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Monday 17 September 2018

FRIENDLY CARDS, INC.


Question # 2: Perform an NPV analysis to see if Friendly Cards should purchase the envelope machine (you will need to come up with a reasonable WACC).


Solution:

Purchase of envelop machine:

Friendly Card is bearing millions of cost every year on envelops purchasing. So it is considering the option of purchasing an envelope machine rather than envelops. As the NPV calculated by discounting the cash flows of 8 years at a wacc of 7.9% is positive, so I think it’s a good investment to purchase an envelope machine. Positive negative value is an indicator that cash inflows by purchasing envelope machine exceeds

FRIENDLY CARDS, INC.


Question # 1: Perform a ratio analysis of FC for 1985-1987 and a pro forma ratio analysis of the FC financials for 1988-1990 to show what is likely to happen to the firm’s bond covenants if the status quo continues. Run a few scenarios by varying the sales growth rate (first try 0%, then 20%) and see what happens to the covenants.

Solution:


LIQUIDITY: The Quick ratio is below 1 which means that the assets which are in the form of cash or can easily be turned into cash are not enough to handle the current debt payment requirements. There is a definite decline in current ratio but the firm's liquidity is relatively good since its current ratio is still above 1.
ACTIVITY: Inventory turnover declined between 1985 and 1987 and is projected to rise slightly from 1988 to 1990. Due to the decline in the inventory turnover the inventory is staying taking longer to be sold.  This is also impacted by the fact that the firm's sales are seasonal.         
DEBT: The proportion of total assets that are financed by debt is 75% and greater.  It rose to above 83% in 1986 but the firm is obviously aiming at bringing it down in 1988 - 1990. Long term debt to equity ratio is a significant ratio because the firm is aiming at keeping the long-term debt to equity ratio to a maximum of two to one. Notice that this ratio was particularly high in 1986 but began declining in 1987 which is good sign for the firm. If the projections for 1988 - 1990 are achieved then the firm would have accomplished its goal of reducing the debt to equity ratio. Friendly's bankers are feeling uneasy about the extent to which the company is depending on debt capital.  As the total liability to equity ratio points out, the firms liability was approximately 3 times its equity in 1985 and that amount grew to over 5 times in   1986.  The firm is attempting to control this amount as indicated in the case. (Exhibit 2 shows this ratio). Friendly's bankers insisted on a few terms, one of them being that the bank loans outstanding at any time should not exceed 85% of the receivables. Based on the performance in 1987 and the projected performance for 1988 - 1990, the firm seems to be in violation of this particular bank request. This may lead to financing problems for the firm.      
PROFITABILITY: Profitability in relation to sales is relatively low from period to period.  However, the firm is projecting an increase Net profit margin.

AFTER 20% INCREASE IN SALES:

LIQUIDITY & DEBT: Liquidity ratios remain unaffected by increase in sales as these are not affected by income statement items. These are totally dependent on balance sheet items.         

ACTIVITY: Inventory turnover declined between 1985 and 1987 but with 20% growth in projected sales remains constant from 1988 to 1990. Due to the stability in the inventory turnover the inventory is taking less time to be sold. Hence, the average age of inventory decreases.

PROFITABILITY: With 20% growth in projected sales the profitability increases as gross profit margin, the net profit margin and return on total assets has increased as compared to 0% growth in projected sales.


Monday 16 September 2013

Advice Fran, Gram and Hen as to any potential liability they might face as regards:
FRAUDULENT TRADING
WRONGFUL TRADING
Please Consider:   Re Produce Marketing Consortium Case
Fraudulent trading- There has been civil liability claims on company directors who have been found indulging in activities that amount to fraudulent trading. When considering the case of Re Produce Marketing Consortium Case, it was discovered that section 213 of Insolvency act 1986 governs situations of fraudulent trading, situation in which it appears that business has been carried out with the intent to defraud creditors .In a case, where fraudulent trading is proved the judge on the application of liquidator, might order that any person who were knowingly party to such continuation of business is liable to make such contributions, he is required to contribute to company assets (if liquidators are not fully compensated) in a manner the court thinks proper. However to prove fraudulent trading under section 213 of Insolvency act 1896, there’s a high burden of proof involved if one is to prove dishonesty on the part of another person to whom he has alleged. Fraudulent trading is also a criminal offence, which applies to those personnel’s that carry on business of a company with malafide intentions to defraud its creditors, shareholders or any other person involved. The following outcomes could result-

Gram and Hen as company directors were falsifying the company records and were well aware that the company would reach the point of insolvent liquidation. If proved, they would be liable under fraudulent trading law to have committed both criminal and civil offences. They may get maximum prison sentences for 5 years each for their offences and may have to contribute to the assets of the company, if liquidators are not fully compensated for their losses.

