Uniglobe College, Kathmandu, Nepal MBA-II trimester

1. PRESENTATION ON
SILVER RIVER MANUFACTURING COMPANY
GROUP MEMBERS
Grisha Yadav
Kohinoor Thapaliya
Krishna Chalise
Manisha Baral
Mani Manandhar
Netra Bdr. Khatri
Pawan Kawan

2. INTRODUCTION OF
Silver River Manufacturing Company (SRM)
 SRM is a large regional product of farm and utility trailers
specialized lives stock carriers and mobile home chassis.
 More than 85% of SRM’S sales come from the south eastern
part of the united state
 SRM is a major client of MCNB.
 SRM whose products are totally based on latest technology and
it holds several patent with which it can partially offsets some of
the risk.

3. Question 1(a)
 Prepare a statement of changes in financial
position for 2005 (sources and uses of funds
statement) or complete Table 6.

4. Table 6: Silver River Manufacturing Company
Statement of Changes in Financial Position Year Ended December 31(thousands of dollars)
Particulars 2004 2005
Sources of funds
Net income after taxes 6, 351.70 755.02
Depreciation 1, 657.50 2, 040.00
Funds from operation 8, 009.20 2, 795.02
Long term loan 3, 187.50 0
Net decrease in working capital 428.26
Total sources 11, 196.70 3, 223.26
Application of funds
Mortgage change 267.75 261.38
Fixed assets change 2, 339.62 2, 773.13
Dividends on stock 1, 587.93 188.76
Net increase in working capital 7, 001.40 0
Total uses 11, 196.70 3, 223.27
Analysis of changes in working capital
Increase (decrease) in current assets
Cash change (1, 145.83) (96.71)
AR change 1, 364.25 10, 894.86
INV change 14, 095.12 13, 629.75
CA change 14, 313.54 24, 427.9
Increase(decrease) in current liabilities
AP change 3, 742.13 9, 492.38
NP change 1, 912.50 13, 132.5
ACC change 1, 657.50 2, 231.28
CL change 7, 312.13 24, 856.16
Net increase(decrease) in working capital 7, 001.41 (428.26)

5. Question 1(b)
 Calculate SRM’s key financial ratios for 2005 and
compare them with those of 2003, 2004, industry
average, and contract requirement or complete
Table 7.

6. Table 7: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31
Particulars 2003 2004 2005 Industry Comment
Average
Liquidity ratios:
Current ratio 3.07 2.68 1.75 2.5 Poor
Quick ratio 1.66 1.08 0.73 1 OK
Leverage ratios:
Debt ratio(%) 40.46 46.33 59.8 50 High(Risky)
Times interest earned 15.89 7.97 1.48 7.7 Very Poor
Asset Management
ratios:
Inventory turnover(Cost) 7.14 4.55 3.57 5.7 Poor
Inventory turnover(selling) 9.03 5.59 4.2 7 Poor
Fixed assets turnover 11.58 11.95 12.1 12 Ok
Total asset turnover 3.06 2.6 2.03 3 Low
Average collection period 36 35.99 53.99 32 High

7. Table 7: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31
Particulars 2003 2004 2005 Industry Comment
Average
Profitability ratios
Profit margin(%) 5.5 3.44 0.38 2.9 Poor
Gross profit margin(%) 20.89 18.7 14.86 18 Poor
Return on total assets 16.83 8.95 0.78 8.8 Poor
Return on owners' equity 28.26 16.68 1.95 17.5 Poor
Potential failure
indicator:
Altman Z Factor 3.1130 2.6305 2.0423 1.81/2.99 Zone of
ignorance

8. Question 2
 Based on the case data and the results of your
analysis in Question 1, what are the SRM,s strengths
and weakness? What are the causes thereof? (Use
of the Du Pont system and Altman Z factor would
facilitate analysis and strength your answer.)

9. Du pont system
Du pont system - basically designed:
 To improve the overall performance of the firm.
 It’s actually used in order to evaluate the profit
margin on sales, the assets turnover ratio, and
the implications of debt interact in order to
determine the rate of return on equity.

10. Du pont system
The three most important things which affects ROE
are as follows:
 Operating efficiency as measured by profit
margin
 Asset use efficiency as measured by total assets
turnover
 Financial leverage as measured by equity
multiplier
 Weakness in either operating or asset use
efficiency or both will lead to lower ROE. If ROE
is unsatisfactory then it will tell us where to start
looking for the reasons.

