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ASSIGNMENT 2- CASE STUDY 1

Assignment 2 Case Study

Ziad Y. Mazboudi

California Southern University

Corporate Finance

FIN 86505

Dr. Conrad Francis

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ASSIGNMENT 2- CASESTUDY 2

Assignment 2 Case Study

Cash Flows and Financial Statements at Sunset Boards, Inc.

Input

2009 2010Cost of goods sold $ 141,641 $ 178,839Cash 20,437 30,880Depreciation 39,983 45,192Interest expense 8,702 9,962Selling & Administrative 27,854 36,355Accounts payable 36,120 40,908Fixed assets 176,400 214,184Sales 277,855 338,688

Accounts receivable 14,482 18,785Notes payable 16,464 17,976Long-term debt 89,040 102,480Inventory 30,475 41,821New equity - 16,800

Tax rate 20%Dividend percentage 50%

1. An income statement for 2009 and 2010

2009 Income Statement

Sales $ 277,855

Cost of goods sold 141,641

Selling & Administrative 27,854

Depreciation 39,983

EBIT $ 68,377

Interest 8,702

EBT $ 59,675

Taxes 11,935

Net income $ 47,740

Dividends $ 23,870

Addition to retained earnings $ 23,870

2010 Income Statement

Sales $ 338,688

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ASSIGNMENT 2- CASESTUDY 3

Cost of goods sold 178,839

Selling & Administrative 36,355

Depreciation 45,192

EBIT $ 78,302

Interest 9,962EBT $ 68,340

Taxes 13,668

Net income $ 54,672

Dividends $ 27,336

Addition to retained earnings $ 27,336

2. A balance sheet for 2009 and 2010

Balance sheet as of Dec. 31, 2009

Cash $ 20,437 Accounts payable $ 36,120

Accounts receivable 14,482 Notes payable 16,464

Inventory 30,475 Current liabilities $ 52,584

Current assets $ 65,394

Long-term debt $ 89,040

Net fixed assets $ 176,400 Owners' equity $ 100,170

Total assets $ 241,794 Total liab. & equity $ 241,794

Balance sheet as of Dec. 31, 2010

Cash $ 30,880 Accounts payable $ 40,908

Accounts receivable 18,785 Notes payable 17,976

Inventory 41,821 Current liabilities $ 58,884

Current assets $ 91,486

Long-term debt $ 102,480

Net fixed assets $ 214,184 Owners' equity $ 144,306

Total assets $ 305,670 Total liab. & equity $ 305,670

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ASSIGNMENT 2- CASESTUDY 4

3. Operating cash flow for each year

Operating Cash Flow = EBIT + Depreciation - Taxes

2009 2010

Operating cash flow $ 96,425 $ 109,826

4. Cash Flow from assets for 2010

Capital Spending

Ending net fixed assets $ 214,184

- Beginning net fixed assets 176,400

+ Depreciation 45,192

Net capital spending $ 82,976

Change in Net Working Capital

Ending NWC $ 32,602

-Beginning NWC 12,810

Change in NWC $ 19,792

Cash Flow from Assets

Operating cash flow $ 109,826

- Net capital spending 82,976

-Change in NWC 19,792Cash flow from assets $ 7,058

5. Cash Flow to creditors for 2010

Cash Flow to Creditors

Interest paid $ 9,962

-Net New Borrowing 13,440

Cash flow to Creditors $ (3,478)

6. Cash Flow to stockholders for 2010

Cash Flow to Stockholders

Dividends paid $ 27,336

-Net new equity raised 16,800

Cash flow to Stockholders $ 10,536

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ASSIGNMENT 2- CASESTUDY 5

Question 1: How would you describe Sunset Boards cash flows for 2010? Write a brief

discussion (Jordan, Westerfield, & Ross, 2011, p. 86).

The operating cash flow seems healthy and increasing annually: $96,425 in 2009 and

$109,826 in 2010. This tells us that the demand for their surfboard is good and they have no

problem selling them, and have enough funds to pay their day to day expenses.

The Net Working Capital is also positive and increasing annually, so this tells us that

Sunset Boards is currently a healthy firm.

The cash flow to creditor is negative, and this is not very good, but it appears that the funds

are being spent on fixed assets to expand the business. Sunset Boards should not have a problem

paying their creditors, but this may require additional funding.

Question 2: In light of your discussion in the previous question, what do you think about

Tads expansion plans?

Sunset Boards appears to be a successful small company. A major expansion as Tad is

planning will require resources such as staffing, business planners, accountants, and more staff to

produce the larger quantities of surfboards that he is envisioning. This will increase Tads

overhead and could reduce his margins of profit. Eventhough he is envisioning a much larger

volume, he will be entering a different market than his current custom surfboard and word of

mouth among professionals. Once the surfboards become more production boards, the company

will be competing among the production surfboard companies, and the word of mouth will not be

enough anymore, resulting in possibly an increase in marketing funds, and other related expenses.

This will also result in a reduction in profit.

My recommendation would be for Sunset Boards to first open the Hawaii store and

establish a presence in the area. Once the store is running smooth and is well established, Tad will

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ASSIGNMENT 2- CASESTUDY 6

be able to assess how is the operation running with the increase in production to support the

Hawaii store, and then evaluate the possibility of supplying other stores.

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ASSIGNMENT 2- CASESTUDY 7

References

Jordan, B. D., Westerfield, R. W., & Ross, S. A. (2011). Corporate Finance Essentials (7th ed.).

Singapore: The McGraw-Hill Companies.