STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION

1. CHAPTER 15 Suggestions for Case Analysis STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER

2. Strategic Audit Worksheet Part I

3. Strategic Audit Worksheet Part II

4. Strategic Audit Outline • Current Situation Current Performance Mission-Objectives-Strategies-Policies • Corporate Governance BOD and Management • External Environment (O-T) Societal-Task • Internal Environment (S-W) Structure-Culture-Resources by Functional Area • Analysis of Strategic Factors SWOT-Review of Mission/Objectives • Strategic Alternatives/Recommendations Corporate-Business-Functional • Implementation Programs-Cost-Priorities • Evaluation and Controls Feedback-Standards-Measures

5. Case Analysis Methodology • First Reading • General Overview • Potential Strategic Factors • Research needed • Second Reading • Using Strategic Audit Worksheet, make notes/comments on appropriate items • Perform financial analysis of the company including ratio analysis and common sizing the statements. • Do outside Research • SWOT Analysis • External Factors Analysis (EFAS) • Internal Factors Analysis (IFAS) • First Draft Sections I – IV (Author/Editor) • Strategic Factors Analysis Summary (SFAS Table Optional) • Reduce the EFAS and IFAS to the most significant factors • Write Analysis of Strategic Factors (Section V) • Strategic Alternatives and Recommendations • List Pros and Cons for each alternative (No Proforma IC is necessary) • Justify your recommendation • Implementation (Matrix of Change Ch.9) • Describe the programs that would be necessary to accomplish the strategic objective. • Evaluation and Control • How will you determine if you are successful. • Proof and Fine Tune the Report

6. Suggestions for Case Analysis • Research – • Reach beyond the information in the case • Focus on environmental setting • Check decision date of case - stay in the timeframe of the Case. • Use information services • COMPUSTAT • www.hoovers.com • www.sec.gov

7. Suggestions for Case Analysis • Financial Ratios are Important – • Ration Analysis • Liquidity ratios • Profitability ratios • Activity ratios • Leverage ratios

8. Suggestions for Case Analysis • Case Analysis – • Research • Annual reports • 10K, 10Q, 14A forms • Income statement • Balance sheets • Cash flow statements • Economic conditions • Industry information

9. Suggestions for Case Analysis • Financial Analysis – • 5 Basic Steps • Historical income statements/balance sheets (3 – 5 years) • Compare historical statements over time (trend analysis) • Calculate changes for individual categories as well as cumulative change • Change as percentage and absolute amount (Common Size Statements) • Adjust for inflation if significant factor (??) • Industry and/or Competitor Comparisons can be helpful – Investigate…

10. Suggestions for Case Analysis • Checklist for Red Flags – • Cash flow from operations should exceed net income • Accounts receivable should not grow faster than sales • Gross margins should not fluctuate over time • Information on top management and Board should be examined carefully • Footnotes are important

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

12. Financial Ratio Analysis -- Profitability How Formula Expressed Meaning 2. Profitability Ratios Net profit margin (ROS) 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

13. Financial Ratio Analysis -- Activity How Formula Expressed Meaning 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 Net sales ——————— Inventory 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

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

15. Financial Ratio Analysis -- Other Financial Ratio Analysis — Other How Formula Expressed Meaning 5. Other Ratios Price/earning ratio (PE 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

16. Suggestions for Case Analysis • Resources – Library – • Moody’s Manuals on Investment • Standard & Poor’s Register • Value Line’s Investment Survey • Business Cycle Development • U.S. Census Bureau • Current Business Reports • Economic Indicators

17. Suggestions for Case Analysis • Common Size Statements -- • Income statements and balance sheets in which the dollar figures have been converted into percentages • Identify Trends • Allows Comparison of companies of varying sizes • Income Statement as a % of Sales • Balance Sheet as a % of Assets

18. Altman’s Bankruptcy Formula 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. • Below 1.81 => Credit Problems • Above 3.0 => Healthy Company • Between => ???

19. Index of Sustainable Growth 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 If planned growth is greater than g* than external capital will be needed.

20. Strategic Audit 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 ————— ————— ————— ————— ————— ————— ————— —————

21. CHAPTER 15 Suggestions for Case Analysis STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER