Reference no: EM133434848

Case: When Jay Smith took the job of Assistant to the President two years ago, things were going well at the Signal Cable company. The company was on an expansionary path and had branched out into the fiber optic business. Expectations and prospects were good and the economy was very strong. The threat of 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 significantly increased its inventory.
Signal Cable had enjoyed a high profit run in recent years. However, when the financial statements were prepared for the current year, the results showed a lower net profit margin. More importantly, there was a severe drop in the company's cash balance and the price had recently fallen from $7 to $5.50 per share.
Jay knew that the shareholders would be very concerned and possibly angry. He was also convinced that his boss, Joe Mathis, would have to come up with some workable answers and suggestions on how the liquidity problems could be mitigated. This concern was primarily important as the company had been hoping to raise some short-term capital in the immediate future. Jay's expectations were met when Joe called him and asked him to make a report explaining the company's financial situation. Table 1 and 2 present the Statement of Income and the Balance Sheet of the last two years.
Questions:
1. Why has the stock price fallen even though net income has increased?
2. How liquid would you say this company is? Calculate the absolute liquidity of the company. How does it compare to the liquidity position of the previous year? *Hint: calculate some of the financial ratios that measure liquidity and compare the results of the last 2 years*
3. How do you compare the market value of the stock to its book value? Is the book or book value accurately reflecting the true condition of the business?
4. The Board of Directors is unclear as to why the cash balance has dropped so much despite the increase in sales and gross profit margin. What should Jay tell the Board? *Hint: In order to identify the items that have caused such a drastic decline, you need to prepare the Statement of Cash Flows for 2004*
5. Measure the company's free cash flow. Which indicates?
6. Calculate the company's net working capital for each of the two years. What can you conclude about the company's net working capital?

7.Should shareholders be concerned about the decline in cash flow or should they be happy that earnings per share have increased? Explain your answer.