ASSIGNMENT 2- CASE STUDY

Assignment 2 Case Study Ziad Y. Mazboudi California Southern University Corporate Finance FIN 86505 Dr. Conrad Francis

ASSIGNMENT 2- CASESTUDY Assignment 2 Case Study Cash Flows and Financial Statements at Sunset Boards, Inc. Input Cost of goods sold Cash Depreciation Interest expense Selling & Administrative Accounts payable Fixed assets Sales Accounts receivable Notes payable Long-term debt Inventory New equity Tax rate Dividend percentage 2009 141,641 20,437 39,983 8,702 27,854 36,120 176,400 277,855 14,482 16,464 89,040 30,475 20% 50% 2010 178,839 30,880 45,192 9,962 36,355 40,908 214,184 338,688 18,785 17,976 102,480 41,821 16,800

1. An income statement for 2009 and 2010 2009 Income Statement Sales $ 277,855 Cost of goods sold 141,641 Selling & Administrative 27,854 Depreciation 39,983 EBIT $ 68,377 Interest 8,702 EBT $ 59,675 Taxes 11,935 Net income $ 47,740 Dividends $ 23,870 Addition to retained earnings $ 23,870

Sales

2010 Income Statement $ 338,688

ASSIGNMENT 2- CASESTUDY Cost of goods sold Selling & Administrative Depreciation EBIT Interest EBT Taxes Net income Dividends Addition to retained earnings 2. 178,839 36,355 45,192 78,302 9,962 68,340 13,668 54,672 27,336 27,336

$ $ $ $ $

A balance sheet for 2009 and 2010 Balance sheet as of Dec. 31, 2009 20,437 Accounts payable 14,482 Notes payable 30,475 Current liabilities 65,394 Long-term debt 176,400 Owners' equity 241,794 Total liab. & equity

Cash Accounts receivable Inventory Current assets Net fixed assets Total assets

$ $

36,120 16,464 52,584

$ $ $

$ 89,040 $ 100,170 $ 241,794

Balance sheet as of Dec. 31, 2010 Cash Accounts receivable Inventory Current assets Net fixed assets Total assets $ 30,880 18,785 41,821 91,486 214,184 305,670 Accounts payable Notes payable Current liabilities Long-term debt Owners' equity Total liab. & equity $ $ 40,908 17,976 58,884

$ $ $

$ 102,480 $ 144,306 $ 305,670

ASSIGNMENT 2- CASESTUDY 3. Operating cash flow for each year

Operating Cash Flow = EBIT + Depreciation - Taxes 2009 96,425 2010 109,826

Operating cash flow

4. Cash Flow from assets for 2010 Capital Spending Ending net fixed assets - Beginning net fixed assets + Depreciation Net capital spending Change in Net Working Capital Ending NWC -Beginning NWC Change in NWC Cash Flow from Assets Operating cash flow - Net capital spending -Change in NWC Cash flow from assets

214,184 176,400 45,192 82,976

$ $

32,602 12,810 19,792

109,826 82,976 19,792 7,058

5. Cash Flow to creditors for 2010 Cash Flow to Creditors Interest paid -Net New Borrowing Cash flow to Creditors

$ $

9,962 13,440 (3,478)

6. Cash Flow to stockholders for 2010 Cash Flow to Stockholders Dividends paid -Net new equity raised Cash flow to Stockholders

$ $

27,336 16,800 10,536

ASSIGNMENT 2- CASESTUDY

Question 1: How would you describe Sunset Boards cash flows for 2010? Write a brief discussion (Jordan, Westerfield, & Ross, 2011, p. 86). The operating cash flow seems healthy and increasing annually: $96,425 in 2009 and $109,826 in 2010. This tells us that the demand for their surfboard is good and they have no problem selling them, and have enough funds to pay their day to day expenses. The Net Working Capital is also positive and increasing annually, so this tells us that Sunset Boards is currently a healthy firm. The cash flow to creditor is negative, and this is not very good, but it appears that the funds are being spent on fixed assets to expand the business. Sunset Boards should not have a problem paying their creditors, but this may require additional funding. Question 2: In light of your discussion in the previous question, what do you think about Tads expansion plans? Sunset Boards appears to be a successful small company. A major expansion as Tad is planning will require resources such as staffing, business planners, accountants, and more staff to produce the larger quantities of surfboards that he is envisioning. This will increase Tads overhead and could reduce his margins of profit. Eventhough he is envisioning a much larger volume, he will be entering a different market than his current custom surfboard and word of mouth among professionals. Once the surfboards become more production boards, the company will be competing among the production surfboard companies, and the word of mouth will not be enough anymore, resulting in possibly an increase in marketing funds, and other related expenses. This will also result in a reduction in profit. My recommendation would be for Sunset Boards to first open the Hawaii store and establish a presence in the area. Once the store is running smooth and is well established, Tad will

ASSIGNMENT 2- CASESTUDY be able to assess how is the operation running with the increase in production to support the Hawaii store, and then evaluate the possibility of supplying other stores.

ASSIGNMENT 2- CASESTUDY References

Jordan, B. D., Westerfield, R. W., & Ross, S. A. (2011). Corporate Finance Essentials (7th ed.). Singapore: The McGraw-Hill Companies.