Merrill Electronics Case Group 5

Advanced corporate finance 4.1

This report will give an overview of Merrill electronics financial situation. First we will
analyze the financial statements in order to find the main problem of Merrill electronics.
After analyzing the financial statements we provide a forecast of cash flows for each
month in the period july 1991 - june 1992. Using the forecasted cash flows we will derive
the extra financing need of Merrill Electronics and set a financing policy. We will also
discuss possible options to solve the financing policy with the bank.
Financial statement analysis
Exhibit 1 provides the calculated financial ratios of Merrill Electronics. The profit margin
has increased during the second half of 1990 . The gross margin is around the 17% ,
which is lower than the 20% they were used to in the past years. But the 17% is normal
for the Electronics equipment sector.
The working capital ratio which indicates whether a company can cover its short term
debt with the companys short term assets has decreased. The inventory days and
accounts payable days have increased. This will lead to higher costs for Merrill
Electronics. Also the Cash conversion cycle increased due to the increase in the inventory
days and accounts payable days.
Exhibit 1 also shows the liquidity ratios. All of the liquidity ratios decreased and
indicate the liquidity problems of Merrill Electronics. The current ratio, the ratio between
the current assets and current liabilities decreased. This indicates that it becomes harder
for Merrill electronics to pay its short and long term debt. The decrease of the quick ratio
indicates that the ability of Merrill electronics to pay its short term debt with the liquid
assets have worsened. Both current ratio and quick ratio are below the average in the
Electronics equipment sector. The cash ratio is very low and also indicates liquidity
problems.
Further, Exhibit 1 shows us that the debt-to-equity ratio increased from 68.41% (first half
1990) to 147,03% (first half 1991). The debt ratio is 59.52% during the first half of 1991,
and is above the average of the electronics equipment sector.

The combination of the decreased efficiency ratios, liquidity ratios and debt-to-equity
ratios indicates the worsened financial health of Merrill Electronics.
The key/core problem of Merrill electronics is the constant decrease of the liquidity
ratios. This can lead to the unwanted situation where Merrill electronics will not be able
to meet its short term obligations.

Cash Budget Forecast

The sales forecast from July 1991 till June 1992 and the income statements of the past 18
months are the main components of the budgeted cash flow forecast shown in Exhibit 2.
Similar to earlier years a decrease in cost of goods sold has been forecasted, bringing it to
81.5% of the net sales. Based on the past income statements we created a forecast. The
expectations are that the net sales for the forecasted period will show an increase of 40%
in comparison with the last year.
We expect that the operating expenses will stay on the same trend as the past 18 months,
in percentages of the net sales. The big increase of net sales can make the forecast less
predictable. We expect that the inventory target level should be reached with the forecast.
Further we expect that the company will give a same amount of dividend in the
forecasted period. The result from this forecast shows us that there will be a shortage of
$1,6 million.
Given the new strategy of Merrill Electronics with higher sales and a higher volume, it is
considerable to finance it with long term debt. Because, the increase in sales the debt
level can be adjusted to match the new sales level and its required investment. To close
the shortage in the short run is dependant on the creditline which the bank is considering
to extend $3 million if the terms are good, which will compensate the short term needs
till next year. Furthermore if the short term needs cant be compensated by the short term
debt. Financing by equity is an alternative last option, which might bring disagreements
between the family members.

Exhibit 1
Financial statement
analysis
Profitability ratio's
Operating
expenses/Sales
EBIT/Sales
Profit margin
Gross margin ratio
Return on equity
Liquidity ratio's
Current ratio
Quick ratio
Cash ratio

Leverage ratio
Debt ratio
Equity ratio
Debt-to-Equity ratio
Eficiency ratio's
Working capital
Working capital ratio
Accounts reivable days
Inventory days
Accounts payable days
Cash Conversion Cycle
Asset turnover

