Dunham Cosmetics Financial Evaluation Essay

1397 words - 6 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 DaysDSO = annual sales/365 26,671/365Fixed 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 ...view middle of the document...

Current assets normally include cash, marketable securities, accounts receivables, and inventories. In the meantime, current liabilities consist of accounts payable, short term notes payable, current maturities of long term debt, accrued taxes and other accrued expenses (principally wages.) If a company is getting into financial difficulty, it begins paying its bills more slowly, borrowing from its bank, and so on. If current liabilities are using faster than current assets, the current ratio will fall, and this could enhance trouble. Because the current ratio provides the best single indicators of the extent to which assets cover the claims of short-term creditors, then they expect to be converted to cash. As a result, it is the most commonly used measured of short-term solvency.5.Suppose Dunham had followed Jensen's 1993 recommendation to lower its payout ratio. Recalculate the firm's debt and current ratios for 1995 assuming that the payout ratio was 20 percent from 1993 to 1995. (Assume that the extra money was used to reduce the firm's notes payable)Dividends = (Net income - Retained earnings required to help finance new investments)= Net income - [(Target equity ratio)(Total capital budget)]1993 1994 1995New POR and funds available to lower CL(558 * 20)/50 = 223.2 (475 *20)/50 = 190 (188 * 20)/50 = 75.2558-223.2 = 334.8 475-190 = 285 188-75.2 = 112.8New current liability3788-334.8 = 3453.2 5940-285 = 5655 7600-112.8 = 7487.2CR= CA/CL1993 1994 19959095/3453.2 = 2.634 11543/5655 = 2.041 12932/7487.2 = 1.7276.A. Jensen discussed Dunham's situation with Paula Robinson, an accounting friend. Robinson said that, in her opinion, Dunham has "too little long-term capital, especially considering your receivables and inventory needs." Why is it frequently appropriate to use a long-term capital source like bonds or equity to finance items like inventory and receivables that appear on a balance sheet as short-term assets?It is frequently appropriate to use a long-term capital source like bonds or equity to finance items like inventory and receivables that appear on a balance sheet as short-term assets because according on the conservative approach philosophy, long-term financing is used to finance all of the firm's long-term assets, and of all of its permanent current assets, in which the needs are higher when does the firm use any short-term financing.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...

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