Case 36

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Case 36 Questions

1. Complete the 1992 columns of Tables 3 through 6, disregarding for now the projected data in the 1993 and 1994 columns. If you are using the Lotus model, use it to complete the tables. Be sure you understand all the numbers, as it would be most embarrassing (and harmful to your career) if you were asked how you got a particular number, and you could not give a meaningful response.

2. Based on the information in the case and on the results of your calculations in Question1, prepare a list of Garden State’s strengths and weaknesses. In essence, you should look at the common-size income statements and each group of keys ratios (for example, the liquidity ratios) and see what those ratios indicate and the company’s operations and financial condition. As a part of your answer, use the extended Du Pont equation to highlight the key relationships.

Strengths:

* Based on the common-size balance sheet (Table 3), the company’s long-term bank loans balance has decreased 3.66% since last year and long-term debt has decreased about 5%, perhaps indicating the company’s ability to repay long-term debt.

* Net sales have increased 6% since last year, according to the income statement (Table 2).

* Retained Earnings have increased $1740, a positive sign for the company.

Weaknesses:

* The Altman Z score of 3.04 this year is below the 3.20 bank-required minimum for strong firms. This raises questions as to the possible future bankruptcy of Garden State.

* Based on the ratio analysis (Table 6), all of the liquidity and profitability ratios have significantly decreased since last year and fall below the industry average in every area. The current, quick, and debt ratios all fall below the bank’s contractual limits of 2.0, 1.0, and 55 percent, respectively.

* All ratios in these areas have shown a consistent decline in the past three years, including this year. This is a...