The Case of the Unidentified Industries - 1995 Solution: In order to find out the exact firm by analysing the

financial structure of typical firms, first we need to separate those firms which have zero inventory turnover (A, B, F and H) from those firms which have zero debt ratio which in our case are (E, H and J) and we use the information to narrow down the possibilities of each firm. In this case there are three groups of companies: 1) Firms having zero inventory turnover. 2) Firms having zero debt. 3) Firms having all financial ratios given.

1) Firms having zero inventory turnover:

Under the category of zero inventories, there are four companies. The nature of these companies show that they are not involved in any production, but they provide services to the people and from services they generate cash. Each one with the name and reason is mentioned below.

Firm A. Commercial Bank: The financial structure of (A) firm shows that it has zero inventory turnover and high receivables collection period. Banks usually have a large amount of receivables because they lend money to the individual people and a company due to which the average number of days, which in this case is very high, requires to convert receivables into cash is very high. Its financial structure also shows that the firm has borrow money from outside to pay debt to its customers.

Firm B. Advertising Agency: This firm has very high receivables and payables due to one reason or the other. The advertising agencies have large number of customers and most of them are credit customers. On the other hand the high expenses show that this firm is paying off its current liabilities by collecting cash from its customers because their customers are core business in generating profit. Firm F. Airline: Again this firm has zero inventory turnover which shows that this perform business on long term basis therefore, it has a large amount of investment in fixed asset. Airline companies have nothing to do with short-term investment because their business is for longer period of time. Due to high investment in fixed asset the firm also need a high amount of debt in order to cover its expenses so the smooth run of business. Firm H. Health Maintenance Organisation: Health care organisations do business on cash basis. They provide proper medical services to different people and they receive cash when operation ends and they dont use any debt to finance their operating activities. The capital structure of this firm shows a zero inventory turnover and a huge amount of cash from the customers from which partially is used to pay current liabilities and the remaining is in the form of retain earning.

2) Firms having zero debt:

Under this category there are three firms which have zero debt ratios because the nature of these firms show that all the financing is done by equity. Firm E. Retail Drug Chain: This type of business seems to be sole proprietor and the financial structure of this firm has maximum number of inventories and zero level of debt financing. Most of the drug retailers usually have a large amount of inventories due to any emergency situation and demand for the medicines is usually high. In this case the high asset turnover shows that the firm is effectively doing business by selling off its assets which in this case is medicines to generate more and more cash. Firm H. Health Maintenance Organisation: As mentioned above. Firm J. Software Developer: In case of software develop companies firms need do not need any debt for financing because they already have existing software programs which simply make new changes and add more features to the existing software and launch them into the market. The result would be high cash which keeps the liquidity position of the company good and adds more value to the firm. This is the reason these companies are called cash cows. One of the best examples is Microsoft. Furthermore these softwares have meaningless depreciation due to which they work for many years. In order to become more profitable the firms constantly research on existing software and generate mere cash.

3) Firms having all financial ratios given:

Under the category this firm there are five firms. A food chain has a considerably higher turnover than does an electric utility. The turnover ratio is a function of the efficiency with which the various asset components are managed, receivables as depicted by the average collection period, inventories as portrayed by the inventory turnover ratio, and fixed assets as indicated by the throughput of product through the plant or the sales to net fixed asset ratio. Firm C. Electric and Gas Utility: A huge investment in fixed asset shows that this firm C gets its series of cash flow using fixed asset investment. Further that this company has a high debt ratio and high receivables collection period which reflects that the company is receiving cash in a longer period of time due to which the firm needs to finance most of its expenses by using debt. That is why the firm has a relative importance of long term debt in its capital structure. Firm D. Departmental Store Chain: A department store chain typically does no manufacturing. As a result the cost of goods sold consists primarily of purchases. It has both high level of inventories and debt. The inventory is used to remain liquid and pay off its debt because its financial structure shows that this firm has credit customers and in order to purchase more inventories the firm is financing through loans. Firm G. Retail Grocery Chain: In case of retail grocery store most of the goods are normal goods and the firms need a high cash to display their inventories. In this case the firm has a slightly high investment in fixed assets and the capital structure shows that the firm has taken loans to finance its inventory because the firm has credit customers.

Firm I. Meat Packer: This firm has a single product due to which it has a large inventory turnover of 47.6 x which makes sense (about once per week). The firms total asset turnover is also very high which reflects the effective utilization of its asset which in this case is (meat).

Firm K. Pharmaceutical Manufacturing:

In situations where there is sizable value added, such as with a manufacturer, the
value of firm depends on the how efficiently the company is operating to generate revenue. In this particular firm the net profit margin is 10.6% which shows that net income per dollar of sale is high because pharmaceutical companies have large investment in fixed assets and in order to utilize the assets effectively there must a large profitability ratio for the smooth run of the business.