Other Guidelines • The report with your solution should be formatted as a scientific report (or a mini-thesis) and sh

[answerhappygod]

Other Guidelines

• The report with your solution should be formatted as a scientific report (or a

mini-thesis) and should contain all the information necessary to be able to

o understand the procedures you used to arrive at your solution

o understand why you used these procedures (always give clear arguments)

o see the results of your computations (I do NOT accept references in the

text such as ‘see the Excel sheet’). In contrast, put your results in clearly

structured tables in your main text. I should be able to read and quote

your report without having to open additional files.

o see that you have thought about the interpretation of the results.

Case One: Ratio Analysis at S&S Air Inc.

Chris Guthrie was recently hired by S&S Air Inc., to assist the company with its financial

planning and to evaluate the company’s performance. Chris graduated from college five

years ago with a finance degree. He has been employed in the finance department of a

Fortune 500 company since then.

S&S Air was founded 10 years ago by friends Max Sexton and Todd Story. The

company has manufactured and sold light airplanes over this period, and the company’s

products have received high reviews for safety and reliability. The company has a niche

market in that it sells primarily to individuals who own and fly their own airplanes. Thecompany has two models; the Birdie, which sells for GHS 53,000, and the Eagle, which

sells for GHS 78,000.

Although the company manufactures aircraft, its operations are different from

commercial aircraft companies. S&S Air builds aircraft to order. By using prefabricated

parts, the company can complete the manufacture of an airplane in only five weeks.

The company also receives a deposit on each order, as well as another partial payment

before the order is complete. In contrast, a commercial airplane may take one and onehalf to two years to manufacture once the order is placed

Mark and Todd have provided the following financial statements. Chris has gathered

the industry ratios for the light airplane manufacturing industry.

S&S AIR, INC.

2021 Income Statement

GHS

Sales

30,499,420

Cost of goods sold

22,224,580

Other expenses

3,867,500

Depreciation

1,366,680

EBIT

3,040,660

Interest

478,240

Taxable Income

2,562,420

Taxes (40%)

1,024,968

Net income

1,537,452


Dividends

GHS560,000

Add to retained earnings

977,452Assets

Liabilities and Equity


GHS


GHS

Current assets

Current liabilities

Cash

441,000 Accounts payable

889,000

Accounts receivable

708,400 Notes payable

2,030,000

Inventory

1,037,120

Total current

liabilities

2,919,000

Total current

assets

2,186,520

Long-term debt

5,320,000

Fixed assets

Shareholder equity

Net plant and

equipment


16,122,400

Common stock

350,000

Retained earnings

9,719,920

Total equity

10,069,920

Total assets

18,308,920 Total liabilities and equity

18,308,920

Light Airplane Industry Ratios

Lower

Quartile Median

Upper

Quartile

Current ratio

0.50

1.43

1.89

Quick ratio

0.21

0.38

0.62

Cash ratio

0.08

0.21

0.39

Total asset turnover

0.68

0.85

1.38

Inventory turnover

4.89

6.15

10.89

Receivables turnover

6.27

9.82

14.11

Total debt ratio

0.44

0.52

0.61

Debt-equity ratio

0.79

1.08

1.56

Equity multiplier

1.79

2.08

2.56

Times interest earned

5.18

8.06

9.83

Cash coverage ratio

5.84

8.43

10.27

Profit margin

4.05% 6.98%

9.87%

Return on assets

6.05% 10.53%

Return on equity

9.93% 16.54%

26.15%:

1. Using the financial statements provided for S&S Air, calculate each of the ratios

listed in the table for the light aircraft industry.

2. Mark and Todd agree that a ratio analysis can provide a measure of the

company’s performance. They have chosen Boeing as an aspirant company.

Would you choose Boeing as an aspirant company? Why or why not? There are

other aircraft manufacturers S&S Air could use as aspirant companies. Discuss

whether it is appropriate to use any of the following companies: Bombardier,

Embraer, Cirrus Design Corporation, and Cessna Aircraft Company.

3. Compare the performance of S&S Air to the industry. For each ratio, comment

on why it might be viewed as positive or negative relative to the industry.

Suppose you create an inventory ratio calculated as inventory divided by current

liabilities. How do you think S&S Air’s ratio would compare to the industry

average?