Cases in Finance 3rd Edition DeMello Solutions Manual 2024 Scribd Download Full Chapters
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Gillian’s Pool & Spa Supplies
Income
Statements
2011 2012 2013 2014 2015
2-2
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Questions
1. Calculate Gillian Pool and Spa Supplies’ average annual compound growth rate
of sales and analyze its earnings performance for the past 5 years.
Gillian Pool and Spa Supplies’ sales have increased by an average compound rate of
14% per year over the past five years. In comparison, its net income has declined
2. In order to shed some light on the firm’s financial condition, which statements
Denny should refer to the income statement and the balance sheet over the past 3-5
year period. In addition, he should prepare a cash flow statement, common size
income statement and common size balance sheet. Denny should calculate the
various liquidity, leverage, profitability, activity, and coverage ratios for at least a
three-year period. In addition, a Du Pont analysis of the return on equity will help
The accounting statements provide the raw data from which the other statements can
be prepared and the various ratios calculated. The cash flow statement helps
determine where the cash came from and where it was spent during a year. The
common size statements provide useful information regarding the relative trends of
the various assets, liabilities, revenue sources, and expense items. They also help the
2-3
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
3. Realizing that comparison with an appropriate benchmark is a key component
benchmark?
Based on Gillian Pool & Spa Supplies’ industry classification code, Denny should
collect industry averages of the key financial ratios. Some useful sources for
industry ratios include: Value Line, Moody’s, Standard & Poor, and Dun &
Bradstreet. In addition to the industry average, the industry leaders’ (within the size
category) ratios could also be collected from the Internet (e.g. Marketguide.com) and
2-4
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
4. While attending his MBA finance class, Denny had learned that doing a
common size analysis and DuPont analysis are very useful first steps when
The common size income statements and balance sheets for the 5 year period 2011-
2011 2011% 2012 2012% 2013 2013 % 2014 2014% 2015 20 15%
Net sales $900,00 100.0 $982,50 100.0 $1,170,00 100.0 $1,310,40 100.0 $1,520,06 100.0%
Cost of goods sold 0729,00 %81.0% 0801,90 %81.6 0 962,28 %82.2 01,100,73 %84.0 41,305,00 85.9%
0 0 % 0 % 6 % 0
Gross profit $171,00 19.0% $180,60 18.4 $207,72 17.8 $209,66 16.0 $215,06 14.1%
0 0 % 0 % 4 % 4
Admin and selling $45,00 5.0% $58,95 6.0% $64,35 5.5% $72,07 5.5% $91,20 6.0%
exp 0 0 0 2 4
Depreciation 37,50 4.2% 40,00 4.1% 50,00 4.3% 50,00 3.8% 50,00 3.3%
Miscellaneou 03,04 0.3% 03,55 0.4% 04,68 0.4% 0
14,41 1.1% 0
22,80 1.5%
s expenses 1 7 0 4 1
Total operating exp $85,54 9.5% $102,50 10.4 $119,03 10.2 $136,48 10.4 $164,00 10.8%
EBIT 1
$85,46 9.5% 7$78,09 %7.9% 0$88,69 %7.6% 6$73,17 %5.6% 5$51,05 3.4%
Interest on ST loans 0$6,00 0.7% 3
$17,40 1.8% 0
$16,80 1.4% 8
$17,76 1.4% 9
$17,76 1.2%
