First, restructure the balance sheet into a managerial balance sheet by re-arranging it to include the…

First, restructure the balance sheet into a managerial balance
sheet by re-arranging it to include the working capital
requirement. Then answer the questions that follow. Treat pre-paid
expenses the same as you would accounts receive-able. As a check on
your work. You should arrive at a capital employed (left hand side
of the managerial balance sheet) of $1,090).
The balance sheet of a firm is (in millions of $):

Cash

75

Short term
debt
50

A/R

65

A/P

35

Pre-paid
expense
10

Long term
debt
900

Inventory
75

Owner’s
equity
140

Net fixed
assets
900

1125

1125

The income statement is (in millions of $):

Revenue

1600

Cost of goods
sold

-1160

Sales and
administration expenses
-200

Depreciation

-55

EBIT

185

Net interest
expense

-65

Earnings before
tax (EBT)

120

Income tax
expense

-95

Earnings after tax
(EAT)

25

Dividends

-10

Retained
earnings

15

(A) What WCR to you calculate?
(B) What is the Invested Capital?
(C)Looking at the combined debt (short and long term), what
average interest rate is the firm paying on debt?
(D)Calculate the firms ROIC before taxes
(E) What is the firms ROE?
(F) What is the firms operating profit margin?
(G)What is the firms cash flow (BEFORE it pays a dividend and
BEFORE it pays taxes but AFTER it pays interest on the debt)?
(H)What is the self-sustainable growth rate ?
(I)What concerns you about the firms financial condition (there
is more than one correct answer)?
(A) It doesnt have enough long term debt
(B) It has a lot of debt. This means that if its cash flow drops
too much it will not be able to meet the interest payments on the
debt and risks bankruptcy
(C)It has a lot of debt. This means that if its cash flow drops
too much it will not be able to meet the dividend payments because
it has to make the interest payments ahead of the interest
payments. If it cuts the dividend payment it will shake investor
confidence in the stock
(D)Nothing, the balance sheet is in fine shape

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