Classification: Public

Name Girish Suryakant Telage

Question 1

Ans A.
Net income in 2006E is 1534, only 226 will translate to the cash flow from
Operations for 2006.
This means only 14% of the net income will translate to the cash flow from operations
Out of the three categories. The three categories in the cash flow statement has
contributed majorly from 2003 to 2006(E) to the decrease in the change in cash are
1) Change in Accounts Receivable, 2) Investment in PP&E and 3) Retirement of Debt.

Ans B.

Trend in cash flow from operating activities- Over the years, the cash flow from
operating activities are constantly decreasing. the reason for decrease in cash flow from
operating activities is Increase in Accounts Receivable Trend in cash flow from
'investing activities - Over the years, the cash flow from investing activities are
increasing. Reason for increase in cash flow from investing activities is the decrease in
investment in land over the years. Trend in cash flow from 'financing activities' - The
cash flow from financing activities increased constantly from 2003 till 2005 but
decreased in 2006(E). Reason for firstly increase and then decrease in cash flow from
investing activities is the amount of debt issued by the company in each year.

Ans C.
Cash position of the company - The cash position of the company is not satisfactory.
The company has generated only 226 in cash flow from operating activities in 2006(E)
despite earning a net income of 1534 in 2006(E).
 Classification: Public

This has led to the negative change in cash of cash of -203 in 2006(E) Funding of
investments - The company is currently relying upon issuance of debt to fund its
investment.
The company has issued debt of 2006 in 2006(E) in order to fund its investment of PP&E
of -1398. This might lead to the company being caught in the debt trap. Instead, the
company can use its accumulated profits and reserves to fund its investments.
Free cash flow -
Free cash flow (2006E) = Operating Cash Flow - Capital Expenditures
Free cash flow (2006E) = 226 - 1398
Free cash flow (2006E) = -1172
The free cash flow of the company in 2006(E) is negative because of the two factors,
namely increase in accounts receivable and increased investment in PP&E. The accounts
receivable increased by 4185 which resulted in lower Operating Cash Flow and
increased investment in PP&E further reduced the free cash flow.

Question 2

Ans A.

Operating Working capital 2002 to 2006E

At December 31 2002 2003 2004 2005 2006E
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Operating Working capital 4,540 4,227 5,122 6,917 8,894

Ans B.

Operating Working capital ratio 2002 to 2006E

At December 31 2002 2003 2004 2005 2006E
4226.57 5122.45 6917.19 8893.82
Operating Working capital 4540 3 3 6 1
 Classification: Public

Sales 24,652 26,797 29,289 35,088 42,597

Operating working capital 0.18416 0.15772 0.17489 0.19713 0.20878
ratio 2 6 3 7 9

Ans C.

DSO from 2002 to 2006E

At December 31 2002 2003 2004 2005 2006E
Accounts Receivable 3,485 4,405 6,821 10,286 14,471
Sales revenue per day 68 74 81 97 118
50.8920 59.1780 83.8356 105.534 122.301
DSO 3 8 2 2 4

DIO from 2002 to 2006E

At December 31 2002 2003 2004 2005 2006E
Inventories 3,089 2,795 3,201 3,291 3,847
Cost of Goods Sold 57 60 66 79 98
54.3484 46.3561 48.3287 41.4246 39.4520
DIO 1 6 7 6 5

DPO from 2002 to 2006E

At December 31 2002 2003 2004 2005 2006E
Accounts Payable 2,034 2,973 4,899 6,660 9,424
Cost of Goods Sold 57 60 66 79 98
35.7865 49.3150 83.8356 96.6575
DPO 5 7 73.9726 2 3

Ans C.

Due to a long credit period given to dealers by ceres gardening limited its working
capital requirement increased by more than 20%.

As the day sales outstanding (DSO) Increased to 122.3 day on 2006E, the accounts
receivable increased. This increased account receivable which is cash outflow
contributed to higher working capital requirement.
 Classification: Public

Question 3

Ans 3.