Interest on LT loans 05,70 0.6% 0 8,82 0.9% 017,64 1.5% 017,10 1.3% 016,47 1.1%
Interest on mortgage 3
14,00 1.6% 0
13,84 1.4% 0
21,68 1.9% 0
21,44 1.6% 0
21,12 1.4%
0 0 0 0 0
Total interest $25,70 2.9% $40,06 4.1% $56,12 4.8% $56,30 4.3% $55,35 3.6%
3 0 0 0 0
Before- $59,75 6.6% $38,03 3.9% $32,57 2.8% $16,87 1.3% ($4,291 -0.28%
tax earnings 7 3 0 8 )
Taxes 23,90 2.7% 15,21 1.5% 13,02 1.1% 6,75 0.5% - -0.11%
Net income 3
$35,85 4.0% 3
$22,82 2.3% 8
$19,54 1.7% 1
$10,12 0.8% 1,716
($2,574 -0.17%
Dividends on stock 4 0 0 0 2 0 7 0 ) 0
Additions to
retained earnings $35,85 $22,82 $19,54 $10,12 ($2,574
EPS (100,000 4 $0.3 0 $0.2 2 $0.2 7 $0.1 ) ($0.03
shares) 6 3 0 0 )
The common size income statement indicates that the firm’s cost of goods sold has
increased quite a bit since 2011 (from 81% to 85.9%). Miscellaneous expenses (0.3% to
1.5%), interest charges (2.9% to 3.6%) and selling and administration expenses (5% to 6%)
2-5
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
have also increased slightly. The firm needs to look into its cost structure and try and
Current assets $325,000 59.36% $408,552 69.12% $441,385 76.91% $593,984 67.77% $673,634 74.34%
Net fixed assets $222,500 40.64% $182,500 30.88% $132,500 23.09% $282,500 32.23% $232,500 25.66%
Total assets $547,500 100.00% $591,052 100.00% $573,885 100.00% $876,484 100.00% $906,134 100.00%
LIABILITIES AND EQUITIES
Short-term bank loans $80,000 14.61% $80,000 13.54% $80,000 13.94% $148,000 16.89% $148,000 16.33%
Accounts payable 20,000 3.65% 22,000 3.72% 24,000 4.18% 37,000 4.22% 39,000 4.30%
Accruals 10,000 1.83% 11,000 1.86% 12,963 2.26% 17,276 1.97% 18,500 2.04%
Current liabilities $110,000 20.09% $113,000 19.12% $116,963 20.38% $202,276 23.08% $205,500 22.68%
Long-term bank loans $60,000 10.96% $60,000 10.15% $60,000 10.46% $150,000 17.11% $183,000 20.20%
Mortgage 200,000 36.53% 173,000 29.27% 153,000 26.66% 268,000 30.58% 264,000 29.13%
Long-term debt $260,000 47.49% $271,000 45.85% $213,000 37.12% $418,000 47.69% $447,000 49.33%
Total liabilities $370,000 67.58% $384,000 64.97% $329,963 57.50% $620,276 70.77% $652,500 $1
Common stock (100,000 shares) $125,000 22.83% $125,000 21.15% $125,000 21.78% $125,000 14.26% $125,000 13.79%
Retained earnings 52,500 9.59% 82,052 13.88% 118,922 20.72% 131,208 14.97% 128,634 14.20%
Total equity $177,500 32.42% $207,052 35.03% $243,922 42.50% $256,208 29.23% $253,634 27.99%
Total liabilities
and equity $547,500 100.00% $591,052 100.00% $573,885 100.00% $876,484 100.00% $906,134 100.00%
The common size balance sheet (shown below) shows that the firm’s inventory and
accounts receivables levels have gone up sharply, while its cash balance has significantly
declined. Fixed assets have increased over the past 5 years. The firm has taken on
significantly larger amounts of short and long-term debt relative to its total assets. Total
equity has decreased from 32.42% of total assets to around 28%. As a result its capital
©2018 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Du Pont Analysis 2011 2012 2013 2014 2015
has decreased significantly since 2011. Most of the decrease has come from the deteriorating profit
situation. The firm’s total asset turnover has improved consistently since 2013.