Fran had earlier distanced himself and was not involved in falsifying accounts inorder to incur more debt. Hence, there is no evidence against Fran to convict him for fraudulent trading

Wrongful trading- was introduced to complement the concept of fraudulent trading. Unlike fraudulent trading, wrongful trading doesn't need finding of 'intent to defraud' (heavy burden of proof) but only balance of probabilities or simple proof. Wrongful trading is therefore a less serious and more common offence than fraudulent trading.

Wrongful trading is an action that can only be taken by company liquidators; once incompetency leading to insolvent liquidation is proved particular individuals potentially become liable for the debts of their companies. Wrongful trading is civil wrong under section 214 of Insolvency act 1986, this section has a wide scope and also applies where a company is being winding up & it appears, that a director or couple of directors knew before the start of liquidation that there was no reasonable chance of company avoiding insolvent liquidation. In such cases, one has to refer to the judgment given in Re Produce Marketing Consortium Case-

“In my judgment, there is nothing wrong in the fact that directors incur credit at a time when, to their knowledge, the company is not able to meet all its liabilities as they fall due. What is manifestly wrong is if directors allow a company to incur credit at a time when the business is being carried on in such circumstances that it is clear the company will never be able to satisfy its creditors. However, there is nothing to say that directors who genuinely believe that the clouds will roll away and the sunshine of prosperity will shine upon them again and disperse the fog of their depression are not entitled to incur credit to help them to get over the bad time.”

This establishes that unless the director took every reasonable measure to minimize potential loss for the creditor, the director(s) might be liable to contribute such money to the assets of the company as the court thinks proper. As wrongful trading is a civil wrong case it requires civil burden of proof (simple proof) e.g the director is particularly well qualified, they will be expected to perform in line with those standards is enough to convict. The director needs to have general knowledge, experience of the post.
The mode in which the directors would be liable to contribute in the companies’ asset is also shown in Re Produce Marketing Consortium Ltd (1989), in which two directors (Mr. David, Mr. Murphy) were held liable to pay the indemnity from the point they ought to know that the company could not avoid insolvent liquidation. So the following outcomes could result if convicted for wrongful trading.
Gram and Hen are clearly personally liable to contribute in companies assets to under section 214 of IA 1986.They are liable for increasing companies debt from 10,000 to 100,000 in a period of three years.
Fran as a director would also be liable to contribute under the same section (s.214), because he didn't took reasonable steps to minimize company loss and gave it less priority. He would be liable to compensate the liquidators.

Wednesday 27 March 2013

CSR

 Literature review:
One may describe Corporate Social Responsibility (CSR) as an approach to decision making which includes both social and environmental factors[1].CSR comply  that companies do not only have single objective of profitability, but they also have objectives of adding environmental and social value to society[2]. In an influential article, Carroll (1979) presented corporate social responsibility as a construct that "encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time." In his definition, Carroll argued that most of the companies hold those responsibilities not only for the sake of their own company but for the sake of society as well. This means that organizations by their very existence can be viewed as entering into a social contract that obligates the corporation to take the interests of society into consideration when making decisions[3].
Marketplace polls (e.g. Dawkins, 2003) and academic research (e.g. Sen & Bhattacharya, 2001) suggest consumers increasingly expect business to go beyond delivering economic outcomes and also contribute to society's welfare and sustainability by being socially-responsible, and will support them if they do so. It is therefore thought that pro-social marketing initiatives, such as CSR claims, can become a market differentiating strategy[4], build brand equity[5], and lead to customer loyalty and other positive post purchase outcomes[6].
One broad framework used to categorize CSR initiatives includes actions under the domains of employee relations and diversity programs, ethical materials sourcing, product design, marketing programs, the environment, human rights, and corporate governance[7].
When it comes to social responsibility, a consumer need can be a product/service that not only meet personal needs but to improves social welfare as well. It has to be noted that not every consumer experiences this need. The recognition of this need depends on personal moral views, also called as ethical obligation, and whether or not this obligation forms an essential part to ones self-identity[8] .
The sources of information greatly influence a consumer perception of effectiveness. For example, mass media often focuses on the drama regarding a social issue (e.g. the harm inflicted) than on the solutions (reasons why it happened and possible strategies to solve it). It reduces the consumers believe of change. On the other hand, information coming from formal sources (e.g. university classes), informal sources (NGOs, seminars, campaigns, magazines etc) can be more educational and empowering for consumers and might increase the perceived self-efficacy[9].
In addition, consumers might buy responsibly if they have knowledge about a companys impact on social welfare. However, studies have shown consumers face difficulties in finding this information. Also, this is due to that fact that ethical and social attributes of a product are often acceptable attributes, which cannot be judged before, during or after product use due to lack of knowledge, expertise and the height of difficulty.
Experimentally, it has been shown that consumer knowledge of a firm's CSR initiatives may lead to a higher appraisal of the company and a more positive evaluation of the company's product[10].
Consumers course of action related to information can depend on their involvement with a product or a brand. If a consumer has a strong commitment to a brand, he/she is able to show more resistance to negative information and might have difficulty remembering ethical attributes of a product.
Consumers will only buy responsibly if these products can perform at least as good as the irresponsible products. Another factor influencing the purchase decision is the price of a socially responsible product. The additional costs resulting from responsible producing processes are often passed on to the consumer by charging a premium price[11]. Reports have shown that consumers are willing to pay a higher price for a socially responsible product. However, this happen as long as they have a budget for it. If their income cannot support responsible purchasing, consumers will buy competing products with a lower price. Other factors that have an influence on a consumers purchase behavior are travelling a distance to buy the product and spending too much time locating the product in the store.
After seeking information and taking into account the alternatives, consumers make the decision to choose a socially responsible product. As mentioned before, it is hard to judge the ethical attributes of a product. That is why it is important for companies to raise awareness and provide information about their CSR developments and their impact of improving social welfare.

