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Finance i. Sources of Funds (Capital Structure) Callaway Golf Company raises its capital through owners equity.

The chart and graph below shows that Callaway is 100% equity financed.
Capital Structure Debt Equity Debt Percentage Equity Percentage 2007 2008 $568,230 $578,155 100% 100%

2007
Debt Equity

2008
Debt Equity

Callaway is 100% equity financed with $568,230 in assets in 2007 and $578,155 in assets in 2008, meaning that their main source of capital comes from issuance of shares and owners equity. 1. Bonds Callaway Golf Company does not have any bonds. 2. Stocks Callaway Golf Company is a publicly traded corporation, so shares are available to investors on a stock exchange or through a broker. Equity financing is their primary source of capital. The Preferred Stock and Common Stock for the firm are available on the New York Stock Exchange under the ticker symbol ELY. On 01/02/2009 the price closed at $9.72 per share. However if stock was purchased on the same date in 2006, the price paid would be $14.50.

Stock Price Changes of ELY (2006 2009)

So, in overall the company was able to make a profit to its shareholders, which is a good sign of its financial health and ability to grow over the long run. The dividends has remained consistent at $0.28 per share in the years 2006, 2007, and 2008 but decreased to $0.10 in 2009. 2006 Dividends 0.28 2007 0.28 2008 0.28 2009 0.10

Dividends
0.3 0.25 0.2 0.15 0.1 0.05 0 2006 2007 2008 2009 Dividends

ii. Liquidity Ratios Liquidity ratio is its ability to meet its near-term obligations, and it is a major measure of financial health. Liquidity can be measured through current ratio and quick ratio. 1. Current Ratio Current ratio signifies a companys ability to meet its short term liabilities with its short-term assets. Current Ratio = Current Assets/ Current Liabilities According to the Callaway Golf Companys balance sheet, their current assets and current liabilities of 2007 and 2008 are:
2007 $490,003 $223,548 2.192 2008 $496,581 $253,411 1.960

Current Assets Current Liabilities Current Ratio


$600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 2007 2008

Current Assets Current Liabilities

Current Ratio
2.200 1.900 1.600 1.300 1.000 0.700 2007 2008 Current Ratio

For the Callaway Golf Company, their current ratio displaying above one for the consecutive two years, 2007 and 2008. We can say that the company does not have any liquidity issues and they have ability to satisfy their near term obligations. The current ratio in the year 2007 was 2.19 while in the year 2008 it decreased to 1.96 meaning that the company was holding more liquid assets in 2007 than in 2008.

2. Quick Ratio Quick ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick Ratio = (Total Current Assets Inventory) / Total Current Liabilities
2007 $490,003 $253,001 $223,548 1.06 2008 $496,581 $257,191 $253,411 0.94

Total Current Assets Inventory Total Current Liabilities Quick Ratio

Quick Ratio
1.10 1.05 1.00 0.95 0.90 0.85 2007 2008 Quick Ratio

A value of the ratio 1 and above is considered to be optimal. However, for Callaway Golf Company, in 2007 quick ratio was above 1 and in 2008 it was lower than 1. Because their quick ratio decreased, it means the firm has to sell inventory to meet its short term liabilities.

Overall Liquidity Ratios


2.500 2.000 1.500 1.000 0.500 0.000

Current Ratio Quick Ratio

2007

2008

Based on the overall liquidity ratio, current ratio is continually higher than the quick ratio over the years, which means a firm can meet its short term obligations but mostly relying upon the sale of inventories to meet their short term obligations. Callaway Golf Companys financial position remains strong because the company has little long-term debt and high liquidity.

iii. Leverage Ratios Leverage ratios measure the ability of the business to meet its long term debt obligations, such as interest payments on debt, the final principal payment on debt, and any other fixed obligations like lease payments. The indicators that we have chosen to evaluate the leverage of Callaway Golf Company are Debt to Equity Ratio and Times Interest Earned in order to measure the companys debt situation. 1. Debt to Equity Ratio The debt to equity ratio measures how much of the company is financed by its debt holders compared with its owners. This is the ratio that essentially shows the leverage of the organization. This means the amount of debt used to finance a firms assets. A firm with significantly more debt than equity is considered to be highly leveraged. The debt to equity ratio is an equation of total liabilities divided by shareholders equity. Debt/Equity = (Short-Term Debt + Long-Term Debt) / Total Equity
Debt to Equity Ratio Short Term Debt Long Term Debt Total Equity Debt to Equity Ratio 2007 $37,000 $568,230 0.07 2008 $90,000 $578,155 0.16

Debt to Equity Ratio


0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 2007 2008

Debt to Equity Ratio

The table shows Callaways short term debt, long term debt, total equity, and debt to equity ratio, which is calculated based on the sum of short term and long term debts divided by equity. The companys debt increased from 0.07 in 2007 to 0.16 in 2008. In 2007 and 2008 during the recession, they had no long term debt; company managed well during that time in order to reduce their risks toward debt.

2. Times Interest Earned The times interest earned ratio indicates the extent of which earnings are available to meet interest payments and the ratio of earnings before interest and tax (EBIT) of a business to its interest expense during a period. It is a solvency ratio measuring the long term viability of a business to pay off its debts. A lower times interest earned ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates. Times Interest Earned = EBIT / Interest Charges According to the Callaway Income Statement,
Times Interest Earned EBIT Interest Expense Times Interest Earned 2004 ($24,702) $ 945 -26.14 2005 $17,206 $ 2,279 7.55 2006 $37,055 $ 5,421 6.84 2007 $90,183 $ 5,363 16.82 2008 $84,188 $ 4,666 18.04

Times Interest Earned


25.00 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00 -25.00 -30.00

2004

2005

2006

2007

2008

Times Interest Earned

Graph shows that organizations times interest earned ratio computed by the EBIT and interest expense. The higher the result is easier for the business to meet its interest payments. Lower values are unfavorable. In general, times interest earned of 1.5 or below is unsafe. Times interest ratio of Callaway Golf Company are -26.14, 7.55, 6.84, 16.82, and 18.04. In 2004, the companys times interest earned ratio was below the safe value 1.5, but in the following years it increased above the level 1.5, which explains that income before interest and tax of the business is enough to pay off its interest expense. From the creditors side, they will consider the Callaway Golf Company as a less risky firm to lend.
18 16 14 12 10 8 6 4 2 0 2007 2008 Debt to Equity Ratio Times Interest Earned

Callaways is managing their debts well and their ability to meet its interest payments are secure, which is indeed a good sign for the creditors and investors.