Credit Assignment 1

The following is your first credit assignment. Assignment 1 consists of a case.

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Value 8%

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The Budda--Bing Manufacturing Company

Current Financial Position Analysis
Part A:
Tony Soprano and Pauli Walnuts, experienced budget analysts at The Budda-Bing
Manufacturing Company, have been charged with assessing the firms financial performance
during 2012 and its financial position at year-end 2012. To complete this assignment, they
gathered the firms 2012 financial statements, shown below. In addition, Tony and Pauli
obtained the firms ratio values for 2010 and 2011, along with the 2012 industry average ratios
(also applicable to 2010 and 2011). These are presented in the Historical Ratios table,
below.

Required Part A:
a. Calculate the firms 2012 financial ratios, and then complete the ratio table.
b. Analyze the firms current financial position from both a cross-sectional and a
time-series viewpoint. Break your analysis into an evaluation of the firms
liquidity, activity, leverage, and profitability. Use a common-size analysis for
profitability. Based on your analysis of all the data available, provide a detailed
discussion of the firms overall financial position. In your discussion, be sure to
comment on the companys financial strengths and weaknesses. Provide your
analysis in five sections: one for each of the four categories of ratios, and one for
an overall evaluation.
570-433 Assignment 1 Budda-Bing Manufacturing

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Balance Sheet
The Budda-Bing Manufacturing
Company
As at December 31st, 2011 and 2012

December 31
Assets
Current Assets
Cash
Accounts Receivable
Inventories
Total Current Assets
Gross fixed assets (at cost)
Less: Accumulated Amortization
Net fixed assets
Total assets

2011

2012

$
24,100
763,900
763,445
1,551,445
1,691,707
348,000
1,343,707
$2,895,152

$
25,000
805,556
700,625
1,531,181
2,093,819
500,000
1,593,819
$3,125,000

$
400,500
370,000
100,902
871,402
700,000
1,571,402

$
230,000
311,000
75,000
616,000
1,165,250
1,781,250

50,000
293,750
980,000
1,323,750

50,000
293,750
1,000,000
1,343,750

$2,895,152

$3,125,000

Liabilities and Shareholders Equity

Current Liabilities
Accounts Payable
Line of credit
Accruals
Total Current Liabilities
Long- term debt
Total Liabilities
Shareholders Equity
Preferred Shares
Common Shares
Retained Earnings
Total Shareholders Equity
Total Liabilities and Shareholders
Equity

570-433 Assignment 1 Budda-Bing Manufacturing

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Income Statement
The Budda-Bing Manufacturing
Company
For the Year ended December 31,
2012

Sales revenue
Less: Cost of goods sold Gross margin
Less: Operating expenses
Selling expense
General and administrative expenses
Amortization Expense
Total operating expense
Operating Earnings (EBIT)
Less: Interest expense
Earnings before taxes
Less: Taxes (rate = 40%)
Net income after taxes

$5,075,000
3,704,000
1,371,000
$650,000
416,000
152,000
1,218,000
153,000
93,000
60,000
24,000
$36,000

Historical Ratios
The Budda-Bing Manufacturing Company

Ratio

Current ratio
Quick Ratio
Average age of inventory
Average Collection period
Total Asset turnover (times)
Debt ratio
Times interest earned ratio
Gross margin
Profit margin
Return on total assets (ROA)
Return on Equity (ROE)

Actual
2010

Actual
2011

1.7
1.8
1.0
0.9
70.2days 73 days
50 days 55 days
1.5
1.5
45.8% 54.3%
2.2
1.9
27.5% 28.0%
1.1%
1.0%
1.7%
1.5%
3.1%
3.3%

570-433 Assignment 1 Budda-Bing Manufacturing

Actual
2012

Industry
Average
2012
1.5
1.2
35.8days
46 days
2.0
24.5%
2.5
26.0%
1.2%
2.4%
3.2%
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Part B:
The Budda--Bing Manufacturing Company
Preparing Pro Forma Financial Statements for 2013
Budda-Bing Manufacturing is planning to implement a major plant-modernization program to
improve its competitive position. Included will be construction of a state-of-the-art manufacturing
facility that will cost $400,000 in 2013 and is expected to lower the companys variable cost per
tonne of steel. Tony and Pauli, experienced budget analysts, have been charged with preparing a
forecast of the firms 2013 financial position assuming construction of the proposed new facility.
They plan to use the 2012 financial statements presented above along with the forecasts for other
financial accounts provided in the following table.
Key Projected Financial Data (2013)
The Budda-Bing Manufacturing
Company

Data Item

Sales
Cost of goods sold
Selling Expense
General and administrative expense
Amortization expense
Interest expense
Tax rate
Dividend payments
Average age of inventory
Average collection period
Average payment period
Accruals
Long- term debt, preferred shares, and
common shares:

Value

Increase to $6,500,000
Remain the same %age of sales
Increase by 22%
Increase by 37.5%
Increase to $185,000
Increase to $97,000
40%
$20,000
56 days
52 days
26 days
Increase to $96,000
Remain the same

570-433 Assignment 1 Budda-Bing Manufacturing

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Required Part B:
a. Use the historic and projected financial data provided to prepare a pro forma income
statement and balance sheet for the year ended December 31, 2013.
b. Will Budda-Bing Manufacturing Company need to obtain external financing to fund
construction of the proposed facility? Explain. Prepare a Statement of EFR.
c. How would you recommend Budda-Bing raise the required Financing? What options might
be available if the company wanted to explore all opportunities other than using their
line of credit?

570-433 Assignment 1 Budda-Bing Manufacturing

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