# Business: Generally Accepted Accounting Principles and Calculate Free Cash

Pages: 2 (431 words) Published: August 30, 2013
FIN3CSF Case Studies in Finance

Semester 2, 2013

Case Study 2: Financial Analysis and Forecasting

Due date: 4.00 pm, Monday, September 9, 2013

Case 9: Horniman Horticulture

Use the information in Case 9 to answer the following questions. 1. Analyse the strengths and weaknesses of the company Horniman Horticulture. (2 marks)

2. Calculate free cash flow to the owners of the firm (FCFE) for 2005 (i.e. operating cash flow less capital expenditure less net working capital). Calculate the cash cycle of the business for 2005. Using these calculations explain how the company using it cash. (4 marks)

3. Extend the financial statements (i.e. balance sheet and profit and loss statements) through to 2006, assuming that Bob Brown grows revenue by 20%. Note: to make the balance sheet balance, define cash as equal to (current liabilities + net worth) – (accounts receivable + Inventory + other current assets + net fixed assets). Assess the financial position and need of the business in 2006. (4 marks)

4. Analyse the company’s accounts-payable policy. (2 marks)

5. What can the company do to solve its cash problem? (3 marks)

6. Calculate the sustainable growth of the company in 2005. Sustainable growth = ROC × leverage × retention: return on capital is the net profit divided by total capital or assets; leverage is total capital or assets divided by net worth or equity, and retention is the fraction of profits retained in the business (i.e. 1 – dividend payout ratio).

Calculate the economic profit generated by the business: economic profit = (ROC – cost of capital) × total capital or assets. Assume the cost of capital equals 10%.

Does the company earn a sufficient return on capital? Why or why not? What economic choices does the company face? Explain. (5 marks)

Supporting materials
• [B] Case 9, pp. 137-141.
• Case 5, “The Thoughtful Forecaster” provides an overview of financial ratios and...