1 UNIVERSITY OF NAMIBIA NAMIBIA BUSINESS SCHOOL FINANCIAL MANAGEMENT STRATEGY CASE STUDY 2020. Due date: 5th June 2020 Watson Leisure Time Sporting Goods manufactures golf clubs, baseball bats, basketball goals, and other similar items. The company's income statements for the past three years are indicated in Exhibit 1. The balance Sheets for the same period are shown in Exhibit 2.

Exhibit 1

WATSON LEISURE TIME SPORTING GOODS

Income Statement

2017 2018 2019

Sales (all on credit)............................. $1,500,000 $1,800,000 $2,160,000 Cost of goods sold........................... 950,000 1,120,000 1,300,000 Gross profit....................................... 550,000 680,000 860,000 Selling and administrative expense......... 380,000 490,000 590,000 Operating profit................................. 170,000 190,000 270,000 Interest expense............................. 30,000 40,000 85,000

Net income before taxes..................... 140,000 150,000 185,000 Taxes................................................ 46,120 48,720 64,850

Net Income................................... $93,880 $101,280 $120,150 Shares............................................. 40,000 40,000 46,000

WATSON LEISURE TIME SPORTING GOODS has made the following projections 2020. All sales are on credit

March $24,000 June $28,000

April 16,000 July 35,000

May 18,000 August 38,000

Sales in January and February were $27,000 and $26,000, respectively. Experience has shown that of total sales, 40 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale. Total annual sales for the year 2020 are forecasted to be $2,500,000.

Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labour costs will run $6,000 per month, and fixed overheads is $3,000 per month. Interest payments on the debt will be $4,500 for both March and June. Finally, Watson's sales force will receive a 3 percent commission on total sales for the first six months of the year, to be paid on June 30. A cash dividend of $20,000 is scheduled to be paid in September. Tax payments of $3,500 are due in June and September.

2 Exhibit 2

WATSON LEISURE TIME SPORTING GOODS

Balance Sheet

Assets 2017 2018 2019 Cash...................................................... $20,000 $30,000 $20,000 Marketable securities.............................. 30,000 35,000 50,000 Accounts receivable.................................... 150,000 230,000 330,000 Inventory.......................................... 250,000 285,000 325,000 Total Current Assets.................................... 450,000 580,000 725,000 Net Plant and equipment................................. 550,000 720,000 1,169,000 Total Assets............................................... $1,000,000 $1,300,000 $1,894,000 Liabilities & Equity

Accounts payable.................................. $100,000 $225,000 $200,000 Notes payable (bank).................................... 100,000 100,000 300,000 Total Current liabilities................................. 200,000 325,000 500,000 Long-term liabilities................................. 250,000 331,120 550,740 Total liabilities............................................. 450,000 656,120 1,050,740 Common stock ($10 par)........................ 400,000 400,000 460,000 Capital paid in excess of par................... 50,000 50,000 80,000 Retained earnings....................................... 100,000 193,880 303,260 Total stockholders' equity................................... 550,000 643,880 843,260 Total liabilities and stockholders'equity.................. $1,000,000 $1,300,000 $1,894,000

Required:

Question 1 (50 marks)

(a) Calculate the earnings per share for the years 2017 through 2019. (3 marks)

(b) Calculate the return on assets (ROA) ratio for the years 2017 through 2019. (3 marks)

(c) Calculate the proportions of assets financed by debt for years 2017 through 2019. (3 marks)

(d) Using the Du Pont System, describe the changes in the return on equity from year to year. (10 marks)

(e) Construct the common size Income Statement for Watson Company for 2017 through 2019. (9 marks)

(f) Using the percent of sales method, prepare Watson Company's Pro-Forma Balance Sheet and Pro-Forma Income Statement for 2020 based on 2019 statements. (10 marks)

(g) Prepare Indexed Financial statements on Watson Company with 2017 as the base year. (12 marks)

Question 2

Prepare a schedule of monthly cash receipts, monthly cash payments and a complete monthly budget for March through June for Watson Company. (30 marks)