1.Calculate Dunham's 1995 financial rations. (See Exhibits 1,2, and 3).
Current Ratio = (current assets/current liabilities) = (16,268/7,600) = 2.1405%
Inventory Turnover = (sales/inventory) = (26,671/6,133) = 4.3487%
receivable____ = 5,920___ = 81.01 Days
DSO = annual sales/365 26,671/365
Fixed Asset Turnover = (sales/net fixed assets) = (26,671/3,336) = 7.9949%
Total Turnover Asset = (sales/total assets) = (26,671/16,268) = 1.6394%
Total Debt to Total Assets = (total debt/total assets) = (9,666/16,268) = 0.5941%
Time Interest Earned = (earnings before interest taxes/interest charge)
EBITDA Coverage = (EBITDA + Lease Payment)/( Interest + Principal payment + Lease Payment)
Profit margin on sales = (net income available to common stock)/(sales)
= (376/ 26,671)
Basic Earning Power = (EBIT/ Total Assets) = (753/16,268) = 0.0462%
Return on Total Assets = (Net income available to common stock/Total Assets)
Return on common equity = (Net income available to common stockholders/Common Equity)
2.Does a trend analysis indicate Dunham's position has been deteriorating? (See Exhibit 3)
A trend analysis indicates that Dunham's position has been deteriorating.
3.Is the bank justifiably concerned? Justify your answer.
The bank is justifiably concerned because the debt ratio increases and creditors prefer low debt rates due to the reason that the greater cushion against creditor losses in the event of liquidation.
4.Nineteen ninety-four was a "down" year for Dunham. Do you think that CBG had a responsibility to express concern in 1994, especially since the current ratio was close to 1.85, the number that could trigger a call of the loan? Explain.
GCB had the responsibility to express concern in 1994, especially since the current ratio was close to 1.85. The current ratio is calculated dividing current assets by current liabilities. Current assets normally include cash, marketable securities, accounts receivables, and inventories. In the meantime, current liabilities consist of accounts payable, short term notes payable, current maturities of long term debt, accrued taxes and other accrued expenses (principally wages.) If a company is getting into financial difficulty, it begins paying its bills more slowly, borrowing from its bank, and so on. If current liabilities are using faster than current assets, the current ratio will fall, and this could enhance trouble. Because the current ratio provides the best single indicators of the extent to which assets cover the claims of short-term creditors, then they expect to be converted to cash. As a result, it is the most commonly used measured of short-term solvency.
5.Suppose Dunham had followed Jensen's 1993 recommendation to lower its payout ratio. Recalculate the firm's debt and current ratios for 1995 assuming that the payout ratio was 20 percent from 1993 to 1995. (Assume that the extra money was used to reduce the firm's notes payable)
Dividends = (Net income - Retained earnings required to help finance new investments)
= Net income - [(Target equity ratio)(Total capital budget)]
1993 1994 1995
New POR and funds available to lower CL
(558 * 20)/50 = 223.2 (475 *20)/50 = 190 (188 * 20)/50 = 75.2
558-223.2 = 334.8 475-190 = 285 188-75.2 = 112.8
New current liability
3788-334.8 = 3453.2 5940-285 = 5655 7600-112.8 = 7487.2
1993 1994 1995
9095/3453.2 = 2.634 11543/5655 = 2.041 12932/7487.2 = 1.727
6.A. Jensen discussed Dunham's situation with Paula Robinson, an accounting friend. Robinson said that, in her opinion, Dunham has "too little long-term capital, especially considering your receivables and inventory needs." Why is it frequently appropriate to use a long-term capital source like bonds or equity to finance items like inventory and receivables that appear on a balance sheet...
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