Mini Case Ch
1. What appears to be the problem areas in the Hobby Horse Company?
The problem with Hobby Horse Company is that they were having a tough year throughout 2011. The company has $45 million loan that is due at the end of September, however the company does not have the means to cover the cost of the loan. Looking at the financial statement the company has fairly high leverage where their equity is not as strong. In addition, their current assets don’t cover current liabilities—meaning that the company is not as liquid. For the year 2011, shareholders would not be better off in terms of investing in this company due to low return on capital for that year. For shareholders to actually benefit from this, earning a higher return would allow them to invest on their own in financial markets. Shareholders want the companies to invest only in projects for which the return on capital is at least as great as the cost of capital.
2. What questions do the financial ratios suggest that Ms. Platt and Mr. Green need to address during their meeting with HH Management.
Some questions Ms. Platt and Mr. Green need to address during their meeting with HH management is the asset turnover in order to measure the efficiency of the entire asset base in order to turn them over more quickly. Looking at the operating profit margin would allow the company to measure the proportion of the sales that are in the profits and create plans to increase them each year. In analyzing the debt ratio, the managers need to take a deeper look into measuring the financial leverage due to their debt situation with the $45 million dollar loan being due at the end of September. This would put the company at risk for future borrowing since debt increases returns to shareholders in good times and reduces them in bad times. When Hobby Horse borrows money it makes