6. Project Dunham’s income and balance sheet for 1996 assuming the bank grants Dunham a $675K note payable at 12 percent and no existing interest-bearing debt is retired. Dividends will be 50 percent of net income. Cash will be the balancing item
FINANCE 522
DR. DENIS BOUDREAUX
FALL 2014
DUNHAM COSMETICS CASE
QUESTIONS
Calculate Dunham's 1995 financial ratios and prepare common size statements.
Do a comparative and trend analysis. Organize the analysis/ presentation by the four ratio groups.
Is the bank justified concerned? Justify your answer.
Nineteen ninety-four was a "down" year for Dunham. Do you think that GCB 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.
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 dividend payout ratio was 20 percent from 1993 to 1995. The extra money would have been used to reduce the firm's notes payable.
Project Dunham's income and balance sheet for 1996 assuming the bank grants Dunham a $675K note payable at 12 percent and no existing interest-bearing debt is retired. Dividends will be 50 percent of net income. Cash will be the balancing item.
Calculate the firm's 1996 minimum cash balance by assuming that the average cash balance between 1993 to 1995 is the required 1996 cash balance.
Use any extra cash at the end of 1996 to retire notes payable and redo the pro forma statements for 1996.
Calculate Dunham's financial ratios for 1996.
Will the bank be impressed by Jensen's changes?
What other options does Dunham have?
A) Jensen discussed Dunham's situation with Paula Thibodaux, an accounting friend. Thibodaux commented that Dunham has "too little long-term capital, especially considering the receivables and inventory needs." Why is it appropriate to use long-term capital to finance inventory and receivables that appear on a balance sheet as short-term assets?
B) What advantages and disadvantages are there for using short-term debt to finance long-term assets? Do some research to find the answer.
DUNHAM COSMETICS CASE
DR. DENIS BOUDREAUX
FALL 2014
DUNHAM COSMETICS CASE
QUESTIONS
Calculate Dunham's 1995 financial ratios and prepare common size statements.
Do a comparative and trend analysis. Organize the analysis/ presentation by the four ratio groups.
Is the bank justified concerned? Justify your answer.
Nineteen ninety-four was a "down" year for Dunham. Do you think that GCB 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.
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 dividend payout ratio was 20 percent from 1993 to 1995. The extra money would have been used to reduce the firm's notes payable.
Project Dunham's income and balance sheet for 1996 assuming the bank grants Dunham a $675K note payable at 12 percent and no existing interest-bearing debt is retired. Dividends will be 50 percent of net income. Cash will be the balancing item.
Calculate the firm's 1996 minimum cash balance by assuming that the average cash balance between 1993 to 1995 is the required 1996 cash balance.
Use any extra cash at the end of 1996 to retire notes payable and redo the pro forma statements for 1996.
Calculate Dunham's financial ratios for 1996.
Will the bank be impressed by Jensen's changes?
What other options does Dunham have?
A) Jensen discussed Dunham's situation with Paula Thibodaux, an accounting friend. Thibodaux commented that Dunham has "too little long-term capital, especially considering the receivables and inventory needs." Why is it appropriate to use long-term capital to finance inventory and receivables that appear on a balance sheet as short-term assets?
B) What advantages and disadvantages are there for using short-term debt to finance long-term assets? Do some research to find the answer.
DUNHAM COSMETICS CASE