Provide a final full report of 4–6 pages to the CFO and CEO that encompasses the

Question

Provide a final full report of 4–6 pages to the CFO and CEO that encompasses the following:
•Financial pros and cons and final recommendations for Superior going public and the new production plant
•Discussion on what hurdle rates the production plant project would not pass
•Debt versus no debt option (associated risk and impact to financial statements)
•Key financial metrics for the senior management team
Make sure your metrics include the following:

•Payback period
•Net present value
•Internal rate of return
•Modified internal rate of return
Finally, be sure your recommendation is based on sound financial principles.

Click here to view Superior's Balance sheet.

Click here to view the company's income statement.

Explanation / Answer

Current Situation Superior Living, Inc. is a private, domestic US manufacturer of home furniture targeted at US consumers ages 21 to 54. The company generates US$250 million in revenues from six product lines: outdoor patio, luxury, durable rental, children's furniture, rare woods, and space saver. The company sells its products through a number of retailers and has a solid business reputation with distributors and customers. Superior Living is looking to go public in the next 6 to 8 months with an initial public offering (IPO) for further expansions. I have to give final recommendations regarding the IPO and further expansion plans. Recommendations Salient points of analysis of financial statements One should see the profitability and other important parameters of the Superior to know the performance of the organization. Let us see the critical financials of the Superior: 1) Net profit margin indicates the overall efficiency of the organization. This ratio is measured to evaluate the efficiency of company in terms of profit. Besides management of the company, creditors and owners are also interested in the profitability of the firm. Superior's net margin: Net Margin = Net Profit/Sales Net Margin of Superior is better in current year which is (29414/250000) = 11.77%, which is more than 2002's net margin of (25078/227000) = 11.05%. This is positive for the company. 2) Debt equity ratio This measures the long term solvency of the organization. Lower debt equity ratio indicates lower financial risk. Bank will prefer the organization to have lower debt equity ratio. Superior's debt equity ratio is quite low indicating lower financial risk. Debt equity ratio= Debt /Equity =3400/132550 =.025 times This indicates safety of the organization. Salient points of analysis of Capital Budgeting tools Capital budgeting involves taking decisions about the long term assets mix of the organization. One uses following tools for analyzing a project: 1) NPV 2) Payback 3) IRR 4) MIRR NET PRESENT VALUE: The net present value (NPV) method offsets the present value of an investment's cash inflows against the present value of the cash outflows. If a prospective investment has a positive net present value (i.e., the present value of cash inflows exceeds the present value of cash outflows), then it clears the minimum cost of capital and is deemed to be a suitable undertaking. On the other hand, if an investment has a negative net present value (i.e., the present value of cash inflows is less than the present value of cash outflows), the investment opportunity should be rejected. (principlesofaccounting, 2008) Hence Net present value is positive then one should accept the project as its value accretive for the organization. Superior's new project is having NPV of $1,420,825 which is positive and one should accept the project. Payback period Payback is calculated by dividing the initial investment by the annual cash inflow. The payback period is the point at which the cumulative net cash inflows begin to exceed the cumulative net cash outflows. (principles of accounting, 2008) If an investment involves uneven cash flows, the computation requires scheduling cash inflows and outflows. Hence payback period is the duration in which initial investments are recovered. 3) IRR Internal rate of return is the return at which present value of cash inflows are equal to initial investments. In other words, it is the interest rate that would cause the net present value to be zero. IRR is a ranking tool. The IRR would be calculated for each investment opportunity. The decision rule is to accept the projects with the highest internal rates of return, so long as those rates are at least equal to the firm's cost of capital. (principles of accounting, 2008) If IRR is greater than cost of capital then one should accept the project. Superior has got IRR of 23.1% which is more than cost of capital. Hence one can accept the project. 4) MIRR While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that all cash flows are reinvested at the firm's cost of capital. Therefore, MIRR more accurately reflects the profitability of a project. (Investopedia, 2008) MIRR greater than cost of capital reflects that the project is profitable and acceptable. Superior has MIRR of 17.8% which is more than cost of capital of 10% and hence one can accept the project. Conclusion Superior Living is looking to go public in the next 6 to 8 months with an initial public offering (IPO). In addition, the company is aggressively pursuing new business opportunities which may include expansion via acquisition and the development and implementation of new product lines. Based on the above analysis Superior can go for IPO and expansion plan as the project is profitable. This is because of positive NPV, IRR and MIRR is more than cost of capital. Its current profitability margin has increased and has sound solvency.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.