aem428 3 - Siming Zhu March 27, 2008 AEM 428 Problem set 4...

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Siming Zhu March 27, 2008 AEM 428 Problem set 4 1) The following information is taken from the 1989 through 1991 financial staements of The Super Rice company (TSR), and from management projections for 1992. 1989 1990 1991 1992(projected) Sales 635000 590550 637794 688818 Cost of goods sold 444500 413385 446446 482172.60 Selling, General 133350 124016 133937 144652 and Administrative Account Receivable 24356 22652 24424.51 26420 Account Payable 54674 50846 54913 59307.23 Inventory 156575 145615 157624 169846 Accumulated 95020 112737 111871 132535 Depreciation Interest Expense 10000 9500 9900 10000 From the footnote, you know that TSR lost money in the past, carried a tax loss and does not have to pay tax. You find that in 1991, TSR sold a fully depreciated asset whose original cost was $20000. No assets were sold or scrapped in either 1989 or 1990. a) What is TSR’s account receivable/sales ratio for the 1992 year end? What does this ratio tell you about the operation of the company? AR/Sales ratio for 1992 year end is → AR/Sales = 26420/688818 = .0383556 This ratio tells us that TSR expects that at the end of 1992, approximately 3.84% of their annual sales will still be in the form of accounts receivable. This means that cash has not been collected for 3.83% of sales. In general, companies should not have a high AR/Sales ratio because it means that cash has not been collected for much of their sales, which may indicate that they are giving credit too easily (and may be giving credit to bad credit risks) and may not be able to collect the cash for all of their receivables. The risk of not being able to collect cash for all receivables generally increases with AR/Sales ratio.
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b) Estimate TSR’s COGS for 1992. How would you characterize the cost structure of the company? By observing COGS/Sales for 1989-1991, we see that COGS/Sales = .7 for each of these years. Thus, we can safely assume that COGS will be approximately 70% of sales in 1992. Therefore, estimated 1992 COGS = 1992 Sales*.7 = 688818*.7 = $482172.60. The cost structure of this firm indicates that COGS account for approximately 70% of sales revenue. By observing COG/Sales for previous years, we see that the cost structure of this firm is fairly stable, which is good. This means that the firm can have a relatively high level of confidence when predicting their yearly COGS and gross margin. From the company’s current cost structure, we can also assume that their input costs (both fixed and variable) are fairly stable, at least in the short run. c) Suppose there is no other current asset or current liability for the company beyond what is shown. What is the current ratio of the company in 1992? If the average current ratio of the industry peers is 1, what does it tell you about the company? Current ratio = Current Assets/Current Liability = (AR+Inventory)/(AP + Interest).
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aem428 3 - Siming Zhu March 27, 2008 AEM 428 Problem set 4...

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