I. Point of View
This group takes the point of view of Mr. Ricardo Sarmiento, Vice President for Finance of First Farms Corporation (FFC for brevity). Mr. Sarmiento will present to the Board the financial performance and financial position of the company from 1993 to 1995. In the process, he will also make recommendations as to the feasibility of the proposed expansion.
II. Case Context
In 1995, FFC raised P1.1 billion from its initial public offering. P500 million of the proceeds was used as working capital (livestock inventories and raw materials), P476 million went to expansion of operations and acquisition of properties while P69 million was used to pay part of the corporation’s long term debt.
In the face of tight competition,
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Expense*(1-tax rate)]/TA 0.088 0.110 0.078 ↑ ↓
Operating Profit Margin Operating Income/Sales 0.079 0.089 0.078 ↑ ↓
Net Profit Margin NI/Sales 0.030 0.037 0.049 ↑ ↑
*Includes operating expenses
**Includes accrued expenses
ILLUSTRATION 3: DU PONT TECHNIQUE
Year Net Income/ Sales Sales/ Assets Assets/Equity ROE Profitability Efficiency Leverage
1993 0.030 1.719 2.695 0.137
1994 0.037 1.996 2.867 0.214
1995 0.049 1.458 2.168 0.156
Based on Illustration 3, it is observed that in 1995, efficiency and leverage decreased causing the ROE to plunge to 15.6% from 21%. Decrease in efficiency was mainly due to low inventory turnover and low receivable turnover (see Illustration 2) while decline in leverage may be accounted to the substantial increase in stockholders’ equity brought about by the IPO proceeds.
The company’s profitability in 1994 was excellent, for this reason it was easy for FFC to
The remainder of this note discusses each of the steps in the process and then provides an exercise on the various financial measures that are useful as part of the analysis. The final section of the note demonstrates the relationship between a firm’s strategy and operating characteristics; and its financial characteristics.
I was immediately intrigued from the beginning of Food, Inc. There was interesting and valuable information brought up during the film. Many people do not think about where their food comes from. I believe that if people were to know where their food comes from, they would not want to eat it. There are 47,000 products at a grocery store. But, Food, Inc. implies that this is in fact an illusion because all of them are made with the same crops. The fact that there are only a few multi-national corporations that control all of the crops and meat production is a huge surprise. I believe that each person in society would be absolutely shocked if they were to watch this documentary.
These expenditures are funded through internal profits and by issuing $3.7 billion of long term debt and $1.9 billion common stock. Headcount reduced by 30% while operating and maintenance expense reduced from 1.82/kWh to 1.61/kWh from 1990 to 1993. As a result FPL became the largest utility in Florida by 1994 (fourth largest in the country).
The main source of cash is A/R. In 1991 the company also gathered $23M issuing stock.
The next 3 years witnessed a continuous increase in sales and revenues. Their profit margin increased to reach 4.97% by year 1992.
Operating cash flow was not enough to cover capital investments (this firm does not to appear to pay dividends as it does not show in the prior 3 years). The firm is financing it operations from the issuance of common stock. $23,082 was raised during the period, which is covering its investments in capital expenditures.
The company’s ability to generate profitability might not be constant and subject to a lot of factors.
The productive assets of property, plant, and equipment changed dramatically in 1996 they were 5,581 to 2010 an increase to 21,706. In total current assets there was a increase in 1996 from 5,910 to in 2010 21,579. Another significant change is in long term debt in 1996 of 1,116 to in 2010 an increase to 14,041. Also an important figure to note is in the retained earning in 1996 they were 94% (15,127) to 2010 68%
| The ROE decreased in the last year but still in the good margin of profitability.
Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? In assessing the effect of leverage on the cost of capital, you may assume that a firm’s CAPM beta can be modeled in the following manner: BL = BU[1 + (1 − T)D/E], where BU is the firm’s beta without leverage, T is the corporate income tax rate, D is the market value of debt, and E is the market value of equity.
The effect of financial leverage on the cost of equity is prevalent in the Modigliani-Miller capital structure theory. Since the financial leverage increases the cost of equity, it can be considered one of the disadvantages of borrowing. As shown in Appendix A, the cost of equity, at each debt to capital ratio, increases by 0.1% as the financial leverage increases by 10%. With a higher
bank” and wants to share in the financial success that he is funding. At the same time, FF says that convertible debt and preferred equity wouldn’t impose enough discipline on Sunflower management. He likes
If A/P increases from one year to the next, that means that the difference between the two amounts is cash that was available for current use. That is, instead of paying cash, whatever was purchased was put on an account. On the other hand, A/R is considered a use of cash because for every dollar that should be coming in to the company from those who owe the company money, that cash has been delayed for a collection time period. Therefore, the company does not have the money to use for its own operations.
Profitability ratios are basically figures to measure if the company is doing well in the terms of profit[13]. ROCE ratio has increased in 2011 but in 2012 it deteriorates by 3%. This fall indicates that company was not successfully getting high returns as a percentage of its resources available, compared to 2011.
It is determined that the company worth is $856,518 with a share price of $351.03 per value as per the discounting dividend cash flow valuation approach..In appraising the anticipated premerger performance of the company, the weighted average cost of capital is computed; the worth of the WACC for FVC is 9.2% as depicted in