FIN 600: ADVANCED FINANCIAL MANAGEMENT FALL 2016 CASE STUDY 1 Analyzing Corporate Financial Statements Data for United International Company Inc. and its industry averages are given below: Balance Sheet of UIC Inc., $US millions 2008 2007 Assets Current assets Cash $30.0 $35.0 Marketable securities 19.0 15.0 Accounts receivable 20.0 15.0 Inventory 51.0 45.0 Total current assets $120.0 $110.0 Net fixed assets 100.0 90.0 Total assets $220.0 $200.0 Liabilities Current liabilities $55.4 $50.0 Long-term liabilities 80.0 75.0 Total liabilities $135.4 $125.0 Stockholder's equity Common stock, $10 par value $45.0 $45.0 Retained earnings 39.6 30.0 Total stockholder's equity $84.6 $75.0 Total liabilities and stockholders' equity $220.0 $200.0 Income Statement of UIC Inc., $US millions 2008 2007 Sales (gross) $100 $110 Sales returns and allowances 15 8 Net sales $85 $102 Cost of goods sold 50 60 Gross profit $35 $42 Operating expenses Selling expenses $11 $13 General expenses 4 7 Total operating expenses $15 $20 Operating income before depreciation and amortization (EBITDA) 20 22 Depreciation and amortization 2 0 Earnings before interest and taxes (EBIT) $18 $22 Interest expenses 2 2 Earnings before taxes $16 $20 Taxes (40%) 6.4 8 Net income $9.6 $12 Dividends to common shareholders 4.8 6 Common stock price $20 $22 Number of shares outstanding (million) 4.5 4.5 Questions: 1. Compute the indicated ratios in each major group for 2007 and 2008 using the provided Excel sheet. 2. Construct the DuPont equation for UIC Incorporated using the formula in the textbook. 3. Compute the increase in NWC, CapEx, NOPAT and FCF for 2008. Should shareholders have any concerns about the FCF number? 4. Analyze UIC Inc. performance for the last two years (using industry averages) and make appropriate recommendations for improvements. Q1. UIC Inc. financial ratios Ratios 2008 2007 Industry average Liquidity ratios Current ratio 2.0x Quick ratio 1.3x Cash ratio* 1.0x *(Cash plus S-T securities)/CL Asset Management ratios Inventory turnover 6.7x Accounts Receivable turnover --- Days Sales Outstanding 36x Days in Inventories* --- FA turnover 2.8x TA turnover 1.8x *Inventories/(COGS/365) Debt Management Ratios TD/TA 0.40 Debt/Equity --- Times-interest-earned* 6.0x *EBIT/Interest Profitability Ratios Net Profit Margin 5.0% Basic Earning Power* 18.0% ROA 3.6% ROE 12.0% *(EBIT/Total Assets) Market Value Ratios EPS --- P/E 11.3x Book value per share* --- Dividend yield --- Market to book ratio 1.7x *(Total shareholders' equity - Preferred stock)/Common stocks outstanding Q2. DuPont equation for ROE 2008 2007 Industry Profit Margin 5% Total Assets Turnover 1.8x Equity Multiplier* -- ROE = PM x TAT x EM 12% *(Total assets/Total common equity) Q3. Compute FCF for 2008: FCF components: 2008 2007 NOPAT= EBIT*(1-T) Depreciation for 2008 CapEx = NFA(2008) - NFA(2007) Gross CapEx = CapEx + Depreciation (2008) NWC = CA - CL Total Capital = Gross CapEx + NWC(change) FCF = NOPAT + Depreciation – Total Capital Q4. Conclusion/recommendations: