Group Project #2 - Business Finance

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School

Edison State Community College *

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229

Subject

Finance

Date

Jan 9, 2024

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xlsx

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Uploaded by EarlUniverseZebra32

Group Case Study #3 Case Study Table of Contents: Red Tab: Narrative of the Case you will work (Similar to Chapter 16, Problem 8-13, page 414) Blue Tabs: Financial Statements Provided in Chapter Green Tabs: There are (5) Student Tabs Where You Will Insert Your Work. Instructions: Review the Case Review and practice the examples in chapter 16 Work problems within the green tabs (5) in this workbooks Save this workbook using your last name in the title of the file Submit your work via the Blackboard Assignment folder

X-Chip, Inc. Income Statement Please complete all the green tabs in this worksheet to gather the financial facts that Chip needs. Tab#1: Explain financial ratios. If X-Chip, Inc. decides to pursue financial for this venture, what will the Bank use the financial ratios for? Tab#3: After studying the Balance Sheet, show the change year-over-year between 2017 and 2016. Tab#4: Prepare a Statement of Cash Flow that will help you explain to Chip how the cash flow changed between years (2016/2017). You and your fellow team members have recently been hired by X-Chip, Inc. in its relatively new treasury management department. X-Chip, Inc. was founded ten years ago by Chip Hubbard and currently operates 24 stores in the Southeast. The company is privately owned by Chip and his family although Chip is the majority stockholder. X-Chip total sales topped $34M in 2017. X-Chip primarily sells to customers who shop in the stores. Customers come to the store and talk with a sales representative. The sales representative assists the customer in determining the type of computer and peripherals that are necessary for the individual customer’s computing needs. After the order is taken, the computer is made to fill the order. Delivery of the computer averages 15 days, and it is guaranteed in 30 days. Recently, the Chip's son designed a new computer motherboard. The company’s design is both more efficient and less expensive to manufacture, and their design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the new motherboard, X- Chip, Inc. determined that the costs involved in building and manufacturing this plant would be prohibitive. They are considering their options. Your team has been asked to examine X-Chip, Inc.'s financial statements and develop some financial analysis of ratios. Chip needs reassurance that his company is financially healthy and positioned to well against the industry competition. Tab#2: Using the 2015-2017 Financial Statements, calculate the required financial ratios. Compare them to the Industry Standards/Averages and then determine if X-Chip, Inc. is in better, or worse financial shape compared to industry standards. Tab#5: Using the Financial Ratios as a basis for your diagnosis, determine X-Chip, Inc.'s current financial shape. With that explain how they are placed in the industry. Finally, give you overall view of the company's health and of how they are positioned against the industry.

