FNCE 3140 Assignment Fall 2022
\nProfessor Cox
\nTerrace Corporation is a machine maker in Interior British Columbia established in 1995. It has grown over time by making high quality machines and providing excellent customer service. The production plant is located in Merritt and is operating near 100% capacity. Sales are concentrated with 1 large customer, Victoria Vagabonds, under accounts receivable terms of net 50. Raw materials are purchased from a Salmon Arm distributor under terms of net 60 with overdue accounts paying 9% per annum. Financing is from various sources one of which is RBC under a 2 year term revolving line of credit of $6 million. Security for this financing is pledging inventory and accounts receivable as well as a $3 million personal guarantee by the owner-CEO Charlotte Vavavoom. RBC will lend up to 80% of accounts receivable, 35% of raw materials, 20% of work-in-process and 40% of finished goods inventory. The revolving line of credit must have a zero balance for at least 1 month of the year. Covenants with the loan include maintaining a current ratio of 1.7, cash flow coverage of 1.6 and a long-term debt to total capitalization ratio no more than 55%. No dividends are paid and all profits are reinvested in the company for growth. RBC is concerned that Terrace is floundering financially speaking and is reviewing its performance over the last 4 years.
\nRBC will lend up to 80% of receivables, 35% of raw materials, 20% of work-in-process inventory, and 40% of finished goods inventory. For at least one month of the year, the revolving line of credit must have a zero balance. The loan requires a current ratio of 1.7, cash flow coverage of 1.6, and a long-term debt to total capitalization ratio of no more than 55%. There are no dividends paid, and all profits are reinvested in the company for future growth. Terrace is struggling financially, and RBC is reviewing its performance over the last four years.
\nConduct a thorough financial analysis based on the 5 years of income statements and balance sheets provided as well as industry average benchmarks. Include in your report ratio analysis, common size analysis (horizontal and vertical) for 2017-2021 as well as cash flow statements for 2017-2021 plus an annual DuPont Identity ROE analysis. Your report should include a 2 page summary of your analysis.<\/p>\n
Note:
\n1. Cash flow coverage is defined as (EBIT + Depreciation)\/Interest)
\n2. Cash ratio = Cash\/(Current liabilities)
\n3. Long-term debt to capitalization ration = LTD\/(LTD + Total Equity)
\n4. ROA = (Net Income)\/(Total Assets)
\n5. Turnover ratios use end-of-period account balances, i.e. no averaging<\/p>\n
Terrace Corp. Income Statements in $ for 2017 to 2021<\/p>\n
Sales\t45046500\t78391680\t1.1820996E+08\t1.7559702E+08\t2.1453516E+08
\nCOGS\t31303500\t55786590\t84969180\t127696980\t159000450
\nGP\t13743000\t22605090\t33240780\t47900040\t55534710
\nS & D\t4951020\t7351890\t11290200\t16201050\t18003690
\nR&D\t436020\t1360920\t2296020\t4741020\t5701350
\nAdmin\t1651020\t3152250\t5851800\t10200000\t12241560
\nAmort\t1739832\t2726652\t5640852\t8997597\t11516370
\nOperating Profit\t4980108\t8013378\t8161908\t7760373\t8071740
\nInterest\t672417\t1178277\t2856924\t4959705\t6903528
\nEBT\t4307691\t6835101\t5304984\t2800668\t1168212
\nTaxes\t1507692\t2392287\t1856745\t974235\t408873
\nNet Income\t2799999\t4442817\t3448239\t1826433\t759336<\/p>\n
Terrace Corp. Balance Sheets in $ for 2017 to 2021
\nCash\t1202250\t2372010\t3104070\t2470740\t2296020
\nA\/R\t7378800\t13021620\t19351020\t29851020\t34651260
\nRM Inv\t2026020\t3310200\t5368020\t7351020\t9721020
\nWIP Inv\t2622960\t4321590\t5851020\t7022040\t7468170
\nF\/G Inv\t2406480\t5022879\t7843749\t13241259\t20255139
\nCA\t15636510\t28048299\t41517879\t59936079\t74391609
\nL,P,E net\t16513320\t26269020\t55036020\t88360050\t113068680
\nIntang\t735000\t997500\t1372500\t1615920\t2095020
\nT Assets\t32884830\t55314819\t97926399\t149912049\t189555309
\n0\t0\t0\t0\t0
\nA\/P\t5281020\t12029610\t19494681\t29768988\t38656326
\nCPLTD\t1198602\t1947564\t4556499\t7910217\t10637178
\nCL\t6479622\t13977174\t24051180\t37679205\t49293504
\nLTD\t11986020\t19475640\t45564978\t79102167\t106371789
\nEquity\t14419188\t21862005\t28310244\t33130677\t33890013
\nTL & E\t32884830\t55314819\t97926399\t149912049\t189555309<\/p>\n
Benchmark Common Size % Balance Sheet (assume the same for all years)<\/p>\n
Cash 15.45
\nA\/R 9.34
\nRM Inv 6.38
\nWIP Inv 2.54
\nF\/G Inv 13.34
\nCA 47.05
\nL,P,E net 43.65
\nIntang 9.3
\nT Assets 100<\/p>\n
A\/P 9.45
\nCPLTD 5.39
\nCL 14.84
\nLTD 33.45
\nEquity 51.71
\nTL & E 100<\/p>\n
Benchmark Common Size Income Statement % (assume the same for all years)
\nSales 100
\nCOGS 55
\nGP 45
\nS & D 13.45
\nR&D 1.56
\nAdmin 6.67
\nAmort 4.77
\nOperating Profit 18.55
\nInterest 2.59
\nEBT 15.96
\nTaxes 4.79
\nNet Income 11.17<\/p>\n
Benchmarks for Financial Ratios (assume the same for all years 2017 to 2021)
\nCurrent 2.7
\nCash 0.21
\nRM turnover (days) 32
\nWP turnover (days) 14
\nFG turnover (days) 60
\nA\/R turnover (days) 45
\nA\/P turnover (days) 55
\nCash conversion cycle (days) 90
\nFixed Assets turnover 2.7X
\nTotal Asset turnover 1.2X
\nLong-term debt to total capitalization 35%
\nCash flow coverage 2X
\nGross profit margin 42%
\nOperating profit margin 16%
\nNet profit margin 9%
\nROA 7%
\nROE 15%<\/p>\n","protected":false},"excerpt":{"rendered":"
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