Question

1. I/S Analysis:  The following ratios have been calculated for the SolarMolar Company. Note that SolarMolar has NO DEBT.  Given this information and nothing else, analyze the income statement data and provide your thoughts regarding TWO changes you may encourage SolarMolar to consider.                                                                                                                                  (5 pts)

                                                                                                            2018                2017                2016

Gross profit margin                                                    41.9%              42.5%              42.1%

Operating profit margin                                              15.7%              21.7%              21.5%

Net profit margin                                                        11.8%              13.0%              12.9%

2. B/S Analysis:  You are reviewing the balance sheet of DGD Inc., (a durable goods manufacturer) and you notice a sizeable amount of “Deferred Taxes Payable” in the long-term liabilities section of the balance sheet.                                                                                                             (6 pts)

1. Explain how this liability was created

2. Is this a liability that you expect to be repaid in the next five years?  Explain.

3. SOCF Analysis:  Your are reviewing the statement of cash flows for DGD Inc., (a durable goods manufacturer) and you notice that CFFO is meaningfully positive and growing.  However, you also notice that FCF last year was negative.  Given that a firm’s purpose in life is to generate cash flow, would you expect this durable goods company to be in peril?                                      (4 pts)

4. B/S:  Johnny Jim Corporation’s 2019 balance sheet has no funded, long-term debt on the balance sheet.  However, there are operating leases payments that must be made in the future as follows:  

         2018                 47,116

            2019                 43,449

            2020                 41,315

            2021                 37,383

      2022                 32,168

            Thereafter       87,582  (assume this is 30,000/30,000/27,582 in 2023/2024/2025)

1. Calculate an adjustment you would make (assuming a 5% interest rate) to reflect the amount of balance sheet debt these operating leases represent.                          (6 pts)

Answer 1

Answert to

IS analysis -

Gross margin high in 2017 as compared to 2016 and 2018, so the company should consider in reducing non value added cost while manufacturing goods or providing services to enhance its gross profit margin.

Operating profit margin in 2018 is significantly low in 2018 aas compared to 2017 and 2016, Company should identify where the cost has increased in terms of its indirect costs - salary, rent, communication, IT expenses & any other administrative cost and reduce its avoidable cost to return to its operating profit margin trend.   

a) How Deferred tax paybale was created

Deferred tax liabilities are recognized due to the taxable temporary differences, i.e., when the profit as per book is more than the profit as per tax law.

b) Is this liability that you expect to be repaid in the next five years? Explain

DTL is revered in the future period, once the accounting profit will be more than the taxable profit. Usually the deferred tax is expected to be repaid in the next five years.

SOCF analysis -

Operating cah flow is the main input to determine the prerformance of the Company as it is the cash floww from the business activity of the Company. Financila cahs flow is mainly the raising of funds thorugh different sources and payments towards it. FCF does not affect the performance is it is negative, it could also means that the Compnay has reduced its debts and obligations. So, the Company is not going to peril.

Answer to 2nd part a)

Year	2018	2019	2020	2021	2022	2023	2024	2025
Operating lease payments	47116	43449	41315	37383	32168	30000	30000	27582
PV factor@5%	0.95238	0.90703	0.86384	0.82270	0.78353	0.74622	0.71068	0.67684
PV of operating lease payments	44,872	39,410	35,689	30,755	25,204	22,386	21,320	18,669
Present value	238306
Amount of Balance Sheet debt these operating lease represents	238306