X-Chip, Inc. Income Statement ($000) 2017 2016 2015 Sales $ 34,000.0 $ 35,000.0 $ 33,950.0 Cost of Goods Sold $ 11,690.0 $ 12,100.0 $ 13,310.0 Gross Profit $ 22,310.0 $ 22,900.0 $ 20,640.0 Selling, General & Admin. Expenses $ 12,500.0 $ 12,450.0 $ 12,076.5 Depreciation $ - $ - $ - EBIT $ 9,810.0 $ 10,450.0 $ 8,563.5 $ 5,490.0 $ 5,000.0 $ 5,500.0 Earnings Before Taxes $ 4,320.0 $ 5,450.0 $ 3,063.5 Taxes $ 1,700.0 $ 2,100.0 $ 1,194.8 Net Income $ 2,620.0 $ 3,350.0 $ 1,868.7 X-Chip, Inc. Balance Sheet ($000) 2017 2016 2015 2017 2016 2015 Assets Liabilities and Equity Current Assets Current liabilities Cash $ 512.0 $ 453.0 $ 440.0 Accounts Payable $ 1,301.0 $ 1,223.0 $ 1,345.3 Accounts receivable $ 1,325.0 $ 1,215.0 $ 1,180.0 Bank Loans $ 3,664.0 $ 3,550.0 $ 3,905.0 Inventory $ 9,001.0 $ 8,386.0 $ 9,224.6 Short-term Debt $ 1,483.0 $ 1,327.0 $ 1,459.7 Total Current Assets $ 10,838.0 $ 10,054.0 $ 10,844.6 Total Current Liabilities $ 6,448.0 $ 6,100.0 $ 6,710.0 Long term Debt $ 39,100.0 $ 39,000.0 $ 38,000.0 Other Liabilities Net Fixed Assets $ 90,001.0 $ 88,785.0 $ 97,663.5 Total liabilities $ 45,548.0 $ 45,100.0 $ 44,710.0 Owner's Equity Common Stock ($.10 Par) $ 2,000.0 $ 2,000.0 $ 2,000.0 Paid-in-Surplus $ 25,500.0 $ 25,500.0 $ 36,346.3 Retained Earnings $ 27,791.0 $ 26,239.0 $ 25,451.8 Total Stockholders' Equity $ 55,291.0 $ 53,739.0 $ 63,798.1 Total Assets $ 100,839.0 $ 98,839.0 $ 108,508.1 Total Liabilities & Equity $ 100,839.0 $ 98,839.0 $ 108,508.1 Interest Expense (net of interest income)

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Answer these Questions Pertaining to Theory of Financial Ratios What are Financial Leverage Ratios used for? What are Liquidity Ratios used for? What are Profitability Ratios used for? What are Efficiency Ratios used for? A leverage ratio is any one of several financial measurements that assesses the ability of a company to meet its financial obligations. A leverage ratio may also be used to measure a company's mix of operating expenses to get an idea of how changes in output will affect operating income. Liquidity ratios are a measure of the ability of a company to pay off its short-term liabilities. Liquidity ratios determine how quickly a company can convert the assets and use them for meeting the dues that arise. The higher the ratio, the easier is the ability to clear the debts and avoid defaulting on payments. Liquidity ratios are a measure of the ability of a company to pay off its short-term liabilities. Liquidity ratios determine how quickly a company can convert the assets and use them for meeting the dues that arise. The higher the ratio, the easier is the ability to clear the debts and avoid defaulting on payments. The efficiency ratio is typically used to analyze how well a company uses its assets and liabilities internally. An efficiency ratio can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity, and the general use of inventory and machinery.

Ratio Analysis - X-Chip, Inc. 2017 2016 2015 What This Ratio Says Financial Leverage (Debt) Ratios: Debt to Asset Ratio 0.45 0.46 0.41 0.25 worse x-chip is about 45 % financed by creditors, which is more than th Debt to Equity Ratio 0.82 0.84 0.70 1.00 better x-chip is carrying 82% of the debt compared to the amount inves Interest Coverage Ratio 1.79 2.09 1.56 2.50 worse shows how well x-chip can pay interest on outstanding debt, it is Liquidity Ratios Quick Ratio 0.28 0.27 0.24 1.10 worse Current Ratio 1.68 1.65 1.62 2.10 worse x-chip is able to pay off short term obligations when they are DU Profitability Ratios Net Return on Assets 2.62% 3.23% 1.72% 12.00% worse tells us that x-chip is only gaining 2.62% profitability using its ass Net Return on Equity 4.81% 5.70% 2.93% 10.00% worse tells us that x-chip is only gaining 4.81% on income and growth f Efficiency Ratios Inventory Turnover 3.91 3.97 2.50 5.20 worse shows us how many times a year its inventory is sold and replace Compute # of Common Stocks 20,000 20,000 20,000 Compute Market Value Ratios Earnings per Share (EPS) $ 0.13 $ 0.17 $ 0.09 Compute Dividends Paid to Stockholders: Current Yr. Retained Earnings 27791 26,239 25,452 Prior Yr. Retained Earnings 26,239 25,452 24,688 Change in Retained Earnings 1,552 787 764 Net Income Pr. Year 3350 1,869 1,751 Dividends 1,798 1,082 987 % of Net Income 53.7% 57.9% 56.4% Industry Average 2017 Indicate Better/Worse Than Industry Average x-chip is not able to immediately (within 1 year) have enough ca

he 25% industry average. st by the owners, which is lower than the industry average s lower than the industry average. UE. sets which is not efficent. from its equity financing. ed ash to pay off short term obligations

