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Unformatted text preview: on projected sales and end of Q1 net property. Since ‘96 figure assumes no depreciation of Q1 fixed assets during the year, it is an understatement of productivity. The growth in fixed assets is consistent with the sales growth. 18 Clarkson’s Financial Strength Note that all of the things below measure some degree of managerial flexibility or cash cushioning. There is always a cost of maintaining this flexibility, and it may be optimal in some circumstances from the shareholder point of view for management to live life on the financial edge. 1993 Total liabilities / total assets Days payables Current ratio 1994 1995 1996* 45% ­ 68% 38 73% 38 72% 42 2.5 1.6 19 1.1 1.2 Clarkson’s Financial Strength Clarkson financial condition has weakened since 1993 – Trade credit has been stretched from 38 days in 1994 to 42 days in 1996 (borrowing from suppliers) – Current ratio (CA/CL) has declined from 2.5 to 1.2. – Liabilities as a % of assets increased from 45% to 72% – Plus, in the absence of improved profitability, continued sales growth will lead to a further weakening of Clarkson’s financial condition. Profit Margin 1993 2.05% 1994 1.96% 1995 21.70% 0 What is the Sustainable Growth Rate? g* is the sales growth rate that the firm can sustain without external equity financing, while maintaining a constant D/E ratio (given its ROE and retention ratio) In 1995, Clarkson earned a return on beginning equity of 20.7% (77/372). Assume: Continued return on beginning equity of 20.7% No dividend payments (beyond salary currently earned) No equity issues or repurchases No change in capital structure (liabilities / equity), fixed debt capacity 21 Sustainable Growth Rate The sustainable growth model tells us that: g* = ROE x R / [1 – ROE x R] Since R = 1 and ROE = 20.1, then g* = 26.1% The firm grew 22% in 1995, so still below hypothetical g* However, using g* may not be appropriate here. Can Clarkson access more debt financing at the current leverage ratios? 22 Cost of Payables Financing Clarkson claims that he would increase profitability by taking advantage of suppliers’ discounts for early payment What is the implicit financing cos...
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This document was uploaded on 03/09/2014 for the course COMM 371 at The University of British Columbia.

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