11:55 Me . GO BLET.Ill 21% Chapter 3 Case 4 Requirements a and b: Financial Statement Analysis and Interpretation Question The firms Nickels Books Lid and Kerr's All Your Books Ltd are both located on a university campus and are competitors in the student market. At present each have about 50% of the total market. Nickels started business in 20X0 whereas Kerr's is a much older firm. The First New Zealand Bank has been approached by both firms for a $10,000 loan. Both Nickels and Kerr's have been approached by Ryan who is interested in setting up a cafe called West Side Cafe. She has been given approval by the university and has been offered space either next door to Nickels or next door to Kerr's. The two bookshops are in different locations on the western side of the campus. Ryan does not have enough capital to set up the cafe. She has offered a partnership deal to the first firm to bring the $10,000 she needs as capital. Ryan has good catering skills but does not have sufficient assets to ask a bank for a loan. Nickels Books Ltd Statistical measures for years 20X3 20X2 20X1 20X0 Market price (cents) 220.00 189.00 142.00 135.00 Current P/E ratio 16.06 17.80 16.27 13.70 Current dividend yield (%) 2.05 1.80 2.32 2.59 Financial leverage multiplier 2.54 2.53 2.33 2.06 Times interest earned 2.06 1.48 2.37 4.03 Inventory turnover 2.96 2.87 2.65 2.59 Fixed assets turnover 6.17 6.63 9.74 16.93 Total assets turnover 1.78 1.81 1.81 1.96 Sales growth (%) 16.23 18.52 17.38 n/a Net profit growth (%) 73.00 -9.00 -11.00 n/a Earnings per share ($) 13.70 7.94 8.73 9.86 Dividends per share ($) 4.50 3.40 3.30 3.50 Net profit margin (%) 4.90 3.30 4.30 5.70 Return on assets (%) 8.70 6.00 7.80 11.20 Nickels Books Ltd: Financial Profile Statement of Financial Position 20X3 20X2 20X1 20X0 Summary for years $ $ $ Shareholders' funds 19,692 16,765 15,321 13,595 Long-term liabilities 23,450 18,907 13,000 8,650 Current liabilities 6,854 6,682 7,324 5,755 Total liabilities and equity 19,996 42,354 35,645 28,000 Current assets 35,582 30,805 29,014 24,752 Fixed assets 14,414 11,549 6,631 3,248 Total assets 49,996 42,354 35,645 28,000 Number of issued shares 31,806 31,806 31,806 31,806 Inventory at end 30,010 26,617 24,352 21,218 OWe btetom col In Ye oR A Gea Kerr's All Your Books Ltd Statistical measures for years 20X3 20X2 20X1 | 20X0 Market price (cents) 105.00 80.00 | 110.00 | 98.00 Current price earnings ratio 14,00 16.00 | 17.00) 17.00 Current dividend yield (%) 4.76 4.38 2.73 2.04 Financial leverage multiplier 5.95 6.15 3.66 3.82 Times interest earned 0.86 0.61 1.60 1.41 Inventory turnover 0.99 0.91 2.24} 2.34 Fixed assets turnover 1.49 1.70 2.25 1.74 Total assets turnover 0.48 0.48 0.78 0.75 Sales growth (%) 4.00 7.45 9.50 | 18.37 Net profit growth (%) 50.20 20.70 7.70) 23.00 Earnings per share ($) 7.57 5.04 6.36 5.90 Dividends per share ($) 5.00 3.50 3.00 | 2.00 Net profit margin (%) 6.50 4.50 6.10 6.20 [Returnonassets(%) | 340 | 210 | 470] 460 | Kerr's All Your Books Ltd: Financial Profile Statement of Financial Position 20X3 20X2 Summary for years $ $ $ $ Shareholders' funds 42,923 40,219 38,600 | 35,070 Long-term liabilities 102,345 96,167 46,332 | 48,992 Current liabilities 110,225 | 110,914 56,317 | 49,775 Total liabilities and equity 255,493 | 247,300 | 141,249 | 133,837 Current assets 173,441 | 178,047 | 92,667 | 76,495 Fixed assets 82,052 | 69,253 | 48,582 | 57,342 Total assets 255,493 | 247,300 | 141,249 | 133,837 Number of issued shares 105,000 | 105,000 | 105,000 | 105,000 Inventory at end 123,383 | 129,007 48,909 | 42,726 Required The manager of the First New Zealand Bank has asked you to investigate the liquidity of both firms and to comment on their ability to take on the proposed loan assume that the interest rate will be 9%. You have obtained a financial profile and statistical summary for both firms from a financial database but some key ratios are not included. Write a report to the bank manager with a recommendation as to which would be the best firm to receive the loan. Support your report with two relevant liquidity ratios and two other ratios that indicate capacity to support a Loan. If any of the ratios you think are necessary are not included in the statistical summary, calculate them using the figures in the financial profile. Ryan has asked you to advise her on the profitability and financial strength of both firms to help her decide which firm she should be in partnership with. Use the Du Pont return on investment model to analyse the profitability, asset management and capital structure of both firms over the four-year period. Show your workings clearly. Write a report to Ryan commenting on the results of your analysis and any other key ratios not dealt with already. Do not repeat the comments you have already made to the bank manager on liquidity; you can assume Ryan has already seen that report. (II e