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Dynashear

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DYNASHEARS
Memorandum 1. With the limited amount of data, the forecasts shown in case Exhibits 1 and 2 seem fairly reasonable; however, looking at a whole, the pro forma income statement and balance sheet provided by Mr. Sheehan have a few questionable points: a. Net Sales – even though the forecast numbers are based on the typical seasonality of the firm’s sales performance of previous year. The forecast performances are much higher than the actual. b. Profit and retain earnings – closely relate to forecast, these forecast also inaccurate c. Inventory – with sales under perform, the inventory forecasts are also inaccurate. With much higher inventory than anticipated, especially in January 1991, the residual between actual and forecast is 924,000, which is a very big different. These excess inventories became illiquid assets, thus increased the liabilities which have a negative effect on the company’s financial health. Nevertheless, with lack of previous years’ financial data in addition to the unpredictable recession of the economy, it is hard to say whether or not these data were exaggerating. 2. Risk assessment a. Liquidity – as of March 1991, the current and cash ratio of Dynashears are 5.99 and 0.38, which are not bad numbers. The ratios shows that Dynashears’ current assets are still well cover (almost 6 to 1 ratio) over its increasing liabilities due to illiquid assets and that it still has sufficient cash for optimum operation. b. Long-term debt ratio – as of March 1991, the debt ratio is 4.71% which is very low, indicates that Dynashears still able to borrow a lot more. Even though Dynashears’ asset turnover rate is low (estimate at 0.24) and sales performance is not great, Dynashears’ fix assets such as their land, and plant and equipment are very valuable, thus able to leverage more debt. c. Profitability – as far as gross margin (26.19%), operating

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...Finanical Analysis Dynashears Case II Anne Putnam 1 Case Study of the Risk Management Memorandum of Dynashears INC: Liquidity In analyzing liquidity of the company, the current ratio is not very telling of a falling company. The company increased its ratio throughout the period of the income statement thus building upon its company assets and allowing for a 6-1 ratio of assets over its liabilities. This implies the company is still able to operate sufficiently even though it did not make its optimum current ratio of about 8-1. However, when one takes the inventory out of the equation with the quick ratio, the numbers show the true strength of short term liquidity. The numbers are still good, and do not indicate failure – but are nowhere near the projected ratio due to the overstock of inventory. The current assets of the company in comparison to the total assets stayed the same, maintaining around 25%. Long Term Debt paying ability The amount of assets for the company that are financed by the debt remains around 35%, which is still a little higher than the expected number, but the company has progressed to lower their asset financing. The same goes for their long term debt, they remain about 30% of the company’s capital financing is with debt, which is not a large number giving the company pretty good leverage. I would not consider the firm one of great risk from these numbers. The total debt to equity is relatively normal for this type of company. The biggest differences...

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