Project

Overview

This project requires the completion of a comprehensive financial analysis of a company seeking to expand operations. A scenario is presented below as a case studythat requires analysis and resolution.

This assessment will evaluate your mastery with respect to the following course outcomes:

• Understand at a deeper level the economic analysis of strategic and tactical investments, the effect financial leverage has on firm value, and the integration of investment and financial corporate strategies
• Analyze issues that face modern corporate managers when making capital budgeting and capital structure decisions
• Apply finance valuation techniques for purposes of business decisionmaking
• Integrate, synthesize, and present finance concepts and analyses
• Be able to use the corporate finance tools necessary to develop the skills, knowledge, and wisdom (SKW) in current demand by employers
• Understand the qualities needed for careers such as corporate managers, financial analysts, investment analysts, brokers, and business practitioners

Prompt

Scenario:Felicia & Fred, a publicly held U.S. corporation and manufacturer of jewelry, requires a financial analysis of its current year operating performance. Previously, the company expanded capacity to include a Czech crystal bracelet product line. During this year, the company expanded its product offering to include women's accessories, specifically handbags. These are outsourced through a licensing agreement the company initiated with a manufacturer in Asia. In order to preserve intellectual property and branding rights in the United States, this manufacturer exclusively has the right to Felicia & Fred's women's logo purses.

As previously mentioned, the company's inventory investment has grown, but to date it has not required additional storage space in terms of increases in total plant and property since the company is renting warehouse space to accommodate the necessary real estate. However, the company anticipates that this will change if the demand for this product continues to be met with fervor among its customer base.

Given these considerations and the results indicated in the company's income statements and balance sheets for theprior year and current year, as well as the company's cash flow statement for thecurrent year, answer the following questions and address specific qualitative elements as requested.

I. Introduction/Abstract:Discuss briefly the difference between strategic and tactical decision making.

A. Is the decision to enter the handbag distribution business strategic or tactical?
B. What indications of financial performance must a company consider in evaluating whether an investment has successfully increased shareholder wealth?

II. Financial Trend Analysis:Directly analyze the firm's financial statements as presented in the Exhibits.

A. Calculate liquidity ratios of the firm for the prior year and current year: current ratio, inventory turnover, and the accounts receivable turnover (for the denominator of the turnover ratios, use the year presented). Show your calculations and interpret the trend. What conclusions do you draw from this analysis?

B. Calculate the following solvency ratios of the firm for theprior year and current year: debt to equity and times interest earned. Show your calculations and interpret the trend. What conclusions do you draw from this analysis?

C. Calculate the following profitability ratios of the firm for theprior year and current year: gross profit margin, net profit margin, return on assets, and return on equity (for the denominator of the return ratios, use the year presented). Show your calculations and interpret the trend. What conclusions do you draw from this analysis?

III. Integrate Prior Financial Analysis

Consider the prior analysis Felicia & Fred completed for the Czech crystal bracelet product line. Given the prior analysis and the profitability trend of the company, did the inclusion of this product line as compared to theprior year results enhance gross margin for the company? Why or why not?Show calculations and interpret the results.

IV. Long-Term Financial Planning: Prepare updated financial statements for Felicia &Fred based on the following assumptions:

A. The company's sales are projected to grow by 10% next year. Calculate the effects and present the forecasted income statement and balance sheet for the company. Also consider that this sales increase will not require any new capital investments needed in land and buildings and that mortgages will remain the same. Depreciation will remain constant and will accrue year over year in the balance sheet. And finally there will be no dividend payout.

B. Indicate the amount of additional funds needed by the company for next year.

V. Qualitative and EthicalConsiderations of Financial Analysis

A. The cost of capital may change when there are incremental capital requirements obtained from different sources, resulting in changes in capital structure. What qualitative considerations are important for a company seeking to raise capital?Answer this by considering the effect of leverage in your response. Specifically, what expected effects will additional leverage have on a company's decision to accept investment projects? As the cost of capital increases or decreases, are managers more or less likely to accept capital projects? What is the effect on shareholder wealth when managers accept projects based upon fluctuations in cost of capital? Should shareholders be concerned about the ethics of managers' selection processes?

B. Agency conflicts arise when there are differences in the goals of the firm versus the personal goals of managers.What qualitative considerations are important for the mitigation of agency conflicts in relation to the acceptance and completion of capital projects? Indicate the types of monitoring costs and why these are critical. What monitoring activities are required to ensure that project acceptance and outcomes benefit shareholders? What approaches might be necessary to ensure managers make ethical project investment decisions?