Quaker Cracker's

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School

Armstrong State University *

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202

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Finance

Date

Feb 20, 2024

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docx

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2

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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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