Issue 3: Projection of Financial Statements for 2006 and 2007Yes, the company can retire all short-term loans existing on 31st December 2006, if the bank were to maintain the present credit lines and grant an additional $6,375,000.00 short-term loan at a 16% interest effective from 1st January 2006, assuming that SRM doesn’t pay any cash dividends during the year and the tax rate at 48%.

The criteria that the company should meet are:

1. Projected cash balance> Projected short term loan.2. Maintaining minimum cash balance of 5% of sales.

From Table 10,

Projected cash balance for 2006 $36,450.26

Projected short term loan for 2006 $24,607.50

Projected sales for 2006 $207,475.53

Here,

Projected cash balance> Projected short term loan

Or,

$36,450.26 > $24,607.50

Therefore, the company has enough cash balance to pay off short-term loans existing till 31 st December

2006. Also, from the case, it is known that the company has a system of maintaining minimum cash

balance as 5 percent of sales.

Thus, the cash balance maintained after paying short-term loans is:

= $36,450.26 - $24,607.50

=$ 11,842.76

And, the percentage of remaining cash balance to total sales is:

= $ 11,842.76/$207,475.53

= 5.7%

Since the cash balance maintained after paying the short-term loan is higher than the minimum

requirement, the company can pay the due short-term loans under the given condition.

Pro Forma Income Statement Projected for 2006 and 2007The following table is the complete statement of income with projected values for Silver River Manufacturing Company for the years 2006 and 2007. The table projects increase in sales and profit margin. The projected sales for 2006 are $ 207475.53 and that for 2007 is $ 227185.70. Similarly, the projected net income for 2006 is $ 44571.91 and that for 2007 is $ 9708.58. This shows that profit is expected to increase by 787.24% in 2006 and 218% in 2007. These figures assume that no cash dividend is paid during 2006 and 2007. Also, the company expects to maintain industry standard levels for account receivables and inventory turnover.

Silver River Manufacturing CompanyPro Forma Income Statement (Projected)

Worksheet for year end 2007(in thousand dollars)

Particulars 2005 2006 Projected 2007 Projected

Net Sales 95731.63 207475.53 227185.70Cost of Goods Sold 166642.58 171167.31 181748.56 Gross Profit 29089.05 36308.22 45437.14Administrative and Selling 16880.96 16598.04 17039.00Depreciation 2040.00 2422.50 1823.00Miscellaneous Expenses 5724.72 3630.82 2839.82 Total operating expenses 24645.68 22651.32 21701.82 EBIT 4443.25 13656.9 23735.32Interest on short-term loans 1823.25 3937.20 3937.20Interest on long-term loans 956.25 956.25 956.25Interest on mortgage 211.90 190.54 171.52 Net income before tax 1451.94 8572.91 18670.35Taxes 696.94 4115 8961.77 Net income 755.02 4457.91 9708.58Dividends on stock 188.76 - -Additions to retained earnings 566.27 4457.91 9708.58

Price/Earnings Ratio 4.6 5.5 6.5

Pro Forma Projected Balance Sheets for 2006 and 2007The following table depicts the projected balance sheet for the years ending on 31 st December 2006 and 31st December 2007. The company targets to meet the standard set by the bank by reducing cost of goods sold by 82.5% in 2006 and 80% in 2007. Similarly, the company expects to maintain administrative and selling expenses at 8% for 2006 and reduce it to 7.5% for 2007. It is also expecting to reduce its miscellaneous expenses to 1.75% of sales in 2006 and 1.25% in 2007.

Silver River Manufacturing CompanyPro Forma Balance Sheets (Projected)

Worksheet for Year End 2007 (in thousand dollars)

Particulars 2005 2006 Projected 2007 Projected

AssetsCash 3095.77 36450.26 45451.52Accounts Receivables 29356.86 18442.27 20194.28Inventory 46658.62 29639.36 32455.1 Current Assets 79921.26 84531.89 98100.98Land, building, plant and equipment 22873.5 29248.50 30125.96Accumulated Depreciation -6693.75 -9116.25 -10939.20 Net fixed assets 16179.75 20132.25 19186.76Total assets 96101.01 104664.14 117287.74Liabilities and equitiesShort-term bank loans 18232.5 24607.50 24607.50Accounts payable 19998.39 15994.88 16794.62Accruals 7331.28 9301.13 11626.41 Current liabilities 45562.17 49903.51 53028.53Long-term bank loans 9562.50 9562.50 9562.50Mortgage 2339.62 2103.75 1893.75 Long-term debt 11902.12 11666.25 11456.25 Total liabilities 57464.29 61569.76 64484.78Common stock 23269.00 23268.75 23268.75Retained earnings 15367.72 19825.63 29534.21 Owners’ equity 38636.72 43094.38 52802.96Total capital 96101.01 104664.14 117287.74

