Question

1. Fill in the blanks and give reasons:

	Company A	Company B
ROE	8%	8%
Profit Margin %	7%	4%
TAT	1.7	3.0
ROA	11%	8.7%
Generic Strategy?

A. Fill in the generic strategy row above. (5 points)

The answer the following questions:

B. How different are the two firms’ financials? Explain each ratio. (5 points)

C. How are they related to their strategies? (5 points)

2. A. How would you interpret a current ratio of 0.8? (2 points)

B. Is it good or bad for the firm? (2 points)

C. What information you would need to extra to interpret it? (1 points)

3. Use this information for New Tech Company to answer the following question. You may (or may not) need to fill in missing information.

          NEW TECH COMPANY

Income Statement	2010	2011	2012
Sales	100	110	120
Cost of goods sold	50	51	52
Depreciation	20	20	20
General, sales & admin expenses	70	65	60
Taxes	10	10	10
Net Income
Balance Sheet	2010	2011	2012
Current Assets	40	45	40
Property, plant & equipment	60	55	60
Total Assets
Current Liabilities	40	40	35
Long-Term Liabilities	10	10	15
Equity	50	50	50
Total Liabilities & Equity

INDUSTRY AVERAGE RATIOS

	2010	2011	2012
CR (Current Ratio)	1.5	1.5	1
DR (Debt Ratio)=TL/TA	60%	60%	60%
TAT (Total Asset Turnover)	2	2.2	2.5
PM (Profit Margin)	4%	5%	6%
Sales Growth	3%	2.50%	3%
Profit Growth	5%	25%	20%

Which of the following items characterize New Tech Company? (It may be more than one option).

EXPLAIN (and report your calculations) (15 points)

1. High debt & unprofitable
2. Low debt & unprofitable
3. Decreasing profit margin
4. High Asset Utilization Performance
5. Low Asset Utilization Performance
6. Increasing sales with a decreasing sales growth rate
7. 1, 3 and 5 characterize New Tech Company

4. Using CAPSIM Practice Round Courier Reports for the Rounds :

A. Identify your closest competitor at the end of Round 3 ( Hint: identify a company with products & pricing (5 points)

B. Identify industry revenue (growth) averages, PM growth, and CM growth for the 3^rd Practice Rounds (10 points) for all the players in this industry

C. Create & growth and common-size “Selected Financial Statistics” Statements for from 2^nd Round to 3^rd Round (15 points)

D.

I.Write down the steps of strategic financial analysis ( 3 points)

II. Compare and contrast the performance of your firm vs. industry & the closest competitor. (12 points)

E. Which company performed the best? Which company performed the worst? for the end of the 3^rd Practice Round (10 points)

Answer 1

As per policy, only one question or its first four parts are allowed to answer at a time, so answering Q1 here:

A:
	Company A	Company B
Profit Margin	Higher	Lower
Equity investment	Higher	Lower
Rotating assets	Lesser	Higher
Generic Strategy:
a)	Increase the sale of product with increasing the market share to increase profit	Do higher production so that more product is sold to increase profit
b)	Increase the low interest debt to increase ROE as Financial leverage is low	To increase the equity investment to increase production capacity due to lower equity.
B:
	Company A	Company B
Profit Margin	Higher	Lower
Equity investment	Higher	Lower
Rotating assets	Lesser	Higher
Return on Assets	Higher due to high margin	Lower due to lower margin
explanation:
ROE	return to equity is 8% which	return to equity is 8% which
	is equivalent to Comp. B due	is equivalent to Comp. A due
	to higher margin on sales.	to higher production and
		sales volume.
Profit Margin %	profit margin is 7% due to	profit margin is at lower level
	higher margin on sales, which	of 4% due to lower margin set
	is higher to Comp. B	on sales.
TAT	Company able to rotate only	Company able to rotate only
	1.7 times its assets ie. lesser	3 times during period its
	use of assets.	assets ie. lesser use of assets.
ROA	Higher return on assets due	Lower return on assets due to
	to higher margin on sales	lower margin on sales.
	Company A	Company B
C: Related to their strategies:	Higher margin will increase profits with increase sales.	Higher rotation of assets will profit with more volume of production & sales.
	Higher equity will invite inclusion of debt in capital structure	Lower equity with call for more issuance of equity
Part II:
A: Interpret the current ratio:	0.8 shows that against current
	liabilities of $1, the company
	possess $0.8 current assets.
B: Bad or Good for firm:	0.8 is a bad ratio because
	here current assets does not
	covers the current liabilities.
C: Extra information:	Closing Inventory and interest
	expenses required for Acid-
	Test ratio and times interest
	coverage ratio to judge liquidity.