Name

Question 1

Answer A:

Of the anticipated net income of 1,534 in 2006, only 226 will be realized as 'cash flow
from operations.' This implies that merely 14.73% of the net income will be converted
into 'cash flow from operations.' Among the three categories, 'Operating Cash Flow' has
predominantly contributed to the decline in the company's 'change in cash' from 2003 to
2006(E).

Answer B:

Cash Flow from 'Operating Activities' Trend: Over the years, there has been a consistent
decline in cash flow generated from operating activities. This decline can be attributed to
the increase in accounts receivable.

Cash Flow from 'Investing Activities' Trend: Over the years, there has been a steady rise
in cash flow from investing activities. This increase is primarily due to the decreasing
investment in land over time.

Cash Flow from 'Financing Activities' Trend: The cash flow from financing activities
exhibited a continuous increase from 2003 to 2005, followed by a decrease in 2006(E).
The initial increase and subsequent decrease in cash flow from financing activities can be
attributed to the varying amounts of debt issued by the company each year.
Answer C:

Cash position of the company: The cash position of the company is not satisfactory.
Despite achieving a net income of 1,534 in 2006(E), the company has managed to
generate just 226 in cash flow from operating activities during the same period. As a
result, there has been a negative change in cash amounting to -203 in 2006(E).

Funding of investments: The company is presently dependent on raising debt to finance

its investments. In 2006(E), it issued debt totaling 2,006 to support its investment in
PP&E, which amounted to -1,398. This approach carries the risk of the company
becoming caught in a debt cycle. An alternative strategy could involve utilizing the
company's accumulated profits and reserves to fund its investments.

Free cash flow:

Free cash flow (2006E) = Operating Cash Flow - Capital Expenditures
Free cash flow (2006E) = 226-1,398
Free cash flow (2006E) = -1,172

The company's negative free cash flow in 2006(E) can be attributed to two key factors:
first, there was a rise in accounts receivable by 4,185, which led to a decrease in
Operating Cash Flow, and second, the increased investment in PP&E further reduced the
free cash flow.

Question 2

Answer A:

Year 2002 2003 2004 2005 2006(E)

Operating working
4,540.00 4,227.00 5,123.00 6,917.00 8,894.00
capital
Answer B:

2006(E
Year 2002 2003 2004 2005 )
operating working
0.18 0.16 0.17 0.20 0.21
capital/sales ratio

Answer C:

2006(E
Year 2002 2003 2004 2005
)
DIO 55.10 49.47 45.90 41.43 37.11

2006(E
Year 2002 2003 2004 2005 )
DSO 51.60 53.73 69.95 88.98 106.07

2006(E
Year 2002 2003 2004 2005 )
DPO 36.28 42.10 60.26 73.77 83.63

Answer D:

Considering the calculated DSO (Days Sales Outstanding) and DPO (Days Payable
Outstanding), the period for which receivables remain outstanding exceeds the duration
for which payables are outstanding. Put differently, it takes more time to collect cash
from customers than it does to pay suppliers. This situation raises the possibility of a cash
shortfall to meet current obligations.

Question 3

Answer A:

Ceres Gardening Company

Balance Sheet
As at December 2006
Assets 28,117.00 Debt 18,554.00
Equity 9,563
Total Debt and
Total Assets 28,117.00 28,117.00
Equity

Capital Employed = Total Assets - Current Liabilities

= $28,117 - 10,074
= $15,043

Question 4

Answer A:

Variable margin = (Sales revenue - cost of goods sold) / Sales

Operating margin = Operating income/sales
Return on Equity = Net Profit/Owners Equity
ROACE = Earnings after taxes before Interest/Average Capital Employed

(in $ thousand, some numbers are rounded)

2006(E
Year 2002 2003 2004 2005 )
24,652. 26,797. 29,289. 35,088. 42,597.
Sales 00 00 00 00 00
20,461. 21,706. 23,841. 28,597. 35,100.
Cost of Goods Sold 00 00 00 00 00
Earnings before 1,641.0 2,338.0 2,408.0 2,836.0
3,081
Interest & Taxes 0 0 0 0
Interest 187.00 349.00 440.00 547.00 658.00
1,454.0 1,989.0 1,968.0 2,289.0 2,360.0
Earnings before Taxes
0 0 0 0 0
Taxes 264 696 689 801 826
Earnings after 1,344.0 1,520.0 1,565.0 1,843.0 1,962.0
taxes and before 0 0 0 0 0
Interest
1,191.0 1,293.0 1,279.0 1,488.0 1,534.0
Net Income 0 0 0 0 0
8,282.0 10,491. 12,872. 15,460. 18,043.
Capital Employed 0 00 00 00 00
5,024.0 6091.0 7,146.0 8,336.0 9,563.0
Shareholders equity 0 0 0 0 0
Variable Margin as
17.00% 19.00% 18.60% 18.50% 17.60%
percentage
Operating Margin as 6.66% 8.72% 8.22% 8.08% 7.09%
percentage
Return on Equity as 23.70% 21.23% 17.90% 17.85% 16.04%
percentage
Return on Average
Capital Employed as a 16.23% 16.19% 13.40% 13.01% 11.71%
percentage

Answer B:

The trend in ROE from 2002 to 2006(E) indicates a continuous decline over the years. This
decline can be attributed to the decreasing performance of the company's operations.

The performance of operations of the company is measured using Return on Capital

Employed (ROCE).

ROCE
2003: 22.29%
2004: 18.71%
2005: 18.34%
2006(E): 16.73%

Answer C:

The trend in Return on Average Capital Employed (ROACE) from 2002 to 2006(E)
demonstrates a consistent decrease over this time frame. The key factors influencing
ROACE are the operating margin and efficiency. The decline in ROACE can be
attributed to the reduction in the company's operating margin, which has decreased from
8.72% in 2003 to 7.09% in 2006(E).

Question 5
Answer A:

Pros Cons
Constant Growth in Sales Insufficient Distribution
Reputation & Branding Longer Payment Terms
Aggressive Growth Seasonal Sales

The program's sustainability and positive performance make it viable for continuation.
The financial analysis indicates favorable results in the Activity Ratio, signifying the
company's efficient resource utilization. Additionally, it demonstrates that the company
maintains sufficient liquidity to meet its obligations and sustain operations, even with the
program in place. Notably, the program has a high likelihood of experiencing further
sales growth, already achieving a 73% increase in its initial stages.

However, the Financial Leverage aspect reveals a significant amount of outstanding debt,
with most funding obtained through debt financing. This exposes the company to a
heightened risk of default, which could be a potential drawback. Furthermore,
Profitability ratios indicate that the company has limited capacity to generate income or
sales from its core operations.

Considering these financial assessments, it is advisable for the company to implement

additional measures and expand policies to effectively manage and maximize the
program's potential contribution to the company.