This project requires the completion of a comprehensive financial analysis of a company seeking to expand operations. A
scenario is presented below as a case study that requires analysis and resolution.
This assessment will evaluate your mastery with respect to the following course outcomes:
• Understand at a deeper level the economic analysis of strategic and tactical investments, the effect financial
leverage has on firm value, and the integration of investment and financial corporate strategies
• Analyze issues that face modern corporate managers when making capital budgeting and capital structure decisions
• Apply finance valuation techniques for purposes of business decision making
• Integrate, synthesize, and present finance concepts and analyses
• Be able to use the corporate finance tools necessary to develop the skills, knowledge, and wisdom (SKW) in current
demand by employers
• Understand the qualities needed for careers such as corporate managers, financial analysts, investment analysts,
brokers, and business practitioners
Prompt
Scenario: Felicia & Fred, a publicly held U.S. corporation and manufacturer of jewelry, requires a financial analysis of its
current year operating performance. Previously, the company expanded capacity to include a Czech crystal bracelet product
line. During this year, the company expanded its product offering to include women’s accessories, specifically handbags. These
are outsourced through a licensing agreement the company initiated with a manufacturer in Asia. In order to preserve
intellectual property and branding rights in the United States, this manufacturer exclusively has the right to Felicia &
Fred’s women’s logo purses.
As previously mentioned, the company’s inventory investment has grown, but to date it has not required additional storage
space in terms of increases in total plant and property since the company is renting warehouse space to accommodate the
necessary real estate. However, the company anticipates that this will change if the demand for this product continues to be
met with fervor among its customer base.
Given these considerations and the results indicated in the company’s income statements and balance sheets for the prior year
and current year, as well as the company’s cash flow statement for the current year, answer the following questions and
address specific qualitative elements as requested.
I. Introduction/Abstract: Discuss briefly the difference between strategic and tactical decision making.
A. Is the decision to enter the handbag distribution business strategic or tactical?
B. What indications of financial performance must a company consider in evaluating whether an investment has successfully
increased shareholder wealth?
II. Financial Trend Analysis: Directly analyze the firm’s financial statements as presented in the Exhibits.
A. Calculate liquidity ratios of the firm for the prior year and current year: current ratio, inventory turnover, and the
accounts receivable turnover (for the denominator of the turnover ratios, use the year presented). Show your calculations and
interpret the trend. What conclusions do you draw from this analysis?
B. Calculate the following solvency ratios of the firm for the prior year and current year: debt to equity and times
interest earned. Show your calculations and interpret the trend. What conclusions do you draw from this analysis?
C. Calculate the following profitability ratios of the firm for the prior year and current year: gross profit margin, net
profit margin, return on assets, and return on equity (for the denominator of the return ratios, use the year presented). Show
your calculations and interpret the trend. What conclusions do you draw from this analysis?
III. Integrate Prior Financial Analysis
Consider the prior analysis Felicia & Fred completed for the Czech crystal bracelet product line. Given the prior
analysis and the profitability trend of the company, did the inclusion of this product line as compared to the prior year
results enhance gross margin for the company? Why or why not? Show calculations and interpret the results.
IV. Long-Term Financial Planning: Prepare updated financial statements for Felicia & Fred based on the following assumptions:
A. The company’s sales are projected to grow by 10% next year. Calculate the effects and present the forecasted income
statement and balance sheet for the company. Also consider that this sales increase will not require any new capital
investments needed in land and buildings and that mortgages will remain the same. Depreciation will remain constant and will
accrue year over year in the balance sheet.
B. Indicate the amount of external financing required by the company for next year.
V. Qualitative and Ethical Considerations of Financial Analysis
A. The cost of capital may change when there are incremental capital requirements obtained from different sources,
resulting in changes in capital structure. What qualitative considerations are important for a company seeking to raise
capital? Answer this by considering the effect of leverage in your response. Specifically, what expected effects will
additional leverage have on a company’s decision to accept investment projects? As the cost of capital increases or decreases,
are managers more or less likely to accept capital projects? What is the effect on shareholder wealth when managers accept
projects based upon fluctuations in cost of capital? Should shareholders be concerned about the ethics of managers’ selection
processes?
B. Agency conflicts arise when there are differences in the goals of the firm versus the personal goals of managers. What
qualitative considerations are important for the mitigation of agency conflicts in relation to the acceptance and completion
of capital projects? Indicate the types of monitoring costs and why these are critical. What monitoring activities are
required to ensure that project acceptance and outcomes benefit shareholders? What approaches might be necessary to ensure
managers make ethical project investment decisions?
Felicia & Fred Felicia & Fred
Balance Sheets Statement of Cash Flows
Current and Prior Years For the Current Period Ended
000s
Cash Flows from Operating Activities:
000s 000s 000s Net Income 52,500
Assets next current prior Adjustments to reconcile net income to net cash provided by
operating activities
Cash 12,000 11,400 Depreciation Expense 55,700
Accounts Receivable 4,700 4,600 Increase in accounts receivable (100)
Inventory 24,200 13,000 Increase in inventory (11,200)
Total Current Assets 40,900 29,000 Decrease in salaries payable (4,200)
Increase in interest payable 3,000
Land 50,000 40,000 Decrease in taxes payable (11,200)
Building & Equipment 600,000 600,000 Increase in Short Term notes Payable 24,000
Less: Accumulated Depreciation – Building & Equipment (375,700) (320,000)
Increase in accounts payable 2,200
Total Long Term Assets 274,300 320,000 Net Cash Flow from Operating Activities
110,700
Total Assets 315,200 349,000
Cash Flows from Investing Activities:
Liabilities and Stockholders’ Equity Cash paid to purchase land
(10,000)
Net Cash Flow from Investing Activities (10,000)
Accounts Payable 9,200 7,000
Salaries Payable 0 4,200 Cash Flows From Financing Activities:
Interest Payable 3,000 0
Short Term Notes Payable 24,000 0 Cash paid for Bonds (90,100)
Taxes Payable 0 11,200 Cash paid for dividends (10,000)
Total Current Liabilities 36,200 22,400 Net Cash Flow from Financing
Activities (100,100)
Bonds Payable 109,900 200,000 Net Increase in Cash 600
Total Long Term Liabilities 109,900 200,000 Plus: Cash Balance Prior Year
11,400
Cash Balance Current Year 12,000
Common Stock 120,000 120,000
Retained Earnings 49,100 6,600
Total Stockholders’ Equity 169,100 126,600
Total Liabilities and Stockholders’ Equity 315,200 349,000
Felicia & Fred
Income Statements
For the Current and Prior Periods Ended 000s 000s 000s
next current prior
Revenue: 975,000 950,000
Less: Cost of Goods Sold (723,600) (749,000)
Less: Depreciation Expense (55,700) (52,000)
Gross Margin 195,700 149,000
Selling, General & Administrative Expenses (58,200) (64,000)
Income Before Interest & Taxes 137,500 85,000
Interest Expense (15,000) (12,000)
Income Before Taxes 122,500 73,000
Income Taxes (70,000) (60,000)
Net Income 52,500 13,000
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