Individual paper 1 mini case scandi home furnishings, inc.

Individual Paper 1 Mini Case SCANDI HOME FURNISHINGS, INC.

Individual Assignment 1:

 

NOTES:

·        Submit this assignment as a soft copy

·        Provide spreadsheets for all numeric answers and include formulas in the cells with appropriate linking.

 

 

 

Marks possible per question:

A.    10 marks

B.     7 marks

C.     15 marks

D.    8 marks

E.     8 marks

F.      8 marks

G.    6 marks

H.    8 marks

I.       8 marks

Spreadsheet structure and overall presentation: 12 marks

 

TOTAL 90 MARKS

 

 

MINI CASE: SCANDI HOME FURNISHINGS, INC.

 

Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2007.  Sales during the first full year (2008) of operation reached $1.3 million.  Sales increased by 15 percent in 2009 and another 20 percent in 2010.  However, profits after increasing in 2009 over 2008 fell sharply in 2010 causing Kaj to wonder what was happening to his “pride and joy” business venture.  After all, Kaj has continued to work as close as possible to a 24/7 pace beginning with the startup of Scandi and through the first three full years of operation.

            Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and uncluttered look.  While this furniture style is primarily associated with Denmark, both Norway and Sweden designers have contributed to the allure of Scandinavian home furnishings.  Some say that the inspiration for the Scandinavian design can be traced to the “elegant curves” of art nouveau from which designers were able to produce aesthetically pleasing, structurally strong modern furniture.  Danish furnishings and the home furnishings produced by the other Scandinavian countries—Sweden, Norway, and Finland—are made using wood (primarily oak, maple, and ash), aluminum, steel, and high-grade plastics.

            Kaj grew up in Copenhagen, Denmark and received a college degree from a technical university in Sweden.  As is typically in Europe, Kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen.  After “learning the trade,” he quickly moved into a management position in the firm.   However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business.  At the same time, after traveling throughout the world including the U.S., he was sure that he wanted to be an entrepreneur in the United States.  Thus, while it was hard to give up the Tivoli Gardens with its many entertainment and dining activities, as well as the other attractions in Copenhagen, Kaj moved to the U.S. in early 2007.  With $140,000 of his personal assets, and $210,000 from venture investors, he began operations in mid-2007.  Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi.  Four years later, Kaj is sure he did the right thing.

            Following are the three years of income statements and balance sheets for the Scandi Home Furnishings Corporation.  Kaj has felt that in order to maintain a competitive advantage that he would need to continue to expand sales.  After first concentrating on selling Scandinavian home furnishings in the northeast in 2008 and 2009, he decided to enter the west coast market.  An increase in expenses associated with identifying, contacting, and selling to home furnishings retailers in California, Oregon, and Washington.  Kaj Rasmussen was hoping that you could help him better understand what has been happening to Scandi Home Furnishings both from operating and financial standpoints.

 

SCANDI HOME FURNISHINGS, INC.

 

Income Statements

            2008                2009    2010

 

Net Sales                     $1,300,000           $1,500,000                    $1,800,000          

Cost of Goods Sold    780,000           900,000           1,260,000       

Gross Profit                                  520,000                600,000                         540,000

Marketing                                    130,000                 150,000                         200,000

General & Administrative           150,000                 150,000                         200,000

Depreciation                                  40,00053,000                                60,000

  EBIT                                                     200,000                 247,000                           80,000

Interest                                                45,000 57,000                         70,000

  Earnings Before Taxes              155,000                 190,000                           10,000

Income Taxes (40%)               62,000 76,000                         4,000

  Net Income                                $93,000               $114,000                                      $6,000

Cash Dividends                                  $0                   $74,000                                $0

 

SCANDI HOME FURNISHINGS, INC.

