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Financial Standing of Warf Computers

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Cash flow of the firmOperating cash flow EBIT $ 1598 Depreciation +191Taxes -467 1322Capital Spending Ending Fixed Asset $ 2,700| Beginning Fixed Asset -2,151Depreciation + 191| | (810)|

Addition to Net Working Capital Difference in Current Assets $ 78 Difference in Current Liabilities -92 (170) Total $ 342Cash flow to investor in the firmDebt Interest $ 105 Retirement of Debt +151 Retained Earnings – 12 81 Equity Dividends $ 225 Repurchase Of Stock + 48 Retained Earnings – 12 261 Total $ 342| 1. How would you describe Warf Computers’ cash flow? Warf Computers was able to support their operating for the year 2012 as the general financial standing and cash flow seems positive.

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The company generated $47 (in thousands) in net cash flow to increase their cash and equivalents account. The company utilized most of the cash generated by operations to increase their fixed assets by almost 30%. Financing cash flows indicate an increase in long-term liabilities and dividends paid accounted for most of the negative cash flow from financing. In general, when more cash is generated than used, the dividends increase, some stock can be bought back, loans and accounts payable can be reduced, or investment can be made into another company.

Warf computers’ finances are showing all the transactions. 2. Which cash flow statement more accurately describes the cash flows at the company?

The financial statement of cash flow is typically used to recognize the firms’ ability to generate financial cash flow (Ross, Westerfield, & Jaffe, 2013). The accounting statement of cash flow is a more detailed method of managing cash flow. It explains the changes in cash flow and the firm’s ability to pay off short term loans (Ross, Westerfield, & Jaffe, 2013). One major difference that can be pointed out is the interest expense. Interest paid should go under financing activities; however, accounting cash flow statement deducts it as an expense from the net income. Therefore, I would say that financial cash flow gives a more accurate picture of the cash flows

To compare the different cash flows, the operating cash flow of Warf Computers is the most accurate statement in representing the Company. It measures the cash generated by normal business operations. Financing and investing are also important activities, but they tend to fluctuate based on management decisions, such as alterations to business plans and structure. Operational cash flows represent how well a business is doing, while investing and financing cash flows represent what they are doing. In addition, cash flows from operations is an indicator whether Warf Computers can grow and maintain the company with or without external financing. 3. In lights of your previous answers, comment on Nick’s expansion plans. It appears that Nick’s expansion plans are very much warranted given the cash flow generated from operations and the low levels of debt. With the Company’s current financial position, Nick will be able to expand by about 19% without any additional external funding. However, I think that dividends could have been held back to reinvest in the business. This would have allowed for increased retained earnings to re-invest and less borrowing in bank loans. On the other hand, the track record of paying back dividends may encourage investors to add to the equity. Financial Ratios Liquidity Ratios |  |  |  |  | 2012|  |  | 2011| | | | | |  | |  |  | Current ratio| =| Current assets| =| 1463| |  | 1385| | | Current liabilities| | 589| |  | 681| | | | | |  | |  |  | | | | =| 2. 48| |  | 2. 03| | | | | |  | |  |  | Quick ratio| =| Current assets – Inventory| =| 1463-493| |  | 1385-510| | | Current liabilities| | 589| |  | 681| | | | | |  | |  |  | | | | | =| 1. 65| |  | 1. 28| |  |  |  | | |  |  | | | | | | |  | |  |  | Cash ratio| =| Cash| =| 348| |  | 301| | | Current liabilities| | 589| |  | 681| | | | | |  | |  |  | | | | | =| 0. 59| |  | 0. 44| |  |  |  | | |  |  | | Current Ratio: Short term liquidity of Warf is measured in this ratio. We can say that Warf has $2. 48 in currents assets for every $1 in current liabilities. We can also say that Warf has its current liabilities covered 2. 48 times over for 2012.

