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FNCE 3140 Assignment Fall 2022
Professor Cox
Terrace Corporation is a machine maker in Interior British Columbia established in 1995. It has grown over time by making high quality machines and providing excellent customer service. The production plant is located in Merritt and is operating near 100% capacity. Sales are concentrated with 1 large customer, Victoria Vagabonds, under accounts receivable terms of net 50. Raw materials are purchased from a Salmon Arm distributor under terms of net 60 with overdue accounts paying 9% per annum. Financing is from various sources one of which is RBC under a 2 year term revolving line of credit of $6 million. Security for this financing is pledging inventory and accounts receivable as well as a $3 million personal guarantee by the owner-CEO Charlotte Vavavoom. RBC will lend up to 80% of accounts receivable, 35% of raw materials, 20% of work-in-process and 40% of finished goods inventory. The revolving line of credit must have a zero balance for at least 1 month of the year. Covenants with the loan include maintaining a current ratio of 1.7, cash flow coverage of 1.6 and a long-term debt to total capitalization ratio no more than 55%. No dividends are paid and all profits are reinvested in the company for growth. RBC is concerned that Terrace is floundering financially speaking and is reviewing its performance over the last 4 years.
RBC will lend up to 80% of receivables, 35% of raw materials, 20% of work-in-process inventory, and 40% of finished goods inventory. For at least one month of the year, the revolving line of credit must have a zero balance. The loan requires a current ratio of 1.7, cash flow coverage of 1.6, and a long-term debt to total capitalization ratio of no more than 55%. There are no dividends paid, and all profits are reinvested in the company for future growth. Terrace is struggling financially, and RBC is reviewing its performance over the last four years.
Conduct a thorough financial analysis based on the 5 years of income statements and balance sheets provided as well as industry average benchmarks. Include in your report ratio analysis, common size analysis (horizontal and vertical) for 2017-2021 as well as cash flow statements for 2017-2021 plus an annual DuPont Identity ROE analysis. Your report should include a 2 page summary of your analysis.
Note:
1. Cash flow coverage is defined as (EBIT + Depreciation)/Interest)
2. Cash ratio = Cash/(Current liabilities)
3. Long-term debt to capitalization ration = LTD/(LTD + Total Equity)
4. ROA = (Net Income)/(Total Assets)
5. Turnover ratios use end-of-period account balances, i.e. no averaging
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Terrace Corp. Income Statements in $ for 2017 to 2021
Sales 45046500 78391680 1.1820996E+08 1.7559702E+08 2.1453516E+08
COGS 31303500 55786590 84969180 127696980 159000450
GP 13743000 22605090 33240780 47900040 55534710
S & D 4951020 7351890 11290200 16201050 18003690
R&D 436020 1360920 2296020 4741020 5701350
Admin 1651020 3152250 5851800 10200000 12241560
Amort 1739832 2726652 5640852 8997597 11516370
Operating Profit 4980108 8013378 8161908 7760373 8071740
Interest 672417 1178277 2856924 4959705 6903528
EBT 4307691 6835101 5304984 2800668 1168212
Taxes 1507692 2392287 1856745 974235 408873
Net Income 2799999 4442817 3448239 1826433 759336
Terrace Corp. Balance Sheets in $ for 2017 to 2021
Cash 1202250 2372010 3104070 2470740 2296020
A/R 7378800 13021620 19351020 29851020 34651260
RM Inv 2026020 3310200 5368020 7351020 9721020
WIP Inv 2622960 4321590 5851020 7022040 7468170
F/G Inv 2406480 5022879 7843749 13241259 20255139
CA 15636510 28048299 41517879 59936079 74391609
L,P,E net 16513320 26269020 55036020 88360050 113068680
Intang 735000 997500 1372500 1615920 2095020
T Assets 32884830 55314819 97926399 149912049 189555309
0 0 0 0 0
A/P 5281020 12029610 19494681 29768988 38656326
CPLTD 1198602 1947564 4556499 7910217 10637178
CL 6479622 13977174 24051180 37679205 49293504
LTD 11986020 19475640 45564978 79102167 106371789
Equity 14419188 21862005 28310244 33130677 33890013
TL & E 32884830 55314819 97926399 149912049 189555309
Benchmark Common Size % Balance Sheet (assume the same for all years)
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Cash 15.45
A/R 9.34
RM Inv 6.38
WIP Inv 2.54
F/G Inv 13.34
CA 47.05
L,P,E net 43.65
Intang 9.3
T Assets 100
A/P 9.45
CPLTD 5.39
CL 14.84
LTD 33.45
Equity 51.71
TL & E 100
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Benchmark Common Size Income Statement % (assume the same for all years)
Sales 100
COGS 55
GP 45
S & D 13.45
R&D 1.56
Admin 6.67
Amort 4.77
Operating Profit 18.55
Interest 2.59
EBT 15.96
Taxes 4.79
Net Income 11.17
Benchmarks for Financial Ratios (assume the same for all years 2017 to 2021)
Current 2.7
Cash 0.21
RM turnover (days) 32
WP turnover (days) 14
FG turnover (days) 60
A/R turnover (days) 45
A/P turnover (days) 55
Cash conversion cycle (days) 90
Fixed Assets turnover 2.7X
Total Asset turnover 1.2X
Long-term debt to total capitalization 35%
Cash flow coverage 2X
Gross profit margin 42%
Operating profit margin 16%
Net profit margin 9%
ROA 7%
ROE 15%
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