.00 26,797.00 29,289.00 35,088.00 42,597.00
# Of days in a year 365 365 365 365 365

DSO 52 60 85 107 124

Days Payable Outstanding (DPO)

2002 2003 2004 2005 2006

Accounts Payable 2,034.00 2,973.00 4,899.00 6,660.00 9,424.00
COGS 20,461.00 21,706.00 23,841.00 28,597.00 35,100.00
# of days in a year 365 365 365 365 365

DPO 36 50 75 85 98

2 D. The Company's extended credit duration for its dealers had a beneficial influence on operational working
capital. Assuming no other variables influenced sales growth over the period, we may conclude that sales
grew as a result of lengthier payment terms for dealers. As a result, the dealers were eager to acquire more.

Question 3

BALANCE SHEET

Liabilities & Shareholders’ Equity

Particulars 2002 2003 2004 2005 2006

Shareholders’ equity 5,024 6,091 7,146 8,336 9,563

Long-Term Debt 3,258 4,400 5,726 7,123 8,480

Current portion of long-term debt 315 352 525 730 649

Accounts Payable 2,034 2,973 4,899 6,660 9,424

Current Liabilities 2,349 3,325 5,423 7,390 10,074

Total Liabilities & Shareholders’ Equity 10,631 13,817 18,295 22,850 28,117

Assets

Cash 705 1,542 1,818 2,158 1,955

Accounts Receivable 3,485 4,405 6,821 10,286 14,471

Inventories 3,089 2,795 3,201 3,291 3,847

Current Assets 7,279 8,742 11,839 15,735 20,273

Plant, Property, & Equipment (net) 2,257 2,680 2,958 3,617 4,347

Other Assets 645 645 645 645 645

Land 450 1,750 2,853 2,853 2,853

Non-Current Assets 3,352 5,075 6,456 7,115 7,844

Total Assets 10,631 13,817 18,295 22,850 28,117

 Capital employed 2002 2003 2004 2005 2006
Total assets – *current liabilities 10631- 13817- 18295- 22850- 28117-

4698 = 6650 = 10847= 14780= 20147=

5933 7167 7448 8070 7970

Question 4

4 A. Profitability Ratios

1) Variable margin = (Gross Profit / Sales) x 100

2) Operarting margin = (Operating Profit / Sales) x 100

Calculation of Variable &

Operating margin 2002 2003 2004 2005 2006E
A Sales 24,652 26,797 29,289 35,088 42,597
B Gross Profit 4,191 5,091 5,448 6,491 7,497
C Operating Profit 1,641 2,338 2,408 2,836 3,018

B / A x 100 Variable margin (%) 17.00% 19.00% 18.60% 18.50% 17.60%

C / A x 100 Operating margin (%) 6.66% 8.72% 8.22% 8.08% 7.09%

3) Return on Equity = (Net Income / Total Shareholder's Equity) x 100

Calculation of Return on
Equity 2002 2003 2004 2005 2006E
A Net Income 1,191 1,293 1,279 1,488 1,534
B Total Shareholder's Equity 5,024 6,091 7,146 8,336 9,563
C = A / B x 100 Return on Equity (ROE) 23.71% 21.23% 17.90% 17.85% 16.04%
4) Return on Average Capital Employed = (EBIT / Average Capital Employed) x 100

Calculation of Return on Average

Capital Employed 2002 2003 2004 2005 2006E
A EBIT 1,641 2,338 2,408 2,836 3,018

Average Capital Employed

Total Shareholder's Equity 5,024 6,091 7,146 8,336 9,563
Long term Debt 3,258 4,400 5,726 7,123 8,480
Total Capital Employed 8,282 10,491 12,872 15,459 18,043

Capital Employed at beginning of year 8,282 8,282 10,491 12,872 15,459

Capital Employed at end of year 8,282 10,491 12,872 15,459 18,043
B Average capital employed 8,282 9,387 11,682 14,166 16,751

C = A / B x 100 Return on Average Capital Employed 19.81% 24.91% 20.61% 20.02% 18.02%

4 B. Trend for ROE and Drivers for ROE

Calculation of Return on
Equity 2002 2003 2004 2005 2006E
A Net Income 1,191 1,293 1,279 1,488 1,534
Total Shareholder's
B Equity 5,024 6,091 7,146 8,336 9,563
C = A / B x 100 Return on Equity (ROE) 23.71% 21.23% 17.90% 17.85% 16.04%

The accompanying table shows that the ROE has decreased during the previous few years. From 23.71 percent in
2002 to 16.04 percent in 2006E, it has decreased.

The dupont analysis, which breaks down the ROE as follows, may be used to analyse the drivers of ROE.
ROE = (Net Profit / Sales) x (Sales / Assets) x (Assets / Total Shareholder's Equity) x (Assets / Total Shareholder's
Equity)

Net profit margin x Asset Turnover x Equity Multiplier Equals Return on Equity

The net profit margin displays net profitability, asset turnover displays the efficiency with which assets are used to
generate sales, and the equity multiplier displays the degree of leverage.

2002 2003 2004 2005 2006E

A Net Income 1,191 1,293 1,279 1,488 1,534
B Sales 24,652 26,797 29,289 35,088 42,597

C=A/Bx
100 Net Profit margin 4.83% 4.83% 4.37% 4.24% 3.60%

D Sales 24,652 26,797 29,289 35,088 42,597

E Total Assets 10,631 13,817 18,295 22,850 28,117
F=D/E Asset Turnover 2.32 1.94 1.6 1.54 1.51

G Assets 10,631 13,817 18,295 22,850 28,117

Total Shareholder's
H Equity 5,024 6,091 7,146 8,336 9,563
I=G/H Equity multiplier 2.12 2.27 2.56 2.74 2.94

The causes for the dropping ROE, as indicated in the table above, are:

1) Declining net profitability, as seen by a declining net profit margin.

2) A falling asset turnover ratio, indicating that the firm is no longer making optimal use of its assets (as compared to
previous years).
4 C. Trend in ROACE and drivers

Calculation of Return on Average Capital

Employed 2002 2003 2004 2005 2006E
A EBIT 1,641 2,338 2,408 2,836 3,018
B Average capital employed 8,282 9,387 11,682 14,166 16,751

C = A / B x 100 Return on Average Capital Employed 19.81% 24.91% 20.61% 20.02% 18.02%

The following table shows that, with the exception of 2003, ROACE has been falling over time. From 19.81 percent in
2002 to 18.02 percent in 2006E, it has decreased.

The primary cause of the decline in ROACE is -

1) Despite the fact that EBIT has improved over time, the downward trend in ROACE is mostly attributable to an
increase in average capital utilised. Over time, this has resulted in a decrease in ROACE. This demonstrates that the
corporation needed to raise its capital employed in order to develop its business (sales).

2) A diminishing asset turnover also indicates inefficiency in the use of assets to generate sales, resulting in greater
capital requirements.

Question 5

Two Pros:

1. Lower the indoor temperature by 6 to 8 degrees to save money on air conditioning

2. Insulate structures against heat and cold by reducing total heat absorption.

Two Cons:

1. The procedure for collecting money from vendors. They are extending the time for shops to pay for their
goods.

2. Ceres finances their company via debt.