Case Study ABC Products

 

Finance and accounting

Case Study

Assignment one

  • The appropriate dollar size

According to the statistics provided for in the case study, the company has a total of 120 employees. For this reason, the company is considered as a mid-size company. To find the market volume of the company, consider the product between the number of the target clients and the penetration rate (Bodie & Merton, 2000). It is assumed that the number of target clients is 2000 while the penetration rate of the company is 70 per cent. Hence, the market volume would be = 2000 * 0.70 = 1400. To find the dollar size, find the product between the market volume and the mean value. Based on the information provided for in the case study, the dollar size would be 1400 * $2. 5 million = $3.500 Billion

  • Appropriate borrowing base formula

In order to find the appropriate borrowing base formula, consider the complete inventory valuation as shown in the inventory data. The exact inventory worth for the company was determined and found to be $2.0544 Million. Secondly consider the value of all the equipment. If at all the company’s equipment has been depreciating, the exact current value of the equipment will be considered for all the vehicles, power tools, and also other equipment. The value of the equipment if the company decides to sell all of them at the current price has not been mentioned in the case study. The third element is computing the accounts receivable. This entails the total amount of money that are outstanding. The total amount based on the current information is a total of $2.915 million. The collateral amount therefore would be the summation of the inventories and the accounts receivables

=$2.915 million + $2.0544

=$4.9694 Million

  • Appropriate monitoring and controls

The appropriate monitoring and control elements are the embedded control. This is perceived to be the right controls that would without having to set a reminder to do something. Some of these aspects include the standardized contracts, the automated back-ups together with the well-designed financial control which works automatically for purposes of protecting the business from any form of poor decision.

  • Recommend Covenants

It is highly recommended that the company uses the procedural control. This entails having separated parties within the operations of the company who are charged with the responsibility of checking the movement of money in the company. The company would also need the right review process for all their recruits.

Assignment Two

Based on the information provided for in the case study, the company is prone to a term loan program that is approximately half of the collateral amount. For this reason, the company is in a position to access a loan of up to $377,000. There are various terms and conditions attached to the term loan (Bodie & Merton, 2000). First, the loan would be paid off between a period of one and twenty five years. The loan will need collateral and the right approval process for purposes of reducing the default risk. There will also a down payment. The function of the down payment to reduce the payment amount together with the final cost of that loan.

Assignment 3

The anticipated loan amount that the company needs to secure to cover all the costs mentioned in the case is a total of $703000. There are various terms and conditions attached to the loan. First, the repayment period for the equipment is up to forty years. The loan will be dependent on the useful life of the collateral (Bodie & Merton, 2000). The interest payment will be due during the deferral time.

 

 

 

Financial Analysis

The analysis of the income statement and balance sheet items will help to determine whether ABC Products Inc should be viable to get a bank loan. In terms of the balance sheet items, the total assets of the company increased in the last four years. In terms of liabilities, the total liabilities of the company reduced slightly from $4,136,000 in 2009 to $3,889,000 in 2012. The concern is that the equity of the company is lower than the total liabilities. In terms of the income statement, the sales revenues of the company have remained fairly the same over the last for four years without any significant growth. The gross profit margin of the company declined from around 36% in 2009 to 32% in 2012. Similarly, the net profit of the company also reduced significantly over the last four years.

Fig.1:

Ratio Analysis.

Ratio Analysis  
Ratios 2009 2010 2011 2012
Current ratio 0.412 0.4188 0.4133 0.4037
Debt- equity ratio 1.692 1.803 1.333 1.323
Net Margin 0.33% 0.36% 0.25% -2%

 

The ratio trend of ABC Products Inc is not good. The current ratio of the company has been worsening over the last four years. In 2009, the current ratio of the company was 0.412 and reduced to 0.4037 in 2012. The trend of the current ratio indicates that the company is unable to pay for its short-term debts using its current assets. The debt to equity ratio of ABC Products Inc is also not favorable, but  it has improved in 2011 and 2012.  The debt to equity ratio at 1.692 in 2008 improved to 1.323 in 2012,which is still unfavorable. The company’s solvency position is worse. The net margin ratio of the company has also worsened in the last four years. In 2012, the company reported a net loss. Based on the financial analysis, it is not recommendable for a bank to advance loan to ABC Products Inc as the company has a poor financial performance and liquidity position. The company would make a poor investment option as the trend on profitability for the company is bad.

 

Reference

Bodie, Z., & Merton, R. (2000). Finance. Upper Saddle River, NJ: Prentice Hall.

 

 

 

 

 

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