The firm’s ROE has suffered significantly since 2011. This has occurred largely due to the steep
drop in net profit margin. Had the firm not had such a high equity multiplier (from its high level of
5. Analyze Gillian Pool’s liquidity, asset utilization, long-term solvency, and profitability
ratios. What arguments would have to be made to convince the bank that they should
2-7
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
2011 2012 2013 2014 2015 Comme nts
2-8
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Liquidity:
The firm’s overall liquidity is quite good with a current ratio of 3.79 and it has
improved quite a bit over the past three years. However, much of its current assets
are tied in inventory, since its quick ratio is only 0.62. The ability of the firm to pay
off its current liabilities from its cash reserves is not very good either and has
Asset utilization:
The firm’s inventory turnover is much lower than what it was back in 2011. There
was some improvement in 2013 and 2014, but there is still a lot of room for further
collection period of 22 days is pretty high for a retail business. The total asset
turnover although not very high is at its highest level in five years.
Long-term solvency:
The firm’s debt ratio is 64% of total assets. Its debt level has gone up by almost
17% since 2011. Since the firm’s coverage ratios are fairly low and declining, the
Profitability:
The firm’s profitability ratios have declined significantly in the past three years. The
©2018 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Arguments that can be made to get the loan:
6. If you were the commercial loan officer and were approached by Andy for a
Given the firm’s poor profitability and cash flow situation, I would not grant the
inventory management and better profitability over the next 2 quarters, we would
reconsider.
The firm needs to improve its inventory management, and credit collection policies.
Further, the cost of sales and miscellaneous costs should be looked into and brought
down more in line with its level in 2011. This will improve the liquidity and
8. What kinds of problems do you think Andy would have to cope with when
General Problems
2-10
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Selection of comparison benchmark
Seasonal businesses
Extraordinary gains/losses
Specific Problems
2-11
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
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Madame probably knew that English wives had no secrets from their
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knew from experience, and, having had the good fortune to win the best and
most charming of wives himself, it hurt him to think of M. de Vieuxbois
missing such a blessing—merely because of a little misconception of his
conduct—a misconception absolutely incredible in a person of Madame's
sagacity and knowledge of the world. In his anxiety for the young people's
happiness, he actually found himself forgetting the necessity for extracting
an apology for an unwarrantable act of incivility to his wife, the necessity
of which both Monsieur and Madame Bontemps would at once admit.
They did at once admit it, and with a celerity and sudden change of
front that not only took Mr. Allonby's breath away, but also that of M.
Isidore, who happened—no doubt by the merest chance—to be lounging
outside the ever open office door, intently studying the Figaro, and who
also happened to have dispatched Heinrich, the porter, on an errand, by the
latter deemed trivial and unnecessary to the last degree.
"It was all that little cat, Dorris," Ermengarde confided afterwards to
those fellow-conspirators, the ex-Anarchist and the woman of mystery; "so
that what she got this morning was perhaps not altogether wasted. Only I
wish she hadn't had it quite so hot."
"It—it really was such a very lovely place—such a unique charm about
it," she said in apology.
"Tell you what, old lady, we'll come again next year if the boom keeps
up," Arthur replied, lighting his pipe in the shelter of a rocky scarp. "But I
bar squabbles first."
Before them the slender tower of St. Michel, just topping the mountain
spur that hides the Old Town, gleamed white on a clear blue sea; it had
rained during the night, and some cloud-wreaths still floated round the
craggy summits, leaving light veinings of snow on the amethystine peaks;
cheery voices and sounds rose from the saw-mill niched in the bottom of a
little gorge across the torrent; the plane avenue was alive with passing
wheels and steps and people of every sort and kind, but all gay as if they
had never known a care; the sea had richer and deeper hues, the sun a
warmer gold, the soaring mountains a more majestic outline, vegetation a
more varied luxuriance and colouring; and Ermengarde, listening to
Arthur's familiar, intermittent growl, and imparting pleasant secrets to him,
was lighter of heart than ever before. The full magic and splendour of the
azure shore was at last upon her, and the exhilaration and the pure joy of
living went to her head, sparkled in her eyes, glowed in her cheeks, and
thrilled her to the very finger-tips.
And yet she was at heart, if not a sadder, at least a wiser, and hoped to
be a better, woman than before those joyous adventures on the Côte d'Azur.
THE END
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