11. DU Pont System:
Particulars Return = × ×
On
Equity
(R.O.E)
2003 28.29%
2004 16.69%
2005 1.9757%
Industry 17.5% 2.9 3.00
Average

12. Altman Z factor:
 Z=
Where,
 = working capital/total assets (working capital is current
assets less current liabilities)
 = retained earnings/total assets
 = earnings before interest and taxes/total assets
 = market value of equity/book value of total debt (market
value of equity includes both preferred and common shares,
and debt includes and long term liabilities)
 = sales/total assets.

13. Altman Z factor:
 Z2003=3.114
 Z2004=2.632
 Z2005=2.044

15. • Z2003=3.114
• Z2004=2.632
• Z2005=2.044

16. Strengths of SRM:
 Fixed assets turnover ratio
 Altman Z factor is compatible

17. Weakness of SRM:
 Profitability Ratios
 Liquidity ratios
 Asset management ratios
 Financial Leverage Ratios

18. Question 3
 If the bank were to maintain the present credit lines and grant
an additional $7,012,500 short-term loan at a 16 percent rate of
interest effective from January 1, 2006, would the company be
able to retire all short-term loans existing on December 31,
2006? (Assume that all of White’s plans and predictions
concerning sales and expenses materialize. In these
calculations cash is the residual balancing figure, and SRM’s
tax rate is 48 percent. Assume that SRM pays no cash
dividends during the year.) Complete tables 9 and 10 included
as worksheets to facilitate analysis.

19. Table 9: Silver River Manufacturing Company
Pro Forma Income Statements (Projected)
Worksheet for Year End 2007 (Thousands of Dollars)
Particulars 2005 2006 2007
Projected Projected
Net sales 215,305 228,223 249,904
Cost of goods sold 183,307 188,284 199,923
Gross profit 31,998 39,939 49,981
Administrative and selling 18,569 18,258 18,743
Depreciation 2,244 2,665 2,006
Miscellaneous expenses 6,297 3,994 3,124
Total operating expenses 27,110 24,917 23,873
EBIT 4,888 15,022 26,108
Interest on short-term loans 2,006 4,331 4,331
Interest on long-term loans 1,052 1,052 1,052
Interest on mortgage 233 210 189
Net income before tax 1,597 9,429 20,536
Taxes 767 4,526 9,857
Net income 830 4,903 10,679
Dividends on stock 208 - -
Additions to retained earnings 622 4,903 10,679

20. Table 10: Silver River Manufacturing Company
Pro Forma Balance Sheets (Projected)
Worksheet for Year End 2007 (Thousands of Dollars)
Particulars 2005 2006 2007
Projected Projected
Assets
Cash 4,296 39,666 49,528
Accounts receivable 32,293 20,286 22,214
Inventory 51,324 33,032 35,074
Current assets 87,913 92,984 106,815
Land, building, plant, and equipment 25,161 32,173 33,139
Accumulated depreciation (7,363) (10,028) (10,939)
Net fixed assets 17,798 22,145 22,200
Total assets 105,711 115,129 129,015
Liabilities and equities
Short-term bank loans 20,056 27,068 27,068
Account payable 21,998 17,594 18,474
Accruals 8,064 10,231 12,789
Current liabilities 50,118 54,893 58,331
Long-term bank loans 10,519 10,519 10,519
Mortgage 2,574 2,314 2,083
Long-term debt 13,093 12,833 12,602
Total liabilities 63,211 67,726 70,933
Common stock 25,596 25,596 25,596
Retained earnings 16,904 21,807 32,486
Owners’ equity 42,500 47,403 58,082
Total capital 105,711 115,129 129,015

21.  Projected cash balance on 2006 = $39666400
 Projected short term loan = $27068000
 Difference = $12598400
 Minimum cash balance to be maintained =
5% of projected sales of 2006 = $11411165
 Hence, company cash balance is adequate
for the payment of the short term loan.
 Also the company is able to retire all short
term loan existing on Dec 31, 2006 with the
maintenance of present credit lines and grant
a $7012500 short term loan

22. Question 4
 Compute projected financial ratios for 2006 and
2007 (or complete Table 11). Compare these
ratios with 2005 along with industry average and
analyze improvement or deterioration in financial
condition

23. Liquidity Ratios
Particulars 2005 2006 2007 Industry Average
Projected Projected (IA)
Current Ratio 1.75 1.69 1.83 2.50
Quick Ratio 0.73 1.09 1.23 1.00