Exhibit 2 - Balance Sheet (in $ thousand, some numbers are rounded)

At December 31 2002 2003 2004 2005
Plant, Property, & Equipment (net) 2,257 2,680 2,958
Other Assets 645 645 645
Land 450 1,750 2,853
Non-Current Assets 3,352 5,075 6,456
Accounts Receivable 3,485 4,405 6,821 10,286
Inventories 3,089 2,795 3,201
Accounts Payable 2,034 2,973 4,899
Operating Working capital 4,540 4,227 5,122
Capital Employed 7892 9301 11578 14032
Long-Term Debt 3,258 4,400 5,726
Shareholders Equity 5,024 6,091 7,146
Current Portion of Long-term Debt 315 352 525
Cash 705 1,542 1,818
Capital Investment 7892 9301 11578 14032

Question 4

Ans A.

Variable margin = (Sales revenue - cost of goods sold) /

Sales Operating margin = Operating income / sales
Return on Equity = Net Profit/Owners Equity
ROACE = Earnings after taxes before Interest/Average capital Employed
Exhibit 3 - Income Statement (in $ thousand, some numbers are rounded)
For Years Ending December 31 2002 2003 2004 2005 2006E
Sales 24,652 26,797 29,289 35,088 42,597
Cost of Goods Sold 20,461 21,706 23,841 28,597 35,100
Earnings before Interest & Taxes 1,641 2,338 2,408 2,836 3,018
Interest 187 349 440 547 658
Earnings before Taxes 1,454 1,989 1,968 2,289 2,360
Taxes 264 696 689 801 826
 Classification: Public

Net Income 1,191 1,293 1,279 1,488 1,534

Capital Employed 2832 3631 3687 4323 4552
Shareholders Equity 5,024 6,091 7,146 8,336 9,563
Variable margin as percentage 17% 19% 18.60% 18.50% 17.60%
Operating margin as percentage 6.66% 8.72% 8.22% 8.08% 7.09%
Return on equity as percentage 23.70% 21.23% 17.90% 17.85% 16.04%
Return on average capital
employed as percentage 16.23% 16.19% 13.40% 13.01% 11.71%

Ans B.

The trend in ROE from

2002 to 2006(E) shows
decreasing over the years.
The reason for decrease in ROE is the decrease in
performance of the operations of the company.
The performance of operations of the company measured using Return on Capital
Employed (ROCE). ROCE for the company is decreasing over the years.

ROCE

2003:22.29%

2004:18.71%

2005:18.34%

2006E:16.73%

Year 2002 2003 2004 2005 2006E

EAI(EBT/EBIT) 89% 85% 82% 81% 78%
Financial 1.57 1.53 1.62 1.68 1.75
Leverage
(Capital
Emp/Owners
Equity)
EAT (Net 82% 65% 65% 65% 65%
Income/EBT)
Efficiency 3.12 2.88 2.53 2.5 2.54
(Sales/Capital
Emp)
 Classification: Public

Operating 7% 9% 8% 8% 7%
Margin

Ans C.

The trend in ROACE from 2oo2 to 2oo6(E) shows

YRS 2002 200 2004 2005 2006

3 E
Ebiat 1378 164 1719 2034 2192
2
ACE 8282 938 11681 14166 1675
7 1
RoACE 17 17 15 14 13

Question 5

Ans A.

Pros Cons
Constant Growth in Sales Insufficient Distribution
Reputation and Branding Longer Payment Terms
Aggressive growth Seasonal Sales

Pros are:

increase in Sales

Increase in EBIT

Decrease in DIO

Corns are:
 Classification: Public

Decrease in ROE

increase in DSO

I will not recommend going for the Get Ceres Program because of multiple reasons:

In the year 2006 have negative cash

Very high COGS

Decrease in ROE means the equity holders are not getting the desire return.

increase in DSO means Account Receivable in 2006 of 14,471 represent 122 days of
sales revenue outstanding.