Signal Cable Company
Autor: taimi003 • August 30, 2015 • Case Study • 2,213 Words (9 Pages) • 616 Views
Signal Cable Company
Issues
1. Why has the stock price fallen despite the fact that the net income has increased?
2. How liquid would you say that this company is?
a. How does it compare with the previous year’s liquidity position?
3. How does the market value of the stock compare with its book value?
a. Is the book value accurately reflecting the true condition of the company?
4. What should Jay tell the board of directors when the about why the cash balance has dropped so much in spite of the increase in sales and the gross profit margin?
5. Measure the free cash flow of the firm. What does it indicate?
6. What can we conclude about the firm’s net working capital?
7. Should the shareholders be concerned about the drop in cash flow or should they be happy that the earnings per share have increased?
Facts
The company was on an expansion path and had branched off into the fiber optics business. The competition was not too serious. Due to the expectation of increased demand for fiber optic communications, the company had established two additional manufacturing facilities, and increased its inventory. Over the past few years, Signal Cable Company had quite a run up in profits, and then when the accounting statement were prepared for the current year, the results were not like they expected, they showed a lower profitability. Not only the profit was low, but there was a serious drop in the cash balance, and also the company stock price had fallen from $7 to $5.50 per share. This concern was primarily important since the firm had been expecting to raise some short-term capital in the immediate future. The president of the Signal Cable Company asked from Jay to prepare a report explanation for the financial condition of the firm.
Income Statement | ||
| 2004 | 2003 |
Net Sale | 2,050,000 | 1,678,894 |
Cost of Goods Sold | 1,537,500 | 1,343,115 |
Depreciation | 79,000 | 51,000 |
Selling & Administrative Expenses | 40,000 | 32,945 |
Earnings Before Interest and Taxes | 393,500 | 251,833.80 |
|
| |
Interest Paid | 155,000 | 44,000 |
Taxable Income | 238,500 | 207,833.80 |
Taxes (40%) | 95,400 | 83,133.52 |
Net Income | 143,100 | 124,700.30 |
Dividends | 42,930 | 37,410.08 |
Addition to Retained Earnings | 100,170 | 87,290.20 |
Balance Sheet | ||
| 2004 | 2003 |
ASSETS |
| |
Cash | 5,000 | 40,000 |
Account Receivable | 540,000 | 200,000 |
Inventories | 1,300,450 | 650,000 |
Total Current Assets | 1,845,450 | 890,000 |
NWC | 950,450 | 535,000 |
Gross Fixed Assets | 1,300,000 | 510,000 |
Accumulated Depreciation | 232,000 | 153,000 |
Net Fixed Assets | 1,068,000 | 357,000 |
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| |
Total Assets | 7,241,350 | 3,335,000 |
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| |
LIABILITIES & EQUITY |
| |
Account Payable | 145,000 | 55,000 |
Notes Payable | 750,000 | 300,000 |
Total Current Liabilities | 895,000 | 355,000 |
|
| |
Long-term Debt | 1,226,280 | 200,000 |
Common-stock and Paid in Surplus | 600,000 | 600,000 |
(200,000 shares outstanding) |
| |
Retained Earnings | 192,170 | 92,000 |
| 2,913,450 | 1,247,000 |
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Analysis
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