Dunham Cosmetics - Financial Evaluation

1079 Words Sep 6th, 2006 5 Pages
1.Calculate Dunham's 1995 financial rations. (See Exhibits 1,2, and 3).

Current Ratio = (current assets/current liabilities) = (16,268/7,600) = 2.1405%

Inventory Turnover = (sales/inventory) = (26,671/6,133) = 4.3487%

receivable____ = 5,920___ = 81.01 Days

DSO = annual sales/365 26,671/365

Fixed Asset Turnover = (sales/net fixed assets) = (26,671/3,336) = 7.9949%

Total Turnover Asset = (sales/total assets) = (26,671/16,268) = 1.6394%

Total Debt to Total Assets = (total debt/total assets) = (9,666/16,268) = 0.5941%

Time Interest Earned = (earnings before interest taxes/interest charge)

= (1,331/578)

= 2.3027%

EBITDA Coverage = (EBITDA + Lease Payment)/( Interest + Principal payment + Lease Payment)

Profit margin on sales = (net
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B. What advantages are there to using short-term debt to finance long-term assets? What are the disadvantages?

The advantage in using short-term debt to finance long-term assets is that a short loan can be obtained much faster. If the firm needs funds, are seasonal or cyclical. A firm may not want to commit itself to long-term debt for three reasons:

1.Flotation costs are higher for long-term debt than short-term credit,

2.Although long-term debt can repay early, providing the loan agreement includes a prepayment provision, in which prepayment penalties can be expensive, and

3.Long-term loan agreements always contain provisions and convenience, or may be inconvenient, constraining the firm's future actions. Short-term credit agreements are generally less restricted.

By the time the funds are obtained, interest costs will be lower if the firm borrows on a short-term rather than a long-term basis. Even though short-term rates are often lower than long-term rates, short-term credit is riskier for two reasons:

1.f a firm borrows on a long-term basis, its interest costs will be relatively stable overtime, but if it were short-term credit, its interest expense will fluctuate widely, at times going
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