24. Leverage Ratios
Particulars 2005 2006 2007 Industry
Projected Projected Average
(IA)
Debt Ratio (%) 59.8 58.83 54.98 50.00
Times Interest Earned 1.49 2.69 4.69 7.70

25. Asset Management Ratio
Particulars 2005 2006 2007 Industry
Projected Projected Average (IA)
Inventory Turnover (Cost) 3.57 5.70 5.70 5.70
Inventory Turnover (Selling) 4.20 6.91 7.12 7.00
Fixed Asset Turnover 12.1 10.31 11.26 12.00
Total Assets Turnover 2.04 1.98 1.93 3.00
Average Collection Period 54.0 32.00 32.00 32.00

26. Profitability Ratios
Particulars 2005 2006 2007 Industry
Projected Projected Average (IA)
Profit Margin (%) 0.39 2.15 4.27 2.90
Gross Profit margin (%) 14.86 17.5 20 18.00
Return on Total Assets (%) 0.79 4.25 8.28 8.80
Return on Equity (%) 1.96 10.34 18.39 17.50

27. Interpretation
 In comparison of SRM projected financial
ratios of year 2006 and 2007 with
financial ratios of 2005, the financial
position of SRM is improved.
 In comparison of SRM projected financial
ratios of year 2006 and 2007 with
industry average, the financial position of
SRM is deteriorated.

28. Question 5
 If all short-term bank loans are repaid towards the end of the
first half of 2006, do you think that company is still able to pay
regular dividends and maintain minimum cash balance?
Revise the tables 9, 10, 11 (or complete the tables 12, 13 and
14). Do you find any situations developing that may indicate
poor financial policy? What should be the impact of such
situations on the ratios for the company, and are such impacts
necessarily either good or bad? Why?

29. Assumption in Table 9, 10 and 11
 Sales Growth: 6% in 2006 and 9.5% in 2007
 COGS: 82.5% in 2006 and 80% in 2007 of sales
 Administrative and selling Expenses: 6% in 2006
and 9.5% in 2007 of sales
 Miscellaneous Expenses: 8% in 2006 and 7.5%
in 2007 of sales
 Average collection Period: 32days (Industry
Level)

30. Assumption in Table 9, 10 and 11
 Average Industry Level: 5.7 (Industry Level)
 No changes in level of Interest Rates over two
year period
 Tax: 48% of Net Income before tax
 MCNB will charge 16% for the short term loan
 Dividend: 25% of Net Income (through back
dated calculation)

31. Comparison of Cash Balance
25000
22263 Amount in ‘000
20000
15000
12217 12495
11411 Minimum Balance
10000 Actual Balance
5000
0
2006 2007

32. Ratios

33. Ratios:

34. Question 6: Solution
On the basis of our analyses company's forecasted future market
growth is favorable.
Demanding immediate repayment won’t be in the best interest for
both the company and the bank.
The bank should extend the existing short and long term loans
without granting the additional loan.

35. Analysis of following ratio shows that
option B is better
 Debt ratio
- It determines the degree of company relying on
outside fund.

36. Cont…
 Times Interest Earned ratio
 It is the measure of the company’s ability to make interest
payments on time
Current ratio
It shows how much of current assets it has to pay the current
liabilities.

37. Cont…
 Quick Ratio
 The company ability to meet the short term debts without
having to sell off receivables
 Profit Margin
 It shows how much profit the firm is earning to know that it can
pay the short term and long term loan easily or not.

38. The conditions/safe guards the bank
should impose to protect itself on the
loans are listed below
 Security
 Mortgage
 Guarantee
 Loan Covenants
• Restriction on Disposal of Certain Assets
• Barring or Limiting the Grant of Dividend
• Requiring A Minimum Net Worth Of The Business
• Limitation on Use of The Funds Loaned
 Monitoring
 Insurance

39. Question 7
 If the bank decides to withdraw the entire line of
credit and to demand immediate repayment of the
two existing loans, what alternatives would be open
to SRM?

40. Solution:
 Converting the cash equivalent assets into cash which
includes:
 Decreasing Account Receivable:
 Minimize Inventory:
 Delay Accounts Payable Period:
 Minimum cash balance policy:
 Selling/Issue of Common Stock:
 Hold back dividend Payment:
 Sale of Assets:

41. Lesson Learnt
 To analyzed the case of the company.
 To calculate the financial ratios and know
its interpretation
 Learn to compare the financial ratios with
industry average
 Learn to compute and analysed du pont
system