Chapter 14

1. Chapter 14 Suggestions for Case Analysis PowerPoint Slides Anthony F. Chelte Western New England College Chapter 14 Wheelen/Hunger

2. Case Analysis Research: • Go beyond information in the case • Research environmental setting • Check decision date of case • Use information services • COMPUSTAT, Compact Disclosure, CD/International • www.hoovers.com • www.sec.gov Chapter 14 Wheelen/Hunger

3. Case Analysis Research: • Annual reports • 10K form • Income statements • Balance sheets • Cash flow statements • Economic conditions • Industry information Chapter 14 Wheelen/Hunger

4. Case Analysis Resources for Case Library Research: • Company Information: • Moody’s Manuals on Investment • Standard & Poor’s Register of Corporations, Directors, and Executives • Value Line’s Investment Survey • Findex: The Directory of Market Research Reports, Studies and Surveys Chapter 14 Wheelen/Hunger

5. Case Analysis Resources for Case Library Research: • Economic Information: • Business Cycle Development • U.S. Census Bureau • Current Business Reports • Economic Indicators • Long-Term Economic Growth • Monthly Labor Review • U.S. Industrial Outlook • Overseas Business Reports Chapter 14 Wheelen/Hunger

6. Case Analysis Resources for Case Library Research: • Industry Information: • Business Week • Fortune • Industry Survey • Industry Week • Forbes • Inc. Chapter 14 Wheelen/Hunger

7. Case Analysis Resources for Case Library Research: • Directory and Index Information: • Business Periodical Index • Directory of National Trade Associations • Encyclopedia of Associations • Funk and Scott’s Index of Corporations and Industries • Thomas’s Register of American Manufacturers • Wall Street Journal Index Chapter 14 Wheelen/Hunger

8. Case Analysis Resources for Case Library Research: • Ratio Analysis Information: • Almanac of Business and Industrial Financial Ratios • Annual Statement Studies • Dun’s Review • Industry Norms and Key Business Ratios Chapter 14 Wheelen/Hunger

9. Case Analysis Resources for Case Library Research: • Online Information: • www.hoovers.com • www.sec.gov • www.pathfinder.com • www.dbisna.com/dnb/dnbhome.htm • www.fuld.com • www.economist.com • www.w100.com • www.bloomberg.com Chapter 14 Wheelen/Hunger

10. Case Analysis Financial Analysis: • Ratio analysis • Liquidity ratios • Profitability ratios • Activity ratios • Leverage ratios Chapter 14 Wheelen/Hunger

11. Financial Ratio Analysis — Liquidity How Formula Expressed Meaning 1. Liquidity Ratios Current ratio Quick (acid test) ratio Inventory to net working capital Cash ratio Current assets ————————— Current liabilities Decimal Decimal Decimal Decimal A short-term indicator of the company’s ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities. Measures the company’s ability to pay off its short-term obligations from current assets, excluding inventories. A measure of inventory balance; measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory. Measures the extent to which the company’s capital is in cash or cash equivalents; shows how much of the current obligations can be paid from cash or near-cash assets. Current assets – Inventory ———————————— Current liabilities Inventory ——————————————— Current assets – Current liabilities Cash + Cash equivalents ——————————— Current liabilities Chapter 14 Wheelen/Hunger

12. Financial Ratio Analysis — Profitability How Formula Expressed Meaning 2. Profitability Ratios Net profit margin Gross profit margin Return on investment (ROI) Return on equity (ROE) Earnings per share (EPS) Net profit after taxes ————————— Net sales Percentage Percentage Percentage Percentage Dollars per share Shows how much after-tax profits are generated by each dollar of sales. Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit. Measures the rate of return on the total assets utilized in the company; a measure of management’s efficiency, it shows the return on all the assets under its control regardless of source of financing. Measures the rate of return on the book value of shareholders’ total investment in the company. Shows the after-tax earnings generated for each share of common stock. Sales – Cost of goods sold ————————————— Net sales Net profit after taxes ————————— Total assets Net profit after taxes ————————— Shareholders’ equity Net profit after taxes – preferred stock dividends ———————————— Average number ofcommon shares Chapter 14 Wheelen/Hunger

13. Financial Ratio Analysis — Activity How Formula Expressed Meaning Net sales ——————— Inventory 3. Activity Ratios Inventory turnover Days of inventory Net working capital turnover Asset turnover Fixed asset turnover Average collection period Accounts receivable turnover Accounts payable period Days of cash Decimal Days Decimal Decimal Decimal Days Decimal Days Days Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year. Measures the number of one day’s worth of inventory that a company has on hand at any given time. Measures how effectively the net working capital is used to generate sales. Measures the utilization of all the company’s assets; measures how many sales are generated by each dollar of assets. Measures the utilization of the company’s fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets. Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers. Indicates the number of times that accounts receivable are cycled during the period (usually a year). Indicates the average length of time in days that the company takes to pay its credit purchases. Indicates the number of days of cash on hand, at present sales levels. Inventory ——————————— Cost of goods sold ÷ 365 Net sales ————————— Net working capital Sales ————————— Total assets Sales ——————— Fixed assets Accounts receivable ————————— Sales for year ÷ 365 Annual credit sales ————————— Accounts receivable Accounts payable ———————————— Purchases for year ÷ 365 Cash ——————————— Net sales for year ÷ 365 Chapter 14 Wheelen/Hunger