It is commonly discussed that Pakistan is a country that is still lacking in CSR practices among companies. The general perception about the corporate sector in Pakistan is that they are blood-sucking leeches who don’t really care about anything but their own selfish interests (profit). You will find various terrible episodes of corporate wrong doing. From irresponsible advertising to companies exploiting their monopolistic position, to a complete ignorance of customer relationship management, the corporate horror stories in Pakistan are in abundant[12].
The corporate sector in Pakistan has come a long way from its early days of politicized, self-promotional advertising covered as CSR. Now there have been certain organizations that have taken the lead and must be appreciated for their efforts in contributing to the society and people of Pakistan.  Some of the leading companies in Pakistan who took initiatives in CSR practices include Unilever, NBP, PSO, Askari Commercial Bank and Siemens etc.


[1] (Fagbemi, 2011)
[2] (Mirfazli, 2008)
[3] (Drumwright, 2001)
[4] (McWilliams & Siegel, 2001)
[5] (Hoeffler & Keller, 2002)
[6] (Bhattacharya and Sen, 2003)
[7] (Kinder, Lydenberg, Domini & Co. Inc., 2006)
[8] (Valor, 2008)
[9] (Valor, 2008)
[10] (Brown & Dacin, 1997)
[11] (Valor, 2008)
[12] (Triple Bottom-Line)

SQL


>creating a table

create table student(
student_id number(5),
first_name varchar2(10),
last_name varchar2(10),
degree varchar2(10)
);


>viewing table structure

desc student;


>inserting values

insert into student
(STUDENT_ID, FIRST_NAME, LAST_NAME, DEGREE)
values
(1, 'ali', 'khan', 'metric');


insert into student
values
(2, 'asad', 'amjad', 'middle');


insert into student
(FIRST_NAME, STUDENT_ID, LAST_NAME, DEGREE)
values
('ahmed', 3, 'malik', 'bsc');


> viewing data

select * from student;


> updating a record

update student
set degree='metric'
where student_id=2;     


> deleting a recor

delete from student
where student_id=2; 


insert into student
(STUDENT_ID, FIRST_NAME, LAST_NAME, DEGREE)
values
(1, 'faheem', 'khan', 'mba');


delete from student
where first_name='faheem' or last_name='malik';

Wednesday 13 March 2013

Analysis of Financial Ratios

Financial statement analysis seeks to evaluate management performance in several important areas including profitability, efficiency, and risk. Analysts use financial ratios because numbers in isolation typically convey little meaning. For example, knowing that a firm earned a net income of $100,000 is not very informative unless we also know the sales figure that generated this income and the assets or capital committed to the enterprise. The ratios are intended to provide meaningful relationships between individual values in the financial statements.

Internal liquidity ratios:
current ratio:
                       it exams the relationship between current assets and current liabilities as follows
current ration = current assets/current liabilities
Quick ratio:
                      some believes that inventories and some other current assets might not be very liquid, so they prefer the quick ration which is as follows
quick ratio = cash + marketable securities + receivables / current liabilities
Cash ratio:
cash ratio = cash and marketable securities / current liabilities
Receivable turnover:
receivables turnover = net annual sales / average receivables
it is useful to analysis the quality (liquidity) of the  accounts receivables by calculating how often the firm's receivables turn over, which implies an average collection period.