6. Project Dunham’s income and balance sheet for 1996 assuming the bank grants Dunham a $675K note payable at 12 percent and no existing interest-bearing debt is retired. Dividends will be 50 percent of net income. Cash will be the balancing item

Topics: Financial ratios, Financial ratio, Balance sheet Pages: 19 (1263 words) Published: October 12, 2014
FINANCE 522

DR. DENIS BOUDREAUX

FALL 2014

DUNHAM COSMETICS CASE

QUESTIONS

Calculate Dunham's 1995 financial ratios and prepare common size statements.

Do a comparative and trend analysis. Organize the analysis/ presentation by the four ratio groups.

Is the bank justified concerned? Justify your answer.

Nineteen ninety-four was a "down" year for Dunham. Do you think that GCB had a responsibility to express concern in 1994, especially since the current ratio was close to 1.85, the number that could trigger a call of the loan? Explain.

Suppose Dunham had followed Jensen's 1993 recommendation to lower its payout ratio. Recalculate the firm's debt and current ratios for 1995 assuming that the dividend payout ratio was 20 percent from 1993 to 1995. The extra money would have been used to reduce the firm's notes payable.

Project Dunham's income and balance sheet for 1996 assuming the bank grants Dunham a $675K note payable at 12 percent and no existing interest-bearing debt is retired. Dividends will be 50 percent of net income. Cash will be the balancing item.

Calculate the firm's 1996 minimum cash balance by assuming that the average cash balance between 1993 to 1995 is the required 1996 cash balance.

Use any extra cash at the end of 1996 to retire notes payable and redo the pro forma statements for 1996.

Calculate Dunham's financial ratios for 1996.

Will the bank be impressed by Jensen's changes?

What other options does Dunham have?

A) Jensen discussed Dunham's situation with Paula Thibodaux, an accounting friend. Thibodaux commented that Dunham has "too little long-term capital, especially considering the receivables and inventory needs." Why is it appropriate to use long-term capital to finance inventory and receivables that appear on a balance sheet as short-term assets?

B) What advantages and disadvantages are there for using short-term debt to finance long-term assets? Do some research to find the answer.

DUNHAM COSMETICS CASE

NAME___________________________________

ANSWERS:

QUESTION #1

1993 1994 1995 IA

LIQUIDITY

Current 2.4 1.94 1.70 1.95

Quick 1.33 1.08 .8946 1.0

LEVERAGE

Debt 46 55 59 53

XINT Earn 8.54 5.2 3.53 5

ACTIVITY

Inv TO 6.25 5.1 4.36 5.4

Fixed A TO 13.33 9.91 7.99 10

Total A TO 2.3 1.82 1.64 2.1

ACP 54 72.7 79.9 51

PROFITABILITY

Gross PM 32 32 29.54 30.5

Net PM 4.4 3.7 1.41 3

ROA 10.1 6.7 2.31 6.3

ROE 18.7 14.8 5.69 13.3

COMMON SIZE STATEMENTS

DUNHAM COSMETICS

INC STATEMENT

1993

%

1994

%

1995

%

PRO FORMA

%

SALES

25,264

100%

25,769

100%

26,671

100%

CGS

17,180

68%

17,508

68%

18,793

70%

GROSS PROFIT

8,084

32%

8,261

32.1%

7,878

30%

ADM E

5,254

20.8%

5,516

21.4%

6,068

22.8%

DEPR

302

1.2%

393

2.2%

479

1.8%

EBIT

2,528

10%

2,352

9.1%

1,331

4.9%

INT

296

1.2%

451

1.8%

578

2.2%

EBT

2,232

8.8%

1,901

7.4%

753

2.8%

TAXES

1,116

4.4%

951

3.7%

377

1.4%

NI

1,116

4.4%

950

3.7%

376

1.4%

CS DIV

558

2.2%

475

1.8%

188

.70%

TO RE

558

2.2%

475

1.8%

188

.70%

DUNHAM COSMETICS

BALANCE SHEET

ASSETS

CASH & MS

1,264

1,237

879

AR

3,789

5,204

5,920

INV

4,042

5,102

6,133

TOTAL CA

9,095

11,543

12,932

GROSS FIXED

3,024

4,123

5,337

ACCUM DEPR

(1,129)

(1,521)

(2,001)

NET FIXED

1,895

2,601

3,336

TOTAL ASSETS

10,990
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