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X-Chip, Inc. Balance Sheet - Year Over Year Comparison of Change ($000) 2017 2016 Change +(-) Assets Current Assets Cash $ 512.0 $ 453.0 $ 59.0 Accounts receivable $ 1,325.0 $ 1,215.0 $ 110.0 Inventory $ 9,001.0 $ 8,386.0 $ 615.0 Total Current Assets $ 10,838.0 $ 10,054.0 $ 784.0 Net Fixed Assets $ 90,001.0 $ 88,785.0 $ 1,216.0 Total Assets $ 100,839.0 $ 98,839.0 Liabilities and Equity Current liabilities Accounts Payable $ 1,301.0 $ 1,223.0 $ 78.0 Bank Loans $ 3,664.0 $ 3,550.0 $ 114.0 Short-term Debt $ 1,483.0 $ 1,327.0 $ 156.0 Total Current Liabilities $ 6,448.0 $ 6,100.0 $ 348.0 Long term Debt $ 39,100.0 $ 39,000.0 $ 100.0 Other Liabilities $ - Total liabilities $ 45,548.0 $ 45,100.0 $ 448.0 Owner's Equity Common Stock ($.10 Par) $ 2,000.0 $ 2,000.0 $ - Paid-in-Surplus $ 25,500.0 $ 25,500.0 $ - Retained Earnings $ 27,791.0 $ 26,239.0 $ 1,552.0 Total Stockholders' Equity $ 55,291.0 $ 53,739.0 $ 1,552.0 Total Liabilities & Equity $ 100,839.0 $ 98,839.0 $ 2,000.0

X-Chip, Inc. Statement of Cash Flow ($000) Operating Activities Net Income $ 2,620.00 Depreciation $ - Investing Activities Fixed Assets $ (1,216.00) Accounts Receivable $ (110.00) Inventory $ (615.00) Financing Activities Current Liabilities $ 348.00 Long-Term Debt $ 100.00 Equity $ 1,552.00 Dividends $ (2,620.00) Net Increase (Decrease) in Cash $ 59.00

Your Financial Findings: You should now have the financial facts that you need to answer the questions below. Remember as you answer these questions that your answers must reveal the following: 1) The current shape of X-Chip, Inc. - hence, their financial situation? 2) How X-Chip, Inc. is placed in its industry? What are the Financial Leverage Ratios telling you about this company? What are the Liquidity Ratios telling you about this company? What are the Profitability Ratios telling you about this company? What are the Efficiency Ratios telling you about this company? Summarize your findings and any recommendations/remarks/comments you might have. From these ratios I would have to say the x-chip is mostly funded by its own investing and not creditors, but it does have a higher creditor debt than the industry average as well. It also shows us that it is lower than average at being able to pay its interest. This would make me worry overall of the long term stability of the company. While the Quick ratio shows that they would not be able to quickly gain the cash needed to pay back short term debt, but they could eventually sell everything including inventory and pay back the full debt when it is due. X-chip is profitable but its not as high as it should be. This could account to many things, but usually it means they are pricing their products to low or spending to much material to make their product. I can tell by the inventory ratio that they just arent making sales like they should. Median is roughly 5 and in 2017 they only had a 3.91 turnover. Given the ratios and the variance in many of them. I would have to conclude that there needs to be an evalution into cost of goods, and any variable of job costing. Either they are just overall to far in debt and there is no way out or they have a serious mismangement when it comes to pricing to sell or pricing of cost to manufacture.

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