14. Financial Ratio Analysis — Leverage How Formula Expressed Meaning 4. Leverage Ratios Debt to asset ratio Debt to equity ratio Long-term debt to capital structure Times interest earned Coverage of fixed charges Current liabilities to equity Total debt ——————— Total assets Percentage Percentage Percentage Decimal Decimal Percentage Measures the extent to which borrowed funds have been used to finance the company’s assets. Measures the funds provided by creditors versus the funds provided by owners. Measures the long-term component of capital structure. Indicates the ability of the company to meet its annual interest costs. A measure of the company’s ability to meet all of its fixed-charge obligations. Measures the short-term financing portion versus that provided by owners. Total debt ————————— Shareholders’ equity Long-term debt ————————— Shareholders’ equity Profit before taxes + Interest charges ———————————————— Interest charges Profit before taxes +Interest charges + Lease charges ———————————————— Interest charges + Lease obligations Current liabilities ————————— Shareholders’ equity Chapter 14 Wheelen/Hunger

15. Financial Ratio Analysis — Other How Formula Expressed Meaning 5. Other Ratios Price/earning ratio Dividend payout ratio Dividend yield on common stock Market price per share ————————— Earnings per share Decimal Percentage Percentage Shows the current market’s evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings. Indicates the percentage of profit that is paid out as dividends. Indicates the dividend rate of return to common shareholders at the current market price. Annual dividends per share ———————————— Annual earnings per share Annual dividends per share ——————————————— Current market price per share Note:  In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular industry. Refer to Standard and Poor’s and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M University–Corpus Christi, Corpus Christi, Texas, for his definitions of these ratios. Chapter 14 Wheelen/Hunger

16. Case Analysis Analyzing Financial Statements: • Scrutinize historical statements • Compare historical statements over time • Calculate changes in categories from year to year • Determine the change as a percentage • Adjust for inflation Chapter 14 Wheelen/Hunger

17. Case Analysis Common Size Statements: • Income statements and balance sheets in which the dollar figures have been converted into percentages. Chapter 14 Wheelen/Hunger

18. Altman’s Bankruptcy Formula Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5 where x1 = Working capital divided by total assets. x2 = Retained earnings divided by total assets. x3 = Earnings before interest and taxes divided by total assets. x4 = Market value of equity divided by total liabilities. x5 = Sales divided by total assets. Z = Overall index of corporate fiscal health. Chapter 14 Wheelen/Hunger

19. Index of Sustainable Growth g*= [ p (1 – D) (1 + L)] / [T – P (1 – D) (1+L)] where P = Net profit before taxes/net sales x 100 D = Target dividends/profit after tax L = Total liabilities/net worth T = Total assets/net sales x 100 Chapter 14 Wheelen/Hunger

20. Case Analysis Operating cash flow: • Amount of money generated by a company before the cost of financing and taxes. • Net income + depletion, amortization, interest expense, and income tax expense Chapter 14 Wheelen/Hunger

21. Case Analysis Economic Measures: • Constant dollars • Dollars adjusted for inflation to make them comparable over various years. • CPI • Prime interest rate • Rate of interest banks charge on their lowest risk loans. • Gross Domestic Product (GDP) • Total output of goods and services within a country’s borders. Chapter 14 Wheelen/Hunger

22. Strategic Audit Worksheet: Part 1 Chapter 14 Wheelen/Hunger

23. Strategic Audit Worksheet: Part 2 Chapter 14 Wheelen/Hunger

24. Convert the following two years of income statements from the Maytag Corporation into common-size statements. The dollar figures are in thousands. What does converting to a common size reveal? 1992 % 1991 % Net sales$3,041,223 $2,970,626 Cost of sales 2,339,406 2,254,221 ————— ————— ————— ————— Gross profits 701,817 716,405 Selling, general, and admin. 528,250 524,898 expenses Reorganization expenses 95,000 — ————— ————— ————— ————— Operating income 78,567 191,507 Interest expense (75,004) (75,159) Other—net 3,983 7,069 ————— ————— ————— ————— Income before taxes and   accounting changes 7,546 123,417 Income taxes (15,900) (44,400) Income before   accounting changes (8,354) 79,017 Effects of accounting changes for   post-retirement benefits (307,000) — ————— ————— ————— ————— Net income (loss) $(315,354) $79,017 ————— ————— ————— ————— ————— ————— ————— ————— Chapter 14 Wheelen/Hunger

25. Case Analysis Case Analysis Method: • Read case • Read case with strategic audit • Do outside research • Begin SWOT analysis • EFAS • IFAS Chapter 14 Wheelen/Hunger

26. Case Analysis Case Analysis Method: • Write Strategic Audit • Parts I – IV • Write Strategic Audit • Part V • SFAS Chapter 14 Wheelen/Hunger

27. Case Analysis • Write Strategic Audit • Part VI • Alternatives • Recommendations • Write Strategic Audit • Part VII • Implementation • Write Strategic Audit • Part VIII • Evaluation & Control • Proof & Fine-Tune Audit • Final Draft Chapter 14 Wheelen/Hunger