Answer Happy

Question 2) (20 marks) Anita, a graduate of the University of Oxford, with four years of banking experience, was recently brought in as assistant to the chairman of the board of Handy Industries, a manufacturer of electronic calculators. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Handy's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice-president plus its major stockholders (who were all local businesspeople), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, William, Handy's president, was informed that changes would have to be made and quickly or he would be fired. At the board's insistence, Anita was given the job of assistant to Fred, a retired banker who was Handy's chairman and largest stockholder. Fred agreed to give up a few of his golfing days and to help nurse the company back to health, with Anita's assistance. Handy's 2009 and 2010 balance sheets and income statements, together with projections for 2011, are shown in the following tables. The 2011 projected financial statement data represent Anita's and Fred's best guess for 2011 results, assuming that some new financing is arranged to help the company recover. Income Statements. 2009 2010 2011E Sales $3,432,000 $5,834,400 $7,035,600 Cost of goods sold 2,864,000 4,980,000 5,800,000 Other expenses 340,000 720,000 612,960 Depreciation 18,900 116,960 $3,222,900 $5,816,960 120,000 $6,532,960 $ 502,640 EBIT $ 209,100 $ 17,440 176,000 Interest expense 62.500 80,000 EBT ($ 158,560) $ 146,600 58,640 87,960 $ 422,640 169,056 Taxes (40%) (63.424) ($ 95,136) Net income $ 253,584 Other Data Stock price $ 8.50 100,000 S 6.00 100,000 S 12.17 250,000 Shares outstanding EPS $ 0.880 ($ S 0.951) 0.110 1.014 0.220 DPS $ 0.220 Tax rate Book value per share $ 6.638 S 5.576 7.909 S $ 40,000 Lease payments $ 40,000 $ 40,000 Note: "E" denotes "estimated"; the 2011 data are forecasts. Department of Electrical Engineering Balance Sheets. 2009 2011E Assets Cash $ 9,000 48,600 7,282 20,000 $ 14,000 71,632 Short-term investments Accounts receivable 351,200 632,160 878,000 Inventories. 715,200 1,287,360 1,716,480 Total current assets $1,124,000 $1,946,802 $2,680,112 Gross fixed assets 491,000 1,202,950 1,220,000 Less: Accumulated depreciation 146,200 263,160 383,160 Net fixed assets 344,800 939,790 $ 836,840 $3,516,952 Total assets $1,468,800 $2,886,592 Liabilities and Equity Accounts payable $ 324,000 $ 359,800 Notes payable $ 145,600 200,000 136,000 720,000 300,000 Accruals 284,960 380,000 Total current liabilities 481,600 $1,328,960 $1,039,800 Long-term debt 323,432 1,000,000 500,000 Common stock (100,000 shares) 460,000 460,000 1,680,936 Retained earnings 203,768 97,632 296,216 Total equity $ 557,632 $1,977,152 Total liabilities and equity 5 663,768 $1,468,800 $2,886,592 $3,516,952 Note: "E" denotes "estimated"; the 2011 data are forecasts. a) Has the firm's profitability, liquidity position and financial stability improved or worsened from 2009 to 2010? Explain with the help of ratio calculations. b) Use the data from the income statement and balance sheet to prepare the statement of cash flows for 2010. What do you conclude from the statement of cash flows? c) Do you think that valid assumptions have been made to create the estimated (projected) values for 2011? Do the statements show any financial improvement in the coming year for the company? Support your justification with the help of calculations. Total operating costs 40% $ 2010 40% 40% Page2