Question

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4) Analyze the changes of both the projected sales and net income of 2019as compared to that of 2018 actual sales and net income. Should Mr. John Chan be worried about the projected financial situation?

5) Evaluate Brighton Food’s cash position if nothing is done to tackle the current situation. Is it going to face any cash storage problem?

6) Discuss whether Mr. John Chan’s secret plan will actually help solve the company’s problem or not. But what are the potential adverse consequences if his plan is actually carried out?

7) Based on the important findings collected by Mr. Tim Lee, suggest appropriate measures to improve Brighton Food’s net income.

8) Based on the important findings collected by Mr. Tim Lee, suggest appropriate measures to improve Brighton Food’s cash position.

9) With reference to the financial ratios indicated by Eastern Bank, calculate all the financial ratios for Brighton Food, using the 2019 projected figures, and then compare each of the ratio result to the Easter Bank’s financial ratio requirements table shown in page 3.

10) According to the answers in the Question (9), will Brighton Food be eligible to obtain a long-term bank from Eastern Bank?

11) If Brighton Food is currently not eligible as according to the projected financial result for the year of 2019, which measure(s) mentioned in the answers of Questions (7) and/or (8), if implemented, should be able to help the company become eligible in the coming months?

12) Suppose Brighton Food successfully obtains the loan from Eastern Bank after improving on the relevant aspects motioned in the answer of question (11). In which specific areas should this long-term financing be used in order to help improve the company’s financial performance?

Answer 1

4. Yes, Mr. Chan should be worried about the projected financial of 2019. The sales which were growing at the rate of 10% yearly has reduced by 25% while the gross profit has also reduced by 2% which means that the company is facing a dip in operational profits as well. The overall Earnings per share has also decreased by 40 % which is a huge decrease as compared to 2018 and measures must be taken immediately to improve the same.

5. Yes, Brighton Foods will face a cash shortage if Western Bank decides to recall its loan. The company is projected to have 60000 cash while the loan from Brighton stands at 100000 which is over and above the accounts payable of the company which is outstanding.

As per terms of the loan, the return on assets must be at least 10 % p.a., currently, the return on assets based on Projected figures is :

Return on Assets = Net Income / (Opening Assets + Closing Assets) /2 *100

Return on Assets = 42,200 / (5,85,000 + 5,46,000)/2 * 100

Return on Assets = 42,200/565,500 * 100 = 7.46 %.

As per the Return on Assets based on projections, Western Bank can recall their loan, that coupled with the slow collection, payment of dividends as well as looming possibility of loan payment would create serious cash crunch for Brighton Foods.

6. Mr. Chans' plan might help the company meet certain regulatory requirements of Western Bank and Eastern bank but the plan should not be carried out as it is basically fraud being committed by Mr. Chan. Moreover, even with the plan, the cash situation at Brighton Foods will remain precarious. Such a step and plan should be expressly recommended against and not carried out by Brighton Foods.

7. In order to solve and improve Brighton Foods Net Income as per the findings of Mr. Lee, the following steps should be taken by Brighton Foods:

a) Change its supplier or invite tenders from various suppliers instead of buying from one supplier around. This will result into reducing the cost price of products and boost the gross profit of the firm.

b) One of the problems faced by Brighton is of overstocking. The Company should look to implement Just in Time inventory management system in order to not buy more than required products. Not only will this free up their working capital and it will also reduce costs of maintaining high inventory and reduce the risk of such products either becoming stale or obsolete. This will also reduce the net purchase and in turn increase the gross profit.

c) The company should try to get its debt refinanced from Eastern back as it will reduce its yearly interest rate on loans by 4% and help boost their net income and net profit by reduced interest payments.

8. a) The company should reduce the collection period being granted to its customers as it is double the normal industry standard and will help them boost their cash balances.

b) The company should stop bulk buying of inventory and in turn apply Just in TIme inventory system, this will result in less cash outflow in making payments to the supplier as well as less cash flow as a result of less cost in maintenance of inventory.

c) If Brighton foods can get its loan refinanced from Eastern loan, it will save in the outflow it pays in Loan repayments due to reduced interest rates.

9.

a) Current Ratio = Current Assets/Current Liabilities

Current Ratio = 60,000 + 2,20,000 + 2,11,000 / 1,08,800

Current Ratio = 4.51

b) Quick Ratio = Current Assets - Inventory/ Current Liabilities

Quick Ratio = 60,000 + 2,20,000/ 108,800

Quick Ratio = 2.57

c) Total Assets to Liabilities Ratio:

Total Assets to Liabilities Ratio = Total Assets/Total Liabilities excluding Shareholders Equity

Total Assets to Liabilities Ratio = 5,46,000 / 1,98,000

Total Assets to Liabilities Ratio = 2.76

d) Debt to Equity Ratio:

Debt to Equity Ratio = Total Liabilities/Total Shareholders Equity

Debt to Equity Ratio = 198,800/347,200

Debt to Equity Ratio = 0.57

e) Return on Assets:

Return on Assets has already been calculated in point No 5 and is 7.46%

f) Profit Margin:

Profit Margin = Net Profit/Sales x 100

Profit Margin = 42,200/960,000 x 100

Profit Margin = 4.395 %

g)Inventory Turnover Ratio:

Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory

Investor Turnover Ratio = 564,000/ (190,000 +2,11,000)/2

Inventory Turnover Ratio = 564,000/200,500

Inventory Turnover Ratio = 2.81

h) Cost of Goods Sold %:

Cost of Goods Sold % = Cost of Goods Sold/Sales x 100

Cost of Goods Sold % = 564,000/960,000 x 100

Cost of Goods Sold % = 58.75%

Ratio	Eastern Bank Ideal	Brighton Limited Ratios
Current Ratio	> 2	4.51
Quick Ratio	>1	2.57
Total Assets to Liabilities Ratio	> 2.5	2.76
Debt Equity Ratio	< 0.75	0.57
Return on Assets	> 9%	7.46%
Profit Margin	> 6%	4.395%
Inventory Turnover Ratio	> 5 times	2.81 times
Cost of Goods Sold %	< 45%	58.75%

10. Brighton won't be able to obtain a loan from Eastern Bank as it fails at 4 out of the 8 key metrics.

11. A few of the metrics that the Company is failing at are all related to profits and Inventory. If the company is able to change its supplier and implement Just in time system, it will both decrease the average inventory held, cost of goods sold. This will help them declare more return on assets, profit margin and also increase their inventory turnover ration.

Moreover, reduce in the amount of inventory held and a change in supplier might lead to a decrease in the Cost of Goods sold which will improve that key metric too. If such changes are undertaken, it might be able to be eligible to borrow from Eastern Bank.

12. The company if it obtains a loan from Eastern bank should spend the money on establishing a better inventory system and in establishing a customer reward and promotions schemes which will attract the key customers that have been lost by it.