Quaker Cracker's
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FIN 610 Module Five Case Study Review: Quaker Cracker
To respond to the following questions, you will need to review the Quaker Cracker case study on pp. 242–244 of your textbook, Working Capital Management: Applications and Case Studies
; the questions were adapted from the same section of the textbook. Respond in complete sentences as appropriate.
1.
Part A: Using the data in exhibits C5.1 and C5.2, discuss how Quaker Cracker’s results compare to its industry. You will need to prepare a pro forma income statement (using the table
below) before proceeding.
Income Statement
(in millions)
Sales
230
Cost of goods sold
180
Gross profit
50
Depreciation expense
5
Advertising and selling expenses
15
Profits before taxes
30
Income Taxes
10.5
Net income
19.5
Current (times)
2.16
Quick (times)
1.25
Debt (%)
26.8%
Average collection period (days)
25.04
Total asset turnover (times)
2.42
Return on Equity (%)
28%
Part B: After entering the calculations in the table above, discuss specific metrics that can be used to analyze working capital performance. Type your two- to three-sentence response below.
When analyzing the data, Quaker Cracker’s numbers are above average of its industry. The company clearly is able to pay off its debts, we can see this by the amount of current assets ($55,000) the company has compared to current liabilities ($25,500). Average collection period for QC is 25.04 days compared the industry of 27 days and return on equity for QC is a 28% compared to the industry average of 8%. 2.
Part A: Show changes to the 2012 pro forma balance sheet assuming the company borrows the necessary funds for the capital improvements at an interest rate of 7 percent. Ignore depreciation on the new equipment. Enter your calculations in the table provided below.
Assets
Calculations
Liabilities and Owners’
Equity
Calculations
Cash and Marketable Securities
46,000,000
Notes payable
0
Accounts Receivable
16,000,000
Accounts payable
19,500,000
Inventory
23,000,000
Accrued expenses
6,000,000
Current Assets
85,000,000
Current liabilities
25,500,000
Gross Fixed Assets
52,000,000
Long-term debt
30,000,000
Accumulated Depreciation
(12,000,0000)
Common Stock ($10 par)
40,000,000
Net fixed assets
40,000,000
Retained earnings
29,500,000
Total assets
125,000,000
Total liabilities and owners’ equity
125,000,000
Part B: Does this cause any significant change in the financials? Type your two- to three-
sentence response below.
When one compares the financials for before and after the changes, there is not a substantial amount of
change. The long-term debt balances the total liabilities, owner's equity, and total assets. 3.
Play the role of a financial analyst and explain your recommended course of action. Type
your three- to five-sentence response below.
As a financial analyst, I would recommend that Quaker Cracker’s look into renovations and gaining new equipment. The old saying goes you must spend money to make money, running a business is no different. Eventually, customer demand will peak because the old machinery and ways of running the business will not allow for growth and the ability to keep up with growing demands. 4.
The Cynsky family controls the company through its ownership of one half of the outstanding stock, with outsiders owning the balance. Should this influence McCabe’s presentation of her recommendations? What arguments can you make in support of and
against
McCabe’s position? Type your four- to five-sentence response below.
Even though the Cynsky family does not currently run the business, they still own one half of the outstanding stock creating a control in their favor. It is important that McCabe presents her presentation of her recommendations. She can stress the fact that the financial debt will better the business by allowing it to grow to keep up with the increasing demands. 5.
Why was the information provided in the second paragraph about competitive companies in the fancy food industry? Type your two- to four-sentence response below.
As a financial analyst, it is important to know where the company stands among its competitors and that
is the purpose of the second paragraph. The second paragraph shows the reader how Quaker Cracker’s has performed against the competition with out the use of long-term debt.
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