week 1 homework

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Financial & Cash Flow Analysis

Signal Cable Company

Case objective:

The objective of this case is to cover financial analysis and cash flow analysis, with

a particular emphasis on liquidity and net working capital.

Case:

When Jay Smith took the job of assistant to the President two years ago, things

they were doing well in the Signal Cable company. The company was on an expansionary route and

it had branched out into the fiber optic business. Expectations and prospects were good

and the economy very strong. The threat of competition was not too serious. Due

In anticipation of increased demand for fiber optic communications, the company

had established two additional manufacturing facilities and significantly increased

your inventory.

Signal Cable had enjoyed a high profit run in recent years. Without

However, when the financial statements were prepared for the current year, the results

showed a lower net profit margin. More importantly, there was a severe

drop in the company’s cash balance and the price had recently fallen from $ 7 to

$ 5.50 per share.

Jay knew that shareholders would be very concerned and possibly angry. As well

was convinced that his boss, Joe Mathis, would have to find some answers

options and suggestions on how liquidity problems could be mitigated. This

concern was primarily important as the company had been waiting

get some short-term capital in the immediate future. The

expectations of Jay when Joe called him and asked him to prepare a report explaining the

financial situation of the company. Table 1 and 2 present the Income Statement and the

Balance Sheet for the last two years.

Questions:

1. Why has the stock price declined despite the increase in net income?

2. How liquid would you say this company is? Calculate the absolute liquidity of the company. How does it compare to the liquidity position of the previous year? * Hint: calculate some of the financial ratios that measure liquidity and compare the results of the last 2 years *

3. How do you compare the market value of the stock with its book value? Is the book or book value accurately reflecting the true condition of the business?

4. The Board of Directors is unclear as to why the cash balance has dropped so much despite the increase in sales and gross profit margin. What should Jay tell the board? * Hint: In order to identify the items that have caused the drastic decline, you need to prepare the Statement of Cash Flow for 2004 *

5. Measure the free cash flow of the business. Which indicates?

6. Calculate the net working capital of the company for each of the two years. What can you conclude about the company’s net working capital?

2003 ______ 2004

Current assets ? ?

– Circulating Pssives? ?

= Net Working Capital? ?

7. Should shareholders be concerned about the decrease in cash flow or should they be happy that earnings per share have increased? Explain your answer.

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