Question: The Ultra Cable Corporation, headquartered in
The Ultra Cable Corporation, headquartered in Chicago, Illinois, had thus far enjoyed a fairly steady run-up in revenues and profits. Two years ago, it hired Ron Swenson away from the competition to assist the president, Tom Gray, in navigating the company through what seemed like a fairly strong growth phase at the time. With the economy looking pretty strong, and the growth prospects very favorable, the company had expanded its service facilities to a number of new markets. Recently, however, competition had become fiercer, and profit margins had started to shrink. What worried Ron the most was that the firm’s stock price had declined precipitously from $35 per share to its current level of $25. Moreover, the company’s cash balance had dropped from $100,000 last year to just $12,500. With the firm’s annual meeting only a few weeks away, Ron knew that the firm’s shareholders would be bombarding the president with many questions about the recent drop in the firm’s share price and cash balance and would demand some explanations. Tom would be hard-pressed to come up with feasible responses and suggestions regarding how the firm would be gearing itself to alleviate its liquidity problems. Ron knew that the firm’s management had planned on raising some short term debt fairly soon to fund its working capital. Therefore, he expected that it would not be long before his boss, Tom, would come knocking on his door asking him that million-dollar question: “Where have all the dollars gone?†Later that day his phone rang, and just as he had feared Tom asked Ron to prepare a report explaining in detail the reasons for the company’s current financial condition. Ron immediately booted up his laptop and downloaded the firm’s balance sheet and income statements for the recent two years, as shown in Tables 1 and 2. 
Questions: Using a cash flow statement explain why Ultra Cable Corporation’s cash balance has declined so precipitously this past year. Why has Ultra Cable’s stock price dropped so much recently despite an increase in its revenues and its earnings per share? Evaluate the firm’s absolute and relative liquidity positions and compare them with its liquidity position last year. Compare the firm’s market value with its book value. Is the book value a good representation of the firm’s true condition? Explain your answer. For the current year, calculate Ultra Cable’s cash flow to investors (CFI) measure using its accounting statements. What can be garnered about Ultra Cable’s performance from this measure? Using the firm’s net working capital calculation for the recent two years, what can you conclude about Ultra Cable’s liquidity situation? Should the shareholders be concerned regarding the firm’s declining cash balance or should they be pleased with the firm’s rising earnings per share? Please explain your answer.
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Table 1 Income Statement Current Year Last Year Net Sales 5,125,000 4,197,235 Cost of Goods Sold 3,843,750 3,357,788 Depreciation 197,500 127,500 Selling & Administrative Expenses 100,000 82,363 Earnings Before Interest and Taxes 983,750 629,585 Interest Paid 387,500 110,000 Taxable Income 596,250 519,585 Taxes (40%) 238,500 207,834 Net Income 357,750 311,751 Dividends 107,325 93,525 Addition to Retained Earnings 250,425 218,226 Table 2 Balance Sheet Current Year Last Year ASSETS Cash 12,500 100,000 Accounts Receivable 1,350,000 500,000 Inventories 3,251,125 1,625,000 Total Current Assets 4,613,625 2,225,000 Gross Fixed Assets 3,250,000 1,275,000 Accumulated Depreciation 580,000 382,500 Net Fixed Assets 2,670,000 892,500 Total Assets 7,283,625 3,117,500 LIABILITIES & EQUITY Accounts Payable 362,500 137,500 Notes Payable 1,875,000 750,000 Total Current Liabilities 2,237,500 887,500 Long-Term Debt 3,065,700 500,000 Common Stock and Paid in Surplus (200,000 shares outstanding) 1,500,000 1,500,000 Retained Earnings 480,425 230,000 Total 7,283,625 3,117,500
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