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Week 4 Individual Assignment Fin/370

1699 words - 7 pages

Reed's Clothier, Inc. Case Study
L. S. Moore
Finance 370
March 30th, 2011

Reed's Clothier, Inc. Case Study
Reed’s Clothier, Inc. Working Capital Policy and the background information, followed by the current situation and the Summary. Questions 1 and 4 will have been answered in an excel spreadsheet.
Exhibit 16.1

Reed’s Clothiers Income Statement (in 000’s)

Common Size

Reed’s Industry

Net Sales $2,035 100% 100%

Cost of Goods ...view middle of the document...

6

Fixed assets 670 42.1 58.4

Total assets $1,591 100% 100%

Accounts payable $205 12.9% 9.3%

Notes payable 234 14.7 6.4

Other current liabilities 18 1.1 0.2

Total current liabilities $457 28.7 15.9

Long-term debt 604 38.0 30.4

Total liabilities $1,061 66.7 46.3

Stockholders’ equity 530 33.3 53.7

Total liabilities and stockholders’ equity $1,591 100% 100%

NOTE:

Finally, Holmes suggested that accounts receivable be reduced by aggressively collecting its past due accounts. (See Exhibit 16.3). This was particularly sore point with Jim, for he knew he had allowed his collections efforts to lapse in his efforts to increase sales. Jim was afraid that if he aggressively attempted to collect his past-due accounts, these customers might become angry and take their business elsewhere. Reed’s sold about 75 percent of its sales on terms of net 30, which were the same terms offered by all its major competitors. As he slowly walked the two blocks between the bank and his store, Reed finally realized that his store was in serious financial trouble and wondered what he needed to do to regain control.

(Exhibit 16.3)

Reed’s Clothiers Aging Schedule

Days Past Due Amount (000’s) Percent

0 – 29 132 32.0%

30 – 59 90 21.8%

60 – 89 89 21.5%

Over 90 102 24.7%

$413 100.0%

Questions: 1 through 8

1. Calculate a few ratios and compare Reed’s results with the industry averages. (Some Industry averages are shown in exhibit 16.4) What do these ratios indicate? (Answer is in an EXCEL Spreadsheet).

Reed’s Clothiers Selected Ratios --- (Exhibit 16.4)

Liquidity Ratios Industry

Current ratio 2.7

Quick ratio 1.6

Receivables turnover 7.7

Average collection period 47.4

Efficiency Ratios

Total asset turnover 1.9

Inventory turnover 7.0

Payable turnover 15.1

Profitability Ratios

Gross profit margin 33.0

Net profit margin 7.8

Return on common equity 25.9

Answer: Below are a Liquidity Ratios and Efficient Ratios I used to compare with industry...

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