Quick Ratio: Warf in 2012 had a more substantial portion of its liquidity tied up in slow moving inventory than it did in 2011. Cash Ratio: A short term creditor may be interested in this example as it shows a solvency within the company for both fiscal years. Financial Leverage Ratios |  |  |  |  | 2012|  |  | 2011| Total debt ratio| =| Total assets-Total equity| =| 2770-2483|  |  | 2151-1848| | | Total assets| | 2770|  | | 2151| | | | | |  |  | |  | | | | | =| 0. 41|  | | 0. 22| |  |  |  | | |  |  | | | | | | |  | |  |  | Debt-equity Ratio| =| Total Debt| =| | |  | | | | Total Equity| | | |  | | | | | | |  | |  |  | | | | | =| 0. 70| |  | 0. 1| | | | | |  | |  |  | Equity Multiplier| =| Total Assets| =| | |  | | | | Total Equity| | | |  | | | | | | |  | |  |  | | | | | =| 1. 70| |  | 1. 91| |  |  |  | | |  |  | | | | | | |  | |  |  | Time Interest Earned Ratio| =| EBIT| =| 348| |  | 301| | | Interest| | 589| |  | 681| | | | | |  | |  |  | | | | | =| 0. 59| |  | 0. 44| Total Debt Ratio: Total debt ratio takes into account all debts of all maturities to all creditors. We can say in 2012 that Warf uses . 41 debt and in 2011 they used . 27 which is substantially lower. We can also say that in 2012, their $ . 41 debt for every $1 in assets calculates to $. 59 in equity for the company.

For 2011 we can see that there was $. 73 in equity. Debt-equity Ratio: In this calculation we added current liabilities and long term liabilities. In 2012 $. 70 debt equity whereas in 2011 we see that there was $. 61 Time Interest Earned Ratio: This is a measure of long term solvency. Here we are looking at how well Warf has is interest obligation covered. For Warf the interest bill for 2012 is covered $15. 22 times over and in 2011 it is covered the same. Turnover Ratios Profitability Ratios ROA | =| Net income| | | Total assets| | | =| 896| | | | 4233| | =| 21. 17%| | | | | | | | | | | | ROE | =| Net income| | | Total equity| | | =| 896| | | | 2483| | =| 36. 09%| | | |

Market Value Ratios Due to insufficient data the market value ratios we not calculated. The market capitalization of Warf Computers is needed to derive these ratios. What is Warf’s Internal Growth Rate? Calculate the Sustainable Growth Rate and the EFN at that rate. Growth Rates and EFN | | | | | b = retention ratio| | | | | | | retention| =| 1 – dividend payout ratio| ratio| | | | | =| 1 – 225/896| | | | | | =| 74. 89%| | | | Internal Growth Rate| | | | | | | | ROA x b| =| 0. 1585| | 1 – ROA x b| | 0. 8415| | | | =| 18. 84%| | | | | | | | | | | Sustainable Growth Rate| | | | | | | | ROE x b| =| 0. 2702| | 1 – ROE x b| | 0. 7298| | | | =| 37. 03%| | | | | | | | | | External Financing Needed Warf Computers| Pro Forma Balance Sheet(37. 03% Growth)| 2012| ($ in thousandas)| |  |  |  |  |  |  |  | | | | | Total Liabilities| $| 1750| | | | | | | |  | | | | | Retained Earnings| | 919| | | | | Total Equity| $| 2483| | | | | | | |  | Total Assets| $| 5800| Total L & E| $| 5152| | | | | | | | | Projected Assets| | | | | | | $4233 X 1. 3703| =| 5800| | | | | | | | | | | | | Increased retained earnings| | | | | $671 X 1. 3703| =| 919| | | | | | | | | | | | | EFN| | =| Total Assets – Total L & E| | | | | | | | | | | | | =| 5800 – 5152| | | | | | | | | | | | | | =| 648| | | | | | | | | | | | | | | | | | | | Warf Computers| Pro Forma Balance Sheet(50% Growth)| 2012| ($ in thousandas)| |  |  |  |  |  |  |  | | | | | Total Liabilities| $| 1750| | | | | | | |  | | | | | Retained Earnings| | 1006. 50| | | | | Total Equity| $| 2483| | | | | | | |  | Total Assets| $| 6349. 50| Total L & E| $| 5239. 5| | | | | | | | | Projected Assets| | | | | | | $4233 X 1. 50| =| 6349. 50| | | | | | | | | | | | | Increased retained earnings| | | | | $671 X 1. 5| =| 1006. 50| | | | | | | | | | | | | EFN| | =| Total Assets – Total L & E| | | | | | | | | | | | | =| 6349. 50 – 5239. 5| | | | | | | | | | | | | | =| 1110. 00| | | | | | References:

Cite this Financial Standing of Warf Computers

Financial Standing of Warf Computers. (2016, Oct 01). Retrieved from https://graduateway.com/warf-computers/

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