 

Balance Sheets

                        2008    2009                2010

 

Cash                                            $50,000                   $40,000                       $10,000

Accounts Receivables                200,000                   260,000                       360,000

Inventories                              450,000                       500,000                       600,000

  Total Current Assets                 700,000                   800,000                       970,000

Fixed Assets, Net                   300,000                       400,000                       500,000

  Total Assets                         $1,000,000              $1,200,000                  $1,470,000

 

Accounts Payable                     $130,000                 $170,000                     $180,000   

Accruals                                        50,000                     70,000                         80,000

Bank Loan                              90,000             90,000             184,000

Total Current Liabilities              270,000                   330,000                       444,000

Long-Term Debt                        300,000                   400,000                       550,000

Common Stock ($10 par)*         300,000                   300,000                       300,000

Capital Surplus                              50,000                     50,000                         50,000

Retained Earnings                   80,000             120,000                       126,000

Total Liab.& Equity            $1,000,000                 $1,200,000                  $1,470,000

 

Note: 30,000 shares of common stock were issued to Kaj Rasmussen and the venture investors when Scandi Home Furnishings was incorporated in mid-2007.

 

 

Part A

Your first challenge is to advise Kaj on what has been happening with Scandi Home Furnishings from a liquidity perspective.

 

  1. Kaj was particularly concerned by the drop in cash from $50,000 in 2008 (not 2007) to $10,000 in 2010.  Calculate(show how you got the figures):
    1.  the average current ratio for 2008-2009
    2. the average current ratio for 2009-2010
    3. the quick ratio for 2008-2009
    4. the quick ratio for 2009-2010
    5. the networking capital to total assets ratio for 2008-2009
    6. the networking capital to total assets ratio for 2009-2010. 

 

 

Note: ratio calculations involving asset items on the balance sheet are averages of the prior and current years.  For example, the ratios for 2009 use average balance sheet account amounts for 2008 and 2009.  Likewise, ratios for 2010 use average balance sheet account amounts for 2009 and 2010.

           

           

g.      Summarise your findings on a table as below:

 

 

 

Liquidity Ratios:                              

                                                2009                2010                Change

Current Ratio                          ____                _____              Lower/Higher/No change

Quick Ratio                             ____                _____              Lower/Higher/No change

NWC-to-Total-Assets             ____                _____              Lower/Higher/No change

 

 

h.      What has happened to Scandi’s liquidity position?

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

 

 

  1. An analysis of the cash conversion cycle should also help Kaj understand what has been happening to the operations of Scandi.  Prepare an analysis of the average conversion periods for the three components of the cash conversion cycle for 2008-2009 and 2009-2010.  Explain was has happened in terms of each component of the cycle.
    1. Name the 3 components of the Cash Conversion Cycle:

                                                              i.      Conversion Period 1:________________

                                                            ii.      Conversion Period 2:________________

                                                          iii.      Conversion Period 3:________________

    1. For each of the Conversion Periods in (a) calculate for 2008-2009 (show workings

Hint:Ratios are based on the current year’s income statement amounts and average amounts (past year and current year) for balance sheet items.

    1. For each of the Conversion Periods in (a) calculate for 2009-2010 (show workings
    2. Complete the table below with your answers from (a), (b) and (c) above

 

 

 

Cash Conversion Cycle (in Days):

                                                2009                2010    Change

_____________                      _____              _____              Better/Worse/No Change

_____________                      _____              _____              Better/Worse/No Change

_____________                      _____              _____  Better/Worse/No Change

  Cash Conversion Cycle         _____              _____              Better/Worse/No Change

 

e.       Explain was has happened in terms of each component of the cycle i.e. what was the change due to?

 

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

 

  1. Kaj should be interested in knowing whether Scandi has been building or burning cash. 

                                  

    1. Compare the cash build, cash burn, and the net cash build/burn positions for 2009 and 2010 by completing the table below

 

 

Cash Build Versus Cash Burn:

                                                2009                2010   

Cash Build:

___________                          ___________              ___________

___________                          ___________              ___________

Cash Build                              ___________              ___________

 

 

Cash Burn:                                                                           

___________                          ___________              ___________

___________                          ___________              ___________

___________                          ___________              ___________

___________                          ___________              ___________

___________                          ___________              ___________

           

  Cash Burn from Inc. Stmt.   ___________              ___________

 

___________                          ___________              ___________

___________                          ___________              ___________

___________                          ___________              ___________

 

___________                          ___________              ___________

___________                          ___________              ___________

 

  Cash Burn                             ___________              ___________

 

Net Cash Build (Burn)            ___________              ___________                                                 

 

 

 

    1. Make a brief commentary on what, if any, changes have occurred?

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

Part B

Your second challenge is to advise Kaj on what has been happening to Scandi from a financial leverage, profitability, and efficiency perspective.

