Extra Work

Q.
Prepare an amortization schedule for a 3 year loan of $75,000. The interest rate is
8% per year and the loan calls for equal annual payments. How much interest is
paid in the third year? How much total interest is paid over the life of the loan?
Q. 2
Problem Solving Questions
You have been hired as an analyst for Mellon Bank and your team is working on an
independent assessment of Daffy Duck Food Inc. (DDF Inc.) DDF Inc. is a firm
that specializes in the production of freshly imported farm products from France.
Your assistant has provided you with the following data for Flipper Inc and their
industry.
Ratio 1999 1998 1997 1999 - Industry Average
Long-term debt 0.45 0.40 0.35 0.35
Inventory Turnover 62.65 42.42 32.25 53.25
Depreciation/Total Assets 0.25 0.014 0.018 0.015
Days sales in receivables 113 98 94 130.25
Debt to Equity 0.75 0.85 0.90 0.88
Profit Margin 0.082 0.07 0.06 0.075
Total Asset Turnover 0.54 0.65 0.70 0.40
Quick Ratio 1.028 1.03 1.029 1.031
Current Ratio 1.33 1.21 1.15 1.25
Times Interest Earned 0.9 4.375 4.45 4.65
Equity Multiplier 1.75 1.85 1.90 1.88
Page 1 of 3
a. In the annual report to the shareholders, the CEO of Flipper Inc wrote, 1997 was a good
year for the firm with respect to our ability to meet our short-term obligations. We had
higher liquidity largely due to an increase in highly liquid current assets (cash, account
receivables and short-term marketable securities). Is the CEO correct? Explain and use
only relevant information in your analysis.
b. What can you say about the firm's asset management? Be as complete as possible given the
above information, but do not use any irrelevant information.
c. You are asked to provide the shareholders with an assessment of the firm's solvency and
leverage. Be as complete as possible given the above information, but do not use any
irrelevant information.
ANSWERS TO PROBLEM: (note that these are just examples of a good answer)
a. The answer should be focused on using the current and quick ratios. While the current ratio
has steadily increased, it is to be noted that the liquidity has not resulted from the most liquid
assets as the CEO proposes. Instead, from the quick ratio one could note that the increase in
liquidity is caused by an increase in inventories. For a fresh food firm one could argue that
inventories are relatively liquid when compared to other industries. Also, given the
information, the industry-benchmark can be used to derive that the firm's quick ratio is very
similar to the industry level and that the current ratio is indeed slightly higher - again, this
seems to come from inventories.
b. Inventory turnover, days sales in receivables, and the total asset turnover ratio are to be
mentioned here. Inventory turnover has increased over time and is now above the industry
average. This is good - especially given the fresh food nature of the firm's industry. In 1999 it
means for example that every 365/62.65 = 5.9 days the firm is able to sell its inventories as
opposed to the industry average of 6.9 days. Days' sales in receivables has gone down over
time, but is still better than the industry average. So, while they are able to turn inventories
around quickly, they seem to have more trouble collecting on these sales, although they are
doing better than the industry.
Page 2 of 3
Finally, total asset turnover is went down over time, but it is still higher than the industry
average. It does tell us something about a potential problem in the firm's long term
investments, but again, they are still doing better than the industry.
c. Solvency and leverage is captured by an analysis of the capital structure of the firm and the
firm's ability to pay interest. Capital structure: Both the equity multiplier and the debt-to-
equity ratio tell us that the firm has become less levered. To get a better idea about the
proportion of debt in the firm, we can turn the D/E ratio into the D/V ratio: 1999: 43%, 1998:
46%, 1997:47%, and the industry-average is 47%. So based on this, we would like to know
why this is happening and whether this is good or bad. From the numbers it is hard to give a
qualitative judgment beyond observing the drop in leverage. In terms of the firm's ability to
pay interest, 1999 looks pretty bad. However, remember that times interest earned uses EBIT
as a proxy for the ability to pay for interest, while we know that we should probably consider
cash flow instead of earnings. Based on a relatively large amount of depreciation in 1999 (see
info), it seems that the firm is doing just fine.
Make your concept clear as solution added. Its just an idea.
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Q.

Problem Solving Questions

Ratio 1999 1998 1997 1999 - Industry Average

Long-term debt 0.45 0.40 0.35 0.35

Inventory Turnover 62.65 42.42 32.25 53.25

Depreciation/Total Assets 0.25 0.014 0.018 0.015

Days sales in receivables 113 98 94 130.25

Debt to Equity 0.75 0.85 0.90 0.88

Profit Margin 0.082 0.07 0.06 0.075

Total Asset Turnover 0.54 0.65 0.70 0.40

Quick Ratio 1.028 1.03 1.029 1.031

Current Ratio 1.33 1.21 1.15 1.25

Times Interest Earned 0.9 4.375 4.45 4.65

Equity Multiplier 1.75 1.85 1.90 1.88

Make your concept clear as solution added. Its just an idea.

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