Explain by citing specifics from the forecast

Assignment Help Financial Management

Reference no: EM131025895

Case Cartwright Lumber Company

Learning Objectives

1 Review calculation of cost of capital (k-wacc).

2 Understand the foibles of equity valuation.

3 Appreciate that the capital budgeting analysis you did in Wk4 ‘values' one project standing alone - the Merseyside project. The valuation analysis this week values the whole business - all the projects - using similar methodology based on free cash flow.

4 Realize that market price is not the same as intrinsic value.

Q1: ROE, ROA, ROIC are given for Cartwright Lumber and Apex Lumber.

Read the Cohen Finance Workbook chapters 1 & 2, concentrating on the how-to's of ratio analysis in chapter 2.

If you need it, chapter 1 acts as an accounting refresher.

	Cartwright Lumber		Apex Lumber
Interest rate	6.0%		8.0%
Income tax rate	17.0%		17.0%

Debt	585		100
Equity	348		833
TOTAL LIAB+EQUITY	933		933

EBIT	86		86
- Interest expense	35.1		8
Earnings before tax	50.9		78
- Income tax	8.7		13.3
Earnings after tax	42.2		64.7

	Ratio	Fraction	Ratio	Fraction
ROE	12.1%	42.2/348	7.8%	64.7/833
ROA	4.5%	42.2/933	6.9%	64.7/933
ROIC	7.7%	86*.83/933	7.7%	86*.83/933

	Numerator	Denominator
RETURN ON EQUITY	Earnings after tax	Equity
RETURN ON ASSETS	Earnings after tax	Total Liab+Eq
RETURN ON INVESTED CAPITAL	EBIT * (1-Tax rate)	Total Liab+Eq

1a: Why is Cartwright ROE higher than Apex ROE? Is it better? Why? Why not? Write answer in box.

1b: Why is Cartwright ROA lower than Apex ROA? What does it tell you about the two companies? Write answer in box.

1c: How do the Cartwright & Apex ROICs compare? What does this suggest about the two companies? Write answer in box.

Q2: FINANCIAL STATEMENT ANALYSIS WITH RATIOS

Read the Cartwright Lumber Company case study.

First, read the first and last paragraphs of the case.
Discern what the case is about, the issues, and the decision to be made.
Next, peruse the case exhibits and preliminarily digest what they tell you.
Then, read the assignment questions so you know what you have to do for the assignment.
Finally, read the rest of the case.
Cohen Finance Workbook chapter 2 goes with this assignment. It explains ratio analysis in detail.

Cartwright's financial statements are below for your convenience.

Financial ratios are automatically calculated in the panels below the financial statements - at row 180.

Examine the cell contents to learn how the ratio calculations work in Excel. Later, when you need to do calculations in Excel, you will know how. Never type-in in calculations done outside of Excel.

Wk2 continues with a forecast of Cartwright's financial statements and external financing needs.

1a: Using the ratios below, appraise the trend (2001-03) of Cartwright's liquidity. Cite specific ratios to justify your analysis.

1b: Using the ratios below, appraise the trend (2001-03) of Cartwright's leverage. Cite specific ratios to justify your analysis.

1c: Using the ratios below, appraise the trend (2001-03) of Cartwright's asset use (efficiency). Cite specific ratios to justify your analysis.

1d: Using the ratios below, appraise the trend (2001-03) of Cartwright's profitability. Cite specific ratios to justify your analysis.

1e: Interpret the DuPont Formula ratios by explaining if its four ratios are a valid substitute for the ratios in Q1a-1d above. Cite specifics.

1f: Based on Cartwright's 2001-03 performance, make a qualitative summary judgment about it.

Part -2:

Q1a

Discuss how the interest expense (row 25) calculation works and whether or not it includes the short term borrowing on the Cartwright balance sheet. HINT: What is the source of the data used in the ratio on row 14?

Q1b How much does Cartwright need to borrow and when? Explain by citing specifics from the forecast.

Q1c Does Cartwright have the ability to pay the interest expense? Explain by citing specifics from the forecast.

Q1d Does Cartwright have the ability to repay the loan principal? Explain by citing specifics from the forecast.

Q2a

Explain how the p 45 table from the Cohen Finance Workbook, shown above starting on row 47, works and its significance to Cartwright's (and most other businesses too) external financing needs problem.

Q2b

Revise the short-form forecast model from Q1, using the 'input cells zeroed' model at the top of this tab.

As the banker, assume a lower growth rate in sales, and explain, showing specifics from the revised forecast, how it helps Cartwright solve his external financing needed problem. Enter revised data in the blue cells, using your judgment.

Attachment:- Assignment Template.xlsx

Reference no: EM131025895

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