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570-433 Assignment 1 Budda-Bing Manufacturing Page 2
Credit Assignment 1 The following is your first credit
assignment. Assignment 1 consists of a case. Please answer the
assignment questions as directed. When submitting an assignment, be
sure to prepare and submit the assignment electronically,
preferably in Word or Excel format. Fine Print: Individual
Submission Submit by Drop box and clearly indicate name of student
on the Cover page. Presentation is important, make sure it flows
and is easy to follow; Show all calculations. Submit your completed
assignment via AVENUE TO LEARN at http://avenue.mcmaster.ca by the
specified due date. DUE DATE: Refer to Assignment Schedule. Value
8%
_________________________________________________________________________________________________________
The Budda--Bing Manufacturing Company Current Financial Position
Analysis
Part A:
Tony Soprano and Pauli Walnuts, experienced budget analysts at
The Budda-Bing
Manufacturing Company, have been charged with assessing the
firms financial performance during 2012 and its financial position
at year-end 2012. To complete this assignment, they
gathered the firms 2012 financial statements, shown below. In
addition, Tony and Pauli obtained the firms ratio values for 2010
and 2011, along with the 2012 industry average ratios (also
applicable to 2010 and 2011). These are presented in the Historical
Ratios table, below.
Required Part A:
a. Calculate the firms 2012 financial ratios, and then complete
the ratio table.
b. Analyze the firms current financial position from both a
cross-sectional and a time-series viewpoint. Break your analysis
into an evaluation of the firms liquidity, activity, leverage, and
profitability. Use a common-size analysis for
profitability. Based on your analysis of all the data available,
provide a detailed
discussion of the firms overall financial position. In your
discussion, be sure to comment on the companys financial strengths
and weaknesses. Provide your analysis in five sections: one for
each of the four categories of ratios, and one for
an overall evaluation.
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570-433 Assignment 1 Budda-Bing Manufacturing Page 3
Balance Sheet
The Budda-Bing Manufacturing
Company
As at December 31st, 2011 and 2012
December 31
Assets
2011 2012
Current Assets
$
$ Cash 24,100 25,000 Accounts Receivable 763,900 805,556
Inventories 763,445 700,625 Total Current Assets 1,551,445
1,531,181
Gross fixed assets (at cost) 1,691,707 2,093,819 Less:
Accumulated Amortization 348,000 500,000
Net fixed assets 1,343,707 1,593,819
Total assets $2,895,152 $3,125,000
Liabilities and Shareholders Equity
Current Liabilities $ $ Accounts Payable 400,500 230,000
Line of credit 370,000 311,000 Accruals 100,902 75,000
Total Current Liabilities 871,402 616,000 Long-term debt 700,000
1,165,250
Total Liabilities 1,571,402 1,781,250
Shareholders Equity
Preferred Shares 50,000 50,000 Common Shares 293,750 293,750
Retained Earnings 980,000 1,000,000
Total Shareholders Equity 1,323,750 1,343,750 Total Liabilities
and Shareholders Equity
$2,895,152
$3,125,000
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570-433 Assignment 1 Budda-Bing Manufacturing Page 4
Income Statement
The Budda-Bing Manufacturing Company
For the Year ended December 31, 2012
Sales revenue $5,075,000
Less: Cost of goods sold Gross margin 3,704,000
Less: Operating expenses 1,371,000
Selling expense $650,000
General and administrative expenses 416,000
Amortization Expense 152,000
Total operating expense 1,218,000
Operating Earnings (EBIT) 153,000
Less: Interest expense 93,000
Earnings before taxes 60,000
Less: Taxes (rate = 40%) 24,000
Net income after taxes $36,000
Historical Ratios
The Budda-Bing Manufacturing Company
Ratio Actual
Actual
Actual
Industry
Average
2010 2011 2012 2012
Current ratio
1.7
1.8
1.5 Quick Ratio 1.0 0.9 1.2
Average age of inventory 70.2days 73 days 35.8days
Average Collection period 50 days 55 days 46 days
Total Asset turnover (times) 1.5 1.5 2.0
Debt ratio 45.8% 54.3% 24.5%
Times interest earned ratio 2.2 1.9 2.5
Gross margin 27.5% 28.0% 26.0%
Profit margin 1.1% 1.0% 1.2%
Return on total assets (ROA) 1.7% 1.5% 2.4%
Return on Equity (ROE) 3.1% 3.3% 3.2%
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570-433 Assignment 1 Budda-Bing Manufacturing Page 5
Part B:
The Budda--Bing Manufacturing Company Preparing Pro Forma
Financial Statements for 2013
Budda-Bing Manufacturing is planning to implement a major
plant-modernization program to
improve its competitive position. Included will be construction
of a state-of-the-art manufacturing
facility that will cost $400,000 in 2013 and is expected to
lower the companys variable cost per tonne of steel. Tony and
Pauli, experienced budget analysts, have been charged with
preparing a
forecast of the firms 2013 financial position assuming
construction of the proposed new facility. They plan to use the
2012 financial statements presented above along with the forecasts
for other
financial accounts provided in the following table.
Key Projected Financial Data (2013)
The Budda-Bing Manufacturing
Company
Data Item Value
Sales Increase to $6,500,000 Cost of goods sold Remain the same
%age of sales Selling Expense Increase by 22% General and
administrative expense Increase by 37.5% Amortization expense
Increase to $185,000
Interest expense Increase to $97,000 Tax rate 40% Dividend
payments $20,000 Average age of inventory 56 days
Average collection period 52 days
Average payment period 26 days Accruals Increase to $96,000
Long-term debt, preferred shares, and common shares: Remain the
same
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570-433 Assignment 1 Budda-Bing Manufacturing Page 6
Required Part B:
a. Use the historic and projected financial data provided to
prepare a pro forma income
statement and balance sheet for the year ended December 31,
2013. b. Will Budda-Bing Manufacturing Company need to obtain
external financing to fund
construction of the proposed facility? Explain. Prepare a
Statement of EFR. c. How would you recommend Budda-Bing raise the
required Financing? What options might
be available if the company wanted to explore all opportunities
other than using their
line of credit?
