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    Ace Institute of Management EMBA Fall 2011

    Assignment- 1

    Financial Analysis of Sliver River Manufacturing Company

    BY

    SABIN MAHARJAN

    SACHIN SHRESTHA

    RAJESH PANDEY

    RAJIB PATHAK

    RUPESH KUMAR SHAH

    SUBMITTED IN PARTIAL FULFILLMENT OF THE

    REQUIREMENTS OF EXECUTIVE MASTER OF BUSINESS

    ADMINISTRATION FOR COURSE CORPORATE FINANCIAL

    DECISION IN ACE INSTITUTE OF MANAGEMENT

    To

    Prof. Radhe Shyam Pradhan (Phd.)

    COURSE INSTRUCTOR Corporate Financial Decision

    Date - 27th July 2012

    1| Financial Analysis of Silver River Manufacturing Company

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    TABLE OF CONTENT Pages

    1. General Background

    2. Issues 1a: Sources and uses

    3. Issues 1b: Computation of ratios and analysis

    4. Issues 2: Analysis of Strength & Weakness

    5. Du Pont Analysis

    6. Altmans Z Factor

    7. Issues 3: Projection of Financial Statement 2006 & 2007

    8. Issue 4: Projection of Financial ratios 2006 & 2007 & analysis

    9. Issue 5: Revision of Financial Statement & ratios & analysis

    10. Issue 6: MNCB Prospective

    11. Issue 7: Alternatives

    12. Conclusion

    2| Financial Analysis of Silver River Manufacturing Company

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    General Background

    This is a typical case focusing on the financial position of the Silver River Manufacturing Company

    (SRMC) manufacturing industry based on farms economy which designs and produces farm and utility

    trailers, specialized livestock carriers, and mobile home chassis.

    The case provides information to look into the deteriorating financial position of the SRMC over the time

    period. Data for the year 2003, 2004, and 2005 provides the information that SRMC is doing quite well in

    the year 2003. SRM had experience high and relatively steady growth in sales, assets and profit.

    However, due to recession starts of the 2000s in nations farm economy towards the end of 2003, things

    began to stand adversely for SRM with fall in demand. The analysis of data shows that the company has

    very difficult time in the year 2005 where most of the indicators are very weak. While analyzing the case,

    it is observed that the company has very difficult time in the year 2005.

    List of Financial Statement of SRM

    Silver River Manufacturing Company

    Balance Sheet for Year Ended December 31 (USD in 000)

    Particulars 2003 2004 2005

    Assets

    Cash 5,148.31 4,002.48 3,905.77

    Account Receivable 17,097.75 18,462.00 29,356.86

    Inventory 18,933.75 33,028.87 46,658.62

    Current assets 41,179.81 55,493.35 79,921.25

    Land, Building, Plant and Equipment 17,760.75 20,100.37 22,873.50

    Accumulated depreciation (2,996.25) (4,653.75) (6,693.75)

    Net fixed assets 14,764.50 15,446.62 16,179.75

    Total assets 55,944.31 70,939.97 96,101.00

    Liabilities and equities

    Short-term bank loans 3,187.50 5,100.00 18,232.50

    Account Payable 6,763.88 10,506.01 19,998.39

    Accruals 3,442.50 5,100.00 7,331.28

    Current liabilities 13,393.88 20,706.01 45,562.17

    Long-term bank loans 6,375.00 9,562.50 9,562.50

    Mortagage 2,868.75 2,601.00 2,339.62

    Long-term debt 9,243.75 12,163.50 11,902.12

    Total liabilities 22,637.63 32,869.51 57,464.29

    Common stock 23,269.00 23,269.00 23,269.00

    3| Financial Analysis of Silver River Manufacturing Company

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    Some of the key chain events that lead SRM to declining financial position are as follows:

    1. Aggressively Reduced price to stimulate sales with believe that key to sustained profits and

    superior market performance was sales growth and achievement of high share of Market.

    2. Increase in production and inventories to meet sales forecast.

    3. Steep Increase in Accounts receivable (especially in 2005) due to favorable credit terms and

    relaxed credit standards as a part of integrated market penetration plan.

    4. Increase in Long-Term (2004), and short-term credit lines in both 2004 and 2005.

    The given financial statement and calculation of various ratios indicates that if the firmed steps are not

    being taken, the probability of bankruptcy is very high. All the indicators are very weak and it is a hard

    time to think upon to boost the financial position of the organization.