Issue 4: Financial Ratio Analysis for 2006 and 2007The following table shows the complete list of financial ratios for Silver River Manufacturing Company along with industry standard and their remarks:

Silver River Manufacturing CompanyRatio Analysis Year Ended December 31, 2007 (Projected)

Particulars 2005 2006 Projected

2007 Projected

Industry Average

Remarks

Liquidity RatiosCurrent Ratio 1.75 1.39 1.85 2.50 PoorQuick Ratio 0.73 1.1 1.23 1.00 GoodLeverage RatiosDebt Ratio (%) 59.79 58.82 54.97 50.00 PoorTimes interest earned 1.48 2.69 4.69 7.70 PoorAsset management ratiosInventory turnover (cost) 3.57 5.77 5.7 5.70 GoodInventory turnover (selling) 4.2 7 7 7.00 GoodFixed asset turnover 12.09 10.3 11.84 12.00 OKTotal asset turnover 2.04 1.98 1.93 3.00 PoorAverage collection period 53.99 32 32 32.00 GoodProfitability ratiosProfit margin (%) 0.38 2.14 4.27 2.90 GoodGross profit margin (%) 14.86 17.5 20 18.00 GoodReturn on total assets 0.79 4.25 8.27 8.80 OKReturn on owners’ equity 3.24 10.34 18.38 17.50 Good

AnalysisCurrent Ratio: The current ratio for both 2006 and 200 7 are below than the industry standard. Therefore, they are very poor. However, it shows that the ratio is in improving trend as it is higher in 2007 than in 2005.

Quick Ratio: The above table shows that quick ratio is good as it exceeds the industry standard and shows improvement from 2005. This also shows that the company is able to pay short-term loans to its creditors.

Debt Ratio: Higher debt ratio means more risky financial situation. The company projects that the debt ratio will show improvement in 2006 and 2007. However, since they are still higher than the industry standard, the company still has financial risks.

Times interest earned: Times interest earned ratio is expected to increase from 1.48 to 2.69 in 2006 and 4.69 in 2007. This shows improving trend, however, since the values are below the industry average, they are still poor and hence, the company needs to focus on increasing this ratio.

Fixed Asset Turnover: The fixed asset turnover will be poor in 2006 as it is below the industry standard. However, it is expected that it will improve in 2007 and come close to industry standard.

Total Asset Turnover: Total asset turnover is expected to perform poorly during 2006 and 2007.

Net Profit Margin: The net profit margin is expected to increase in 2006 and come close to the industry standard and exceed the industry standard in 2007. This shows that the company expects to make significant profit in 2006 and 2007.

Gross Profit Margin: The company expects that the gross profit margin will improve in 2006 (coming close to the industry standard) and exceed the industry standard by 2007.

Return on Total Assets: The company projects that return on total assets will increase in 2006 and come close to the industry standard by 2007.

Return on Owners’ Equity: The company projects that return on owners’ equity will show signs of improvement and 2006 and exceed the industry standard by 2007.

Du Pont Identity AnalysisWe know that Du Pont Identity gives us better picture of financial leverage. The following calculations show different equations to calculate return of equity (ROE).

For 2006,

ROE=ROA x Equity Multiplier

ROE=4.25 X 104664.1443094.38

ROE=10.32

Also,

ROE=NPM X TAT XEquity Multiplier

ROE=2.14 X 1.98 X Equity Multiplier

For 2007,

ROE=ROA x Equity Multiplier

ROE=8.27 X 117287.7452802.96

ROE=18.37

Also,

ROE=NPM X TAT XEquity Margin

ROE=4.27 X1.93 X Equity Margin

For both years, above equations show that net profit margin, total assets turnover and return on assets should be improved to get higher return on equity.

Altman Z-Factor AnalysisRatio 2005 2006 2007 Nonbankrupt Remarks

X1 49.67% 33% 38.42% 42.4% PoorX2 17.94% 19% 25.18% 35.5% PoorX3 34.5% 13% 20.23% 15.4% GoodX4 2.75 40% 97.86% 247.7% PoorX5 3.05 times 1.98 times 1.94 times 1.9 times GoodZ 2.88 2.99

X1 = Working Capital/Total AssetsX2 = Retained Earnings/Total AssetsX3 =EBIT/Total AssetsX4 = Market Value of Equity/Total Debt = Net Income X Price Earning Ratio/Total DebtX5 = Sales/Total Assets