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First Farms Corporation

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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, …show more content…

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

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