The project assignment for module one involves the actual calculation and interpretation of some of the financial ratios you’ve been reading about. If you haven’t reviewed them yet please see this presentation on financial ratios and this this chapter on financial analysis. There are two companies I want you to look at – Arrow Company and Plume Inc. Perform a basic financial analysis of each company by calculating the following ratios:

1. Rate of return on Equity (ROE) = Net Income / Shareholders’ Equity

This ratio can be re-written as a product of the three principal components:

ROE = (Net Income/Sales) x (Sales/Assets) x (Assets/Shareholders’ Equity)

The three components are actually: profit margin, asset turnover, and financial leverage, respectively.

2. Return on Assets (ROA) = Net income/Total Assets

3. Gross Margin = Gross profit/Sales

4. Inventory turnover = Cost of goods sold / Ending inventory

5. The Collection Period = Accounts receivable/Credit sales per day, where credit sales per day (or simply “sales per day” are computed by dividing total sales for the year by 365.

6. Fixed-asset turnover = Sales/Total fixed assets

7. Financial leverage ratios:

Debt-to-assets ratio = Total liabilities/Total assets

Debt-to-equity ratio = Total liabilities/Shareholders’ equity

8. Liquidity ratios:

Current ratio = Current assets/Current liabilities

Acid test = (Current assets – Inventory)/Current liabilities

When you have finished your calculations, summarize them in a brief (2-3 page) report. The actual calculations should be in table format and be sure to show how you did the math. I will give partial credit for having a part of the calculation correct!

Then describe in words any conclusions that you can draw by comparing the ratios of the two companies. Which company seems to be in better financial health and less risky? If you have trouble drawing a conclusion at least tell us a little bit about what you tried to look for. On the basis of one module, you won’t have the skill necessary to make a very sophisticated analysis, but at least you can get a sense of how analysts look at the numbers and make them into meaning.

Please conclude your project report with a paragraph or so describing your overall reaction to the exercise, what you got out of it and didn’t get out of it, and any suggestions you have about how you can strengthen it for learning purposes. This latter part will not be graded, except in terms of its presence or absence — it’s more for guidance and assistance to the faculty in trying to make this course work as well for you as it possibly can.

Please use the following format for the paper: Mod 1 SLP format. You just need to put the ratio calculations into a table and then provide a written section on your comparison and interpretation. Having each of the ratios side-by-side in a table will help you with the comparison.

SLP expectations:

Use information from the modular background readings as well as any good quality resource you can find.

LENGTH: 2-3 pages typed and double-spaced.

The following items will be assessed in particular:

1.Your ability to correctly calculate the financial ratios;

2.Your ability to interpret the ratios and determine the financial health of the companies.

SOURCES:
http://www.missouribusiness.net/sbtdc/docs/financial_ratios.asp
http://educ.jmu.edu//~drakepp/principles/module2/fin_rat.pdf

EACH COMPANIES FINANCIAL INFORMATION:

ARROW COMPANY

Statement of Income

FY 2009

REVENUES

Sales $4,275,000

Other income +95,000

Total revenue $4,370,000

COST OF GOODS SOLD $2,650,000

GROSS PROFIT $1,720,000

OPERATING EXPENSES

Total Selling Expenses $805,000

Total General Expenses +$335,000

Total Operating Expenses $1,140,000

NET INCOME $580,000

ARROW COMPANY

Balance Sheet

December 31, 2009

ASSETS

Current Assets

Cash $295,000

Marketable Securities 520,000

Accounts Receivable 410,000

Notes Receivable 370,700

Ending Inventories 435,000

Prepaid expenses and other 105,000

Total Current Assets $2,135,700

Fixed Assets

Land $535,000

Plant and Buildings 735,000

Equipment 425,000

Total Fixed Assets $1,695,000

Other Assets

Goodwill, net $55,000

Total Other Assets $55,000

TOTAL ASSETS $3,885,700

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts Payable $320,000

Accrued expenses and other 290,000

Current liabilities

Current portion of finance debt 330,500

Total Current Liabilities $940,500

Long??’Term Liabilities

Notes Payable $265,000

Bonds 414,000

Other long-term liabilities 77,000

Total Long??’Term Liabilities $756,000

Total Liabilities $1,696,500

Shareholder’s Equity

Common Stock $1,072,200

Retained Earnings 1,117,000

Total Shareholder’s Equity $2,189,200

TOTAL LIABILITIES &

SHAREHOLDER’S EQUITY $3,885,700

PLUME INCORPORATED

Statement of Income

FY 2009

REVENUES

Sales $4,805,000

Other income +212,000

Total revenue $5,017,000

COST OF GOODS SOLD $2,900,000

GROSS PROFIT $2,117,000

OPERATING EXPENSES

Total Selling Expenses $875,000

Total General Expenses +$405,000

Total Operating Expenses $1,280,000

NET INCOME $837,000

PLUME INCORPORATED

Balance Sheet

December 31, 2009

ASSETS

Current Assets

Cash $375,000

Marketable Securities 100,000

Accounts Receivable 575,500

Notes Receivable 210,000

Ending Inventories 595,000

Prepaid expenses and other 75,000

Total Current Assets $1,930,500

Fixed Assets

Land $757,000

Plant and Buildings 1,105,000

Equipment 650,000

Total Fixed Assets $2,512,000

Other Assets

Goodwill, net $25,000

Total Other Assets $25,000

TOTAL ASSETS $4,467,500

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts Payable $670,000

Accrued expenses and other 505,000

Current liabilities

Current portion of finance debt 195,000

Total Current Liabilities $1,370,000

Long??’Term Liabilities

Notes Payable $210,000

Bonds 85,500

Other long-term liabilities 120,000

Total Long??’Term Liabilities $415,500

Total Liabilities $1,785,500

Shareholder’s Equity

Common Stock $1,832,000

Retained Earnings 850,000

Total Shareholder’s Equity $2,682,000

TOTAL LIABILITIES &

SHAREHOLDER’S EQUITY $4,467,500

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