CASE 68

SWEET DREAMS INCORPORATED

Financial Analysis and Forecasting

INPUT DATA:

KEY OUTPUT:
1996

Sales growth
As a % of sales:
CGS
Admin exp.
Misc expenses
ST int rate
Mtg. int. rate
Fed.-plus-state
tax rate
Div. payout
Com shr outstd
Target DSO
Target inventory
turnover, CGS
Depr, % of GFA
% prior yr's
A/P bal.
Princ. repymt
of mtg.
P/E ratio
New ST loan
ST loan repaid
% sales made

Andrii&Hilary

1997

10.00%

12.50%

83.00%
8.00%
1.80%
8.50%
7.99%

80.00%
7.50%
1.40%
9.00%
8.00%

40.00%

40.00%

7,000

7,000

13.50%

13.50%

20.00%
445

112.50%
472

12
$9,500

1995 Net cash flow

1995 Current ratio
1995 Quick ratio
1995 Debt ratio

1996 Current ratio

1996 Quick ratio
1996 Debt ratio

1997 Current ratio

1997 Quick ratio
1997 Debt ratio
Altman's Z score, 1995
Altman's Z score, 1996
Altman's Z score, 1997

14

MODEL-GENERATED DATA:

Table 1: Historical and Pro Forma Balance Sheets:

ASSETS
Cash and marketable
securities
Accounts receivable
Inventory
Current assets
Land, buildings, plant,
and equipment
Accum. depreciation
Net fixed assets
Total assets

1993

1994

1995

12,523
25,175
29,366

8,696
26,945
54,542

7,514
44,090
75,424

$67,064

$90,183

$127,028

25,975
(4,494)

29,396
(6,981)

Pro Forma
1996

33,453
(10,041)

42,953
(13,101)
$29,852

$21,481

$22,415

$23,412

$88,545

$112,598

$150,440
Pro Forma

LIABILITIES AND EQUITY

Short-term bank loans
Accounts payable
Accruals

1993
4,860
10,541
5,081

1994
7,763
15,409
7,317

1995
26,610
29,240
10,997

1996
36,106
23,392
12,097

$20,482

$30,489

$66,847

$71,595

9,712
4,101

16,248
4,069

16,248
3,585

16,248
3,140

Long-term debt

$13,813

$20,317

$19,833

$19,388

Total liabilities

$34,295

$50,806

$86,680

$90,983

33,750
20,500

33,750
28,042

33,750
30,010

33,750
39,517

Total equity

$54,250

$61,792

$63,760

$73,267

Total liabilities
and equity

$88,545

$112,598

$150,440

$164,249

Current liabilities
Long-term bank loans
Mortgage

Com stk (7,000,000 sh)

Retained earnings

Table 2: Historical and Pro Forma Income Statements:

1993

1994

1995

Pro Forma
1996

259,325
210,431

281,597
231,424

300,351
255,775

330,386
274,220

$48,894

$50,173

$44,576

$56,166

17,089
2,391
2,854

22,844
2,487
5,634

25,530
3,060
7,599

26,431
3,161
5,947

$22,334

$30,965

$36,189

$35,538

$26,560

$19,208

$8,387

$20,627

389
875
328

660
1,463
326

2,262
1,463
287

3,069
1,463
251

$1,592

$2,449

$4,012

$4,783

Before-tax earnings
Taxes

$24,968
9,987

$16,759
6,704

$4,375
1,750

$15,844
6,338

Net income

$14,981

$10,055

$2,625

$9,507

3,745

2,514

656

Net sales
Cost of goods sold
Gross profit
Admin and selling exp
Depreciation
Miscellaneous expenses
Total operating exp
EBIT
Interest on ST loans
Interest on LT loans
Interest on mortgage
Total interest

Dividends on stock

Additions to
retained earnings

$11,236

$7,541

$1,969

$9,507

$2.14

$1.44

$0.38

$1.36

1993

1994

1995

14.14%

7.72%

4.99%

28.43%
33.17%

23.93%
48.44%

29.31%
50.14%

75.74%

80.09%

84.44%

29.34%

26.11%

22.24%

-5.08%

-6.20%

-6.67%

24.26%

19.91%

15.56%

100.00%

100.00%

100.00%

5.49%
11.90%
5.74%

6.89%
13.68%
6.50%

17.69%
19.44%
7.31%

23.13%

27.08%

44.43%

10.97%
4.63%

14.43%
3.61%

10.80%
2.38%

Long-term debt

15.60%

18.04%

13.18%

Total liabilities

38.73%

45.12%

57.62%

Common stock
Retained earnings

38.12%
23.15%

29.97%
24.90%

22.43%
19.95%

Total equity

61.27%

54.88%

42.38%

Total liabilities
and equity

100.00%

100.00%

100.00%

EPS (7,000,000 shares)

Table 3: Common Size Balance Sheets:

ASSETS
Cash and marketable
securities
Accounts receivable
Inventory
Current assets
Land, buildings, plant,
and equipment
Accum. depreciation
Net fixed assets
Total assets

LIABILITIES AND EQUITY

Short-term bank loans
Accounts payable
Accruals
Current liabilities
Long-term bank loans
Mortgage

Table 4: Common Size Income Statements:

1993

1994

1995

Net sales
Cost of goods sold

100.00%
81.15%

100.00%
82.18%

100.00%
85.16%

18.85%

17.82%

14.84%

6.59%
0.92%
1.10%

8.11%
0.88%
2.00%

8.50%
1.02%
2.53%

8.61%

11.00%

12.05%

10.24%

6.82%

2.79%

0.15%
0.34%
0.13%

0.23%
0.52%
0.12%

0.75%
0.49%
0.10%

0.61%

0.87%

1.34%

Before-tax earnings
Taxes

9.63%

5.95%

1.46%

Net income

5.78%

3.57%

0.87%

Dividends on stock

1.44%

0.89%

0.22%

Additions to
retained earnings

4.33%

2.68%

0.66%

1994

1995

Gross profit
Admin and selling exp
Depreciation
Miscellaneous expenses
Total operating exp
EBIT
Interest on ST loans
Interest on LT loans
Interest on mortgage
Total interest

Table 5: Statements of Cash Flows:

CASH FLOW FROM OPERATIONS:

Sales
Increase in receivables
Cash sales
Cost of goods sold
Increase in inventories
Increase in accts payable
Increase in accruals
Cash cost of goods
Cash margin
Admin and selling exp
Miscellaneous expenses
Taxes

$281,597
(1,770)

$300,351
(17,145)

$279,827

$283,206

(231,424)
(25,176)
4,868
2,236

(255,775)
(20,882)
13,831
3,680

($249,496)

($259,146)

$30,331

$24,060

(22,844)
(5,634)
(6,704)

(25,530)
(7,599)
(1,750)

Pro Forma
1996

Net CF from operations

CF FROM FIXED ASSET INVESTMENT:
Investment in fixed assets
CF FROM FINANCING ACTIVITIES:
Increase in short-term debt
Increase in long-term debt
Repayment of mortgage
Interest expense
Common dividends
Net CF from fin activ.
Increase (decrease) in cash
and marketable securities

($4,851)

($10,819)

($3,421)

($4,057)

$2,903
6,536
(32)
(2,449)
(2,514)

$18,847
0
(484)
(4,012)
(656)

$4,444

$13,695

($3,827.6)

($1,181.0)

Table 6: Historical and Pro Forma Ratio Analysis:

LIQUIDITY RATIOS:
Current ratio
Quick ratio

1993

1994

1995

3.27
1.84

2.96
1.17

1.90
0.77

LEVERAGE RATIOS:
Debt ratio
TIE coverage

38.73%
16.68

45.12%
7.84

57.62%
2.09

ASSET MGT RATIOS:

Inv turn, cost
Inv turn, sale
FA turnover
TA turnover
DSO (ACP)

7.17
8.83
12.07
2.93
34.95

4.24
5.16
12.56
2.50
34.45

3.39
3.98
12.83
2.00
52.85

PROFITABILITY RATIOS:
Profit margin
Gross PM
Return on TA
ROE

5.78%
18.85%
16.92%
27.61%

3.57%
17.82%
8.93%
16.27%

0.87%
14.84%
1.74%
4.12%

OTHER RATIOS:
Altman Z score
Payout ratio

25.00%

25.00%

25.0%

Pro Forma
1996

SENSITIVITY ANALYSES:
A
ALTMAN'S Z-SCORE, 1997:
'97 % Sales Made
'96 % Sales Made -----

Pro Forma
1997

0
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%

40.0%

60.0%

80.0%

100.0%

120.0%

B
CURRENT RATIO, 1997:
'97 % Sales Made
'96 % Sales Made ----0
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%

1996 COGS
(% of Sales)

40.0%

1996 Altman's
Z Score
0
77.5%
80.0%
82.5%
85.0%
87.5%
90.0%
92.5%

60.0%

80.0%

1997 COGS
(% of Sales)
77.5%
80.0%
82.5%
85.0%
87.5%
90.0%
92.5%

100.0%

C
1997 Altman's
s) Z Score
0

120.0%

Pro Forma
1997

42,953
(17,131)
$25,822

Pro Forma

1997
36,111
26,316
13,609
$76,036
16,248
2,668
$18,916
$94,952
33,750
58,897
$92,647

$187,599

Pro Forma
1997
371,684
297,347
$74,337
27,876
4,030
5,204
$37,110
$37,227
3,250
1,463
213
$4,926
$32,301
12,920
$19,380
0

$19,380

$2.77

Pro Forma
1997

Industry
Average

140.0%

140.0%

Critical
Z Score
3.00
3.00
3.00
3.00
3.00
3.00
3.00