Marking Scheme: FA Case Task: From the perspective of the new Finance Manager of FA to respond to the Board of Directors’ request to present a “big picture” brief report on FA’s financial performance...

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notice that they may have stopped paying dividends after the year 2001?


Marking Scheme: FA Case Task: From the perspective of the new Finance Manager of FA to respond to the Board of Directors’ request to present a “big picture” brief report on FA’s financial performance from 2000 to 2004. In particulars, the Board of Directors like to hear from you whether FA is able to generate “value” as measured by ROE going forward; in particular, whether there are any concerns about FA’s financial performance. Your Report: Word limit 100 (Type your answer below) Marks: Note: Do not change this to PDF (or others unalterable format). If so, I would return to you for correction. If you resubmit after deadline it would be treated as late submission. Marking Scheme: FA Case Task: From the perspective of the new Finance Manager of FA to respond to the Board of Directors’ request to present a “big picture” brief report on FA’s financial performance from 2000 to 2004. In particulars, the Board of Directors like to hear from you whether FA is able to generate “value” as measured by ROE going forward; in particular, whether there are any concerns about FA’s financial performance. notice that they may have stopped paying dividends after the year 2001?  Your Report: Word limit 100 (Type your answer below) Marks: Note: Do not change this to PDF (or others unalterable format). If so, I would return to you for correction. If you resubmit after deadline it would be treated as late submission. What I did so far… In terms of liquidity: ·        Current ratios are increasing over the years indicating that the company is liquid and able to pay its short-term obligations. Current assets are maximized in terms of satisfying the company’s current debt and payables. ·        Quick / Acid Test ratios are more than 1 and are increasing over the years. This indicates that FA has enough liquid assets to pay its current liabilities. However, the acid-test ratio is lower than the current ratio for all years meaning that FA’s current assets are highly dependent on inventory. This has significance, especially when compared to other companies in the same industry. In terms of financial leverage: ·        Debt to equity ratios are very low. The highest (the year 2000) ratio was 49% meaning that FA has $0.49 of debt for every $1 in equity. This indicates that FA is very mature and can take on additional debt. This also indicates a low-risk investment environment for shareholders and investors overly prudent management in terms of future growth plans and opportunities. ·        Debt to capital ratios have been below 32.41% over the four years indicating, as well, that FA is taking on very low debt. It seems that the ratio is controlled over the years and any spikes are caught and regulated. Also, it indicates that the company is not dependent on debt for survival or day-to-day activities, and a lower risk to lenders and shareholders. ·        Times interest earned for the years indicates financial stability that FA can pay its debts with its current income in terms of covering interest fees with the pre-tax earnings with more cash left over. ·        Asset to equity has been decreasing since the year 2000 indicating that FA has been financing conservatively. Ratios above 1 indicate that FA takes on a little extra debt, but not massively, on top of the shareholders' equity. However, looking at the increasing revenues over the years, it is fair to conclude that FA is wisely trading on equity because the return on borrowed capital exceeds the cost of that capital. In terms of activity: ·        Receivables turnover has been steadily high over the years indicating that FA’s collection of accounts receivable is frequent and efficient and suggesting that it follows a conservative credit policy. ·        High Inventory turnover ratios over the years indicate positive and effective management. The increasing revenues over the years show strong sales relative to inventories in terms of how fast they sell, and when compared to the available historical data, it is relatively relatable and favourable. ·        Asset turnover, although has been declining, still shows ratios over 1 meaning FA’s assets generate 100% or more of net sales (revenue) relative to their value. This means every $1 in assets generates $1 or more in net sales revenue which is an excellent indicator of efficiency in terms of using FA’s assets to generate sales/ revenue. ·        Cash turnover has been fluctuating over the years indicating that FA has a lower frequency of cash replenishment through revenue. However, the ratio does not take credit sales into account, hence, is not the most effective measure of performance. The decrease also indicates that cash is used to fund the increasing revenues over the years. In terms of profitability: ·        ROA over 5% over the years relatively increasing indicates FA’s efficient use of its assets to generate profit/net income. The profits relative to FA’s resources used displays the feasibility of the company's existence with room for improvements. ·        ROE is relatively stable over the years, and as the percentages integrate the balance sheet and income statement, the total return on equity capital shows that FA is able to turn equity investments into profits. The outstanding shares are increasing over the years which indicates are comfortable with the management performance and the risk associated with their investments. This also indicates management's success in using equity wisely for financing.  ·        Operating profit margins have been increasing over the years indicating FA’s well performance and efficiency in managing its expenses to maximize profitability. It also indicates the strength of FA’s management team and wise spending expenses in terms of generating revenues. ·        Return on sales / net profit margin is on the rise over the years indicating financial viability for FA and the ability to take on new opportunities. For example, in 2004 the company had 8.58% NPM indicating the percentage of earnings remaining once all operating and non-operating expenses have been deducted from the revenue generated in the period, which means each $1 of revenue $0.0858 flows down to FA’s net income.
Answered Same DayFeb 12, 2022

Answer To: Marking Scheme: FA Case Task: From the perspective of the new Finance Manager of FA to respond to...

Khushboo answered on Feb 13 2022
107 Votes
Marking Scheme: FA Case
    Task:
From the perspective of the new Finance Manager of FA to respond t
o the Board of Directors’ request to present a “big picture” brief report on FA’s financial performance from 2000 to 2004. In particulars, the Board of Directors like to hear from you whether FA is able to generate “value” as measured by ROE going forward; in particular, whether there are any concerns about FA’s financial performance.
    
    The entity has performed consistently over the past four...
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