First half
1990
15,00%
1,10%
0,30%
16,10%
0,81%

2,77
1,39
0,03

Second half
1990
13,20%
3,80%
1,87%
17,00%
8,07%

1,85
1,08
0,01

First half
1991
14,47
%3,35
%
1,35
%
17,81
%5,05
%
1,67
0,72
0,01

40,62%
59,38%
68,41%

54,84%
45,16%
121,43
%

59,52
%
40,48
%
147,03
%

3.721.020,0
0
2,77
48
58
24
83
1,62

3.883.270,0
0
1,85
48
42
22
68
1,95

3.941.400
,00 1,67
46
75
29
92
1,52

Exhebit 2
Cash Flow Forecast (x
$1000)
Net Sales
Cost of Sales (81,5%)
Gross Margin
Operating expenses:
Direct Selling (4,1%)
Advertising & promotion
(1,3%)
After sales service (4,1%)
Warehouse & shipping
(1,3%)
general administration
(4,2%)
Depreciation
(0,4%)
Total expenses
EBIT
Interest expense (1,3%)
Earnings before taxes
Corporate taxes
Earnings after taxes
Dividend payout
Cash budget from
operations
Depreciation
NWC
Capital expenditures
Debt payoff
Expected Free Cash
Flow

jul91
2545,0
00
2074,1
75
470,82

aug91
2795,0
00
2277,9
25
517,07

sep91
3995,0
00
3255,9
25
739,07

104,34
533,08
5
104,34
533,08
5
106,89
010,18
0
391,9
30
78,8
95
33,08
5
45,81
0
18,32
4
27,4

114,59
536,33
5
114,59
536,33
5
117,39
011,18
0
430,4
30
86,6
45
36,33
5
50,31
0
20,12
4
30,1

163,79
551,93
5
163,79
551,93
5
167,79
015,98
0
615,2
30
123,8
45
51,93
5
71,91
0
28,76
4
43,1

86
0,00
0

86
0,00
0

10,18
0
341,66
3 0,00
0
0,00
- 0
314,17

11,18
0
341,66
3 0,00
0
0,00
- 0
311,47

okt91
5470,0
00
4458,0
50
1011,9

nov91
6840,00
0
5574,60
0
1265,40

50

dec91
5240,0
00
4270,6
00
969,40

jan92
3025,0
00
2465,3
75
559,62

feb92
3595,0
00
2929,9
25
665,07

mrt92
4065,0
00
3312,9
75
752,02

apr92
4360,0
00
3553,4
00
806,60

mei92
4400,0
00
3586,0
00
814,00

jun92
4120,0
00
3357,8
00
762,2

00

214,84
068,12
0
214,84
068,12
0
220,08
020,96
0
806,9
60
162,4
40
68,12
0
94,32
0
37,72
8
56,5

124,02
539,32
5
124,02
539,32
5
127,05
012,10
0
465,8
50
93,7
75
39,32
5
54,45
0
21,78
0
32,6

147,39
546,73
5
147,39
546,73
5
150,99
014,38
0
553,6
30
111,4
45
46,73
5
64,71
0
25,88
4
38,8

166,66
552,84
5
166,66
552,84
5
170,73
016,26
0
626,0
10
126,0
15
52,84
5
73,17
0
29,26
8
43,9

178,76
056,68
0
178,76
056,68
0
183,12
017,44
0
671,4
40
135,1
60
56,68
0
78,48
0
31,39
2
47,0

180,40
057,20
0
180,40
057,20
0
184,80
017,60
0
677,6
00
136,4
00
57,20
0
79,20
0
31,68
0
47,5

168,9
20
53,56
0
168,9
20
53,56
0
173,0
40
16,48
0
634,4
80
127,7
20
53,56
0
74,16
0
29,66
4
44,4

46
0,00
0

280,440
88,920
280,440
88,920
287,280
27,360
1053,36
0
212,04
088,920
123,120
49,248
73,87
76
20,000
0,00
0

92
0,00
0

70
50,00
0

26
0,00
0

02
0,00
0

88
0,00
0

20
0,00
0

96
50,00
0

15,98
0
341,66
3 0,00
0
0,00
- 0
298,51

21,88
27,360
0
341,66
341,663
3 0,00
0,000
0
0,00
0,000
0
282,58 267,791

20,96
0
461,66
3 0,00
0
80,00
0
485,07

12,10
00,00
0
0,00
0
0,00
0
82,67
0

14,38 16,26
17,44
17,60
16,48
00,00
00,00
00,00
00,00
00,00
0
0
0
0
0
0,00
0,00
0,00
0,00
0,00
0
0
0
0
0
0,00
0,00
0,00
0,00
0,00
0
0
0
0
0
38,82 43,90
47,08
47,52
94,49
6
2
8
0
6
Total Expected Free Cash Flow
-1605,120

224,27
071,11
0
224,27
071,11
0
229,74
021,88
0
842,3
80
169,5
70
71,11
0
98,46
0
39,38
4
59,0