    SRMC has taken loan from Marian Country National Bank (MCNB) and bank is very much concern

    about the repayment of loan after analyzing the financial data provided by SRMC. The analysis shows

    that ratios under all the four categories (liquidity, leverage, assets management and profitability ratios)

    have fall over the time period and it is worst in the year 2005. The ratios for 2005 suggest that the

    company could go to the bankruptcy in near future. These analyses compel bank to think of the

    immediate repayment of loan and could force into bankruptcy, which is the legal right of the bank

    Therefore, SRMC forecasted the projected financial statement of the company for next two years taking

    some of the firmed measures like increasing sales in very lucrative area and moving away from traditional

    agriculture, reducing cost of goods sold, administration and selling expenses and miscellaneous expenses,

    reducing average collection period to convince the bank to reclassification of loan. Moreover, SRMC is

    also thinking to ask for more loan of $6,375,000 for the new plant assuming that this step led to company

    to expand its business and strengthen financial position.

    5| Financial Analysis of Silver River Manufacturing Company

    Financial Indicator Summary 2003 2004 2005

    1.EBIT 19,318.73 13,967.64 4,443.37

    2. Total Assets 55,944.31 70,939.97 96,101.00

    3. Net Sales 170,997.50 184,658.25 195,731.63

    4.Total Market Value of shares (in $ 000)= Totalearnings *P/E Ratio 62,128.31 33,664.01 3,473.09

    5. Total Liabilities 22,637.63 32,869.51 57,464.29

    6. Current Assets 41,179.81 55,493.35 79,921.25

    7. Current Liabilities 13,393.88 20,706.01 45,562.17

    8. Retained Earnings 10,037.68 14,801.45 15,367.72

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    Ace Institute of Management EMBA Fall 2011

    Finally, this case provides opportunity to analyze financial data of the SRMC and place our independent

    opinion on the number of financial analysis indicators including financial statement, which helps us to

    strength our capabilities to compare financial position within the company and between the companies for

    forecasting the future course of action.

    Financial Performance of SRM: Strength and Weakness

    SRMs products are not subject to technological obsolescence or to deterioration and in those instances

    where technology is a factor to be considered, SRM holds several patents with which it can partially

    offset some o f the risks. SRM is led by Mr. White who is considered as a pillar of the community and has

    been able to maintain excellent rapport with his suppliers and lenders. The demand for the products of

    SRM despite hit in the short run is in fact profitable in the long run. The plant and machinery and the size

    of the firm are strengths based on which SRM has been able to become a large producer and supplier of

    farm related equipments. Before 2004, SRM was sound in all respects of business which is evident from

    the following statement of changes in financial positions and analysis of key financial ratios.

    Analysis on changes in Financial Position Year ended December 31Analysis on changes in Financial Position Year ended December 31

    The reason for the negative balance is because of increase in credit purchase (AP and NP),

    reduction in price to increase sells, increases in administrative and miscellaneous expenses.

    The negative balance shows that the organization in not in a position to pay current debt without

    liquidating any long-term assets.

    After calculating the changes in Financial Position for 2005, it was observed that in totality Net

    Working Capital is negative. This analysis shows that the organization's Current Liability is more

    than Current Asset.

    6| Financial Analysis of Silver River Manufacturing Company

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    Statement of Ratio and Analysis:Statement of Ratio and Analysis:

    7| Financial Analysis of Silver River Manufacturing Company

    Silver River Manufacturing Company

    Statement of Changes in Financial Position Year Ended December 31 for (Thousands of Dollars)

    Particulars 2004 2005

    Sources of Funds

    Net Income after taxes 6,351.70 755.02

    Depreciation 1,657.50 2,040.00

    Funds from Operation 8,009.20 2,795.02

    Long Term loan 3,187.50

    Net decrease in working capital 428.26

    Total Sources 11,196.70 3,223.28

    Application of funds

    Mortage change 267.75 261.38

    Fixed assets change 2,339.62 2,773.13

    Dividends on stock 1,587.93 188.76

    Net increase in working capital 7,001.41

    Total uses 11,196.71 3,223.27

    Analysis of changes in working capital

    Increase (decrease) in current assets

    Cash change