 

  1. Creditors, as well as management, are also concerned about the ability of the venture to meet its debt obligations as they come due, the proportion of current liabilities to total debt, the availability of assets to meet debt obligations in the event of financial distress, and the relative size of equity investments to debt levels.

 

a.      Calculate each of these areas for the 2008-2009 and 2009-2010 periods and complete the table below.Caution: some of these user average values!

 

Financial Leverage:                                     

2009                2010    Change

Total-Debt-to-Total-Assets     _____              _____              Higher/Lower/No Change

Equity Multiplier                     _____              _____              Higher/Lower/No Change Debt-to-Equity Ratio                        _____              _____              Higher/Lower/No Change Current-Liab.-to-Total Debt            _____              _____              Higher/Lower/No Change Interest Coverage             _____              _____              Higher/Lower/No Change

 

 

    1. Interpret your results and briefly explain what has happened to Scandi.

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

 

 

  1. Of importance to Kaj and the venture investors is the efficiency of the operations of the venture.  Several profit margin ratios relating to the income statement are available to help analyze Scandi’s performance. 
    1. Calculate average profit margin ratios for 2008-2009 and 2009-2010

 

Profitability Ratios:

2009                2010    Change

____________                        _____              _____              Higher/Lower/No Change____________                  _____              _____              Higher/Lower/No Change____________                  _____              _____              Higher/Lower/No Change____________                  _____              _____              Higher/Lower/No Change

 

 

b.      Briefly describe what is happening to the profitability of Scandi Home Furnishings.

 

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

 

 

  1. Kaj and the venture investors are also interested in how efficiently Scandi is able to convert their equity investment, as well as the venture’s total assets, into sales. 
    1. Calculate Efficiency and Return ratios and complete the table below

 

 

 

Efficiency and Return Ratios:

2009                2010    Change

____________                        _____              _____              Higher/Lower/No Change     

____________                        _____              _____              Higher/Lower/No Change

____________                        _____              _____              Higher/Lower/No Change____________                  _____              _____              Higher/Lower/No Change

 

 

b.      Make a brief comment on what has happened between the 2008-2009 and 2009-2010 periods.

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

 

  1. A ROA model consisting of the product of two ratios provides an overview of a venture’s efficiency and profitability at the same time.  A ROE model consists of the product of three ratios and simultaneously shows an overview of a venture’s efficiency, profitability, and leverage performance.

 

    1. Calculate ROA and ROE models for the 2008-2009 and 2009-2010 periods. 

 

            ROA 2009:  ______________________

            ROA 2010:  ______________________

            ROE 2009:  ______________________

            ROE 2010:  ______________________

 

b.      Provide an interpretation of your findings.

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

Part C

Your third challenge is to advise Kaj on what has been happening to Scandi relative to financial developments in the home furnishings industry.

 

  1. Kaj has been able to obtain some industry ratio data from the home furnishings industry trade association of which he is a member.  The industry association collects proprietary financial information from members of the association, compiles averages to protect the proprietary nature of the information, and provides averages for use by individual trade association members.  Over the 2008-2009 and 2009-2010 periods, the inventory-to-sale conversion period has averaged 200 days, while the sale-to-cash conversion period (days of sales outstanding) for the industry has average 60 days.  How did Scandi’s operations in terms of these two components of the cash conversion cycle compare with these industry averages?

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

  1. Trade association data for the home furnishings industry shows an average net profit margin of 6.5 percent, a sales-to-assets ratio of 1.3 times, and a total-debt-to-total-assets ratio of 55 percent over the 2008-2009 and 2009-2010 time periods.  Compare and contrast Scandi’s results with the industry average in terms of the ROA and ROE models.  Make sure you compare the components of each model as well as the product of the components.                    

 

 

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

 

________________________________________________________________________

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