Question

Instructions

In order to complete your case analysis successfully, you should consider

• identifying the role you are playing and the tasks you need to perform,
• analyzing the issues (qualitatively and quantitatively),
• providing a solution to the problem, and
• recommendation for each issue identified in the case.

An average grade will come from you answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute and informed commentary where appropriate, and connections to readings and other content.

Respond in a single Word doc (or comparable text editor).

Project Scenario

You have been an Analyst for the professional service firm, FINACC LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. In your first day on the job you have helped the Manager in the Consulting area in making investment decisions for one of your large clients, Big Spenders Inc. Big Spenders Inc. was very impressed with your report and has asked your Manager if you could work on another project.

Additional Information

Big Spenders Inc. plans to expand its portfolio of investments and requires your firm to suggest and evaluate several Canadian equity investment opportunities. Your responsibility is to pick an industry that you are an expert in and choose a listed company that you think will be a great potential investment opportunity (the target company). You will then have to perform a comparative analysis of the profitability and financial health of this company compared to one of its competitors (the competitor). Finally, you will be asked to give recommendation on why you think your target company will be a great investment for Big Spenders Inc.

As you are new to the job, your Manager has provided you with some initial instructions to carry out this project. He recommends that you break the project into parts.

Part 1- Identify the companies

To start with, you can visit the Toronto Stock Exchange website for information on listed companies in Canada. You can then perform a stock screening to obtain information about the stocks listed as well as the companies' financial information. The stock screener can be found at https://web.tmxmoney.com/screener.php?locale=EN.

After you have picked a company of your choice and identified one of its competitors, your Manager has asked that you provided a brief background on the operations of the two companies as well as on the current stock prices of the two companies.

Part 2- Read and understand the financial statements

an important part of the analysis of the potential equity investment is an assessment of each company’s current and future profitability as well as their financial soundness. You will have to extract details from their income statements in the last five years for both the target and the competitor companies. You can obtain this information directly after you have performed the stock screening on the TSX website, or you can go to the SEDAR filing system to search for Canadian companies’ financial statements (https://www.sedar.com).

Part 3- Perform Financial Statement Analysis

Based on the information obtained from the two companies' income statements as well as the background information, you are to compare the performance of the two companies using financial statement analysis. the horizonal analysis, the vertical analysis and the ratio analysis that you can perform. You have been asked to discuss any other issues that you believe are relevant to the investment decision and make a recommendation to Big Spenders Inc. for whether your target would be a good investment.

Answer 1

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Answer-

You are an Analyst for the professional service firm, ABC LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. After 4 months on the job, you walk into the partner's office to provide him with your two-week notice. Given your excellent performance over the past few months, rival professional service firm, ABC LLP has provided you with an offer you cannot refuse by providing you with a promotion to Consultant and a significant raise. Although sad to see you go, lead part er Justin Medakiewicz reque sted assistance on one last engagement : Average Joe's Gy m. Additional Information Average Joe's caters to families and gives a substantial discount for families to work out together. Families that workout together reach their goals together. Members receive 2 free training sessions with enrollment so that they may start reaching their goals as soon as they sign up. The exercise specialists that provide the training to the members hold the highest certif ication credenti als and come from accredited universities with a specific degree focus in Exercise Science and or Health Education. The company has experienced significant growth in the past five years due to an increase in the popularity of health and fitness among social trends. As a result, Average Joe's ha s applied to TD Bank for a $1 million long term loan in order to finance further expansion plans. Specif ically, the fun ds would be used to purchase additional gym equipment. Average Joe's application and fin ancial statements have been provided by Lisa Jennings, a credit analyst with TD Bank. She would like BUSI 1043 to con duct a preliminary review of Ave rage Joe's fin ancial statements and dete rmine whether Average Joe's should proceed further into a more detailed

analysis. Lisa would like BUSI 1043 to docu ment the recomm endations and supporting analysis in a report that will be maintained by the bank. Lisa: "Average Joe's has provided us with a copy of their most recent Balance Sheet and Inc ome Stat ement (Exhibit I). I kn ow this may not be enough to make the final decision, but it should be more than enough for you to get started." You: "Yes, I can obtain much informati on from these two statements". Lisa: "Okay, that's great. I took a quick look at the Balance She et and am wond ering wh at has caused the change in cash. Cash is ne eded to pay back the loan. Although I haven't do ne an y rigorous analysis, it is a bit conce rning to see the cash decl ine by such a large amount." You: “I can definitely look into the dec rease in cash.” Lisa: “It may also be usef ul to give some thought to what the Balance She et may look like of the loan is approved. Historical statements are fine, but they will not be able to provide you with this information. Additional information on the use of the loan is provided in Ex hibit II." You: “That is a great point. I will take thi s into consid eration." WWW.YORKVILLEU.CA BUSI 1043: INTRODUCTION TO FINANCIAL ACCOUNTING 2 Lisa: "Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend proceeding with furt her due diligence, can you prepare a list of additional information that would be useful in ma king our fin al decision?" You: "Yes, I can most certainly do that. I will get started right away." You are excited with this last assignment and want to leave BUSI 1043 with a good impression. You begin to con duct some preliminary research by reque sting industry comparable from the ba nk. You have locat ed various industry ratios that can be used as a be nchm ark

(Exhibit III). Exhibit I: Financial Statements Liabilities and Shareholder's Equity Current 2014 2013 Accounts Payable 294,305 95,700 Accrued and Other Liabilities 237,595 244,760 Current Portion of Long-Term Debt 375,900 345,900 Total 907,800 686,360 Long Term Debt 1,280,330 1,601,500 Shareholder's Equity Common Shares (50,000 Outstanding) 595,817 595,817 Retained Earnings 1,020,862 750,953 Total Liabilities and Shareholders' Equity 3,804,809 3,634,631 Average Joe's Gy m Statement of Financial Position As at Dec 31 Current Assets 2014 2013 Cash 235,359 134,550 Market able Securiti es 145,780 457,206 Accounts Receivable 223,450 174,930 Inventory 425,770 355,790 Prepaid Expenses 17,500 19,500 TOTAL 1,047,859 1,141,976 Capital 2014 2013 Property and Equipment, net 2,756,950 2,492,655 TOTAL ASSETS 3,804,809 3,634,631. INTRODUCTION TO FINANCIAL ACCOUNTING 3 Average Joe's Gym Income Statement For the Year Ended December 31st 2014 2013 Sales 2,975,990 2,575,990 Cost of Goods Sold 1,368,955 1,184,955 Gross Profit 1,607,035 1,391,035. Exh ibit || Ad diti onal Information Rega rding the Loan. The loan will be used to purchase $1 million in additional capital assets. The additional assets will result in an increase in revenue of 20%. · The loan will bear interest at 6%. Principal payments of $200,000 per annum will be required. • The company will withhold any dividend payments during the foreseeable future in order to support the debt to equity ratio.. The capital assets are expected to have a useful life of 15 years with no residual value. • All other fixed expenses are expected to remain consistent. The existing loan will require a principal payment of approximately $375,900 during the upcoming fiscal year. The payment for the following

fiscal year is expected to be $300,000. · Accounts receivable, inventory, prepaid expense, and accounts payable will all increase by 40% as a result of the increased sales. The marketable securities will be converted to cash at the beginning of the year. Exh ibit III - Industry Ben chmarks Industry Ave Ratio on Profitability 2014 Return of Equity 15.00% Retu rn on Assets 8.00% Financial Le verage Percentage 7.00% Earnings per Share $4.40 Quality of Income 75.00% Profit Margin 10.00% Fixed Asset Turnover 2.00 Tests of Liquidity Cash Ratio 7.00% Current Ratio 1.00 Quick Ratio 0.75 Receivable Turnover 13.00 Average Days in Acco unts Receivable 28.08 Payable Turnover 19.00 Average Days in Acco unts Payable 19.21 Inventory Tu rnover 6.50 Average Days in Inventory 56.15 Solvency and Equity Position Times Interest Ear ned 5.40 Cash Covera ge 6.30 Debt to Equity Ratio 1.35 Miscellaneous Book Value Per Share $29.00 Prepare the report. It is to include, organized and presented in a logical manner: quantitative analys es; • ratio analys es; qualitative analys es; and appropriate recommendations given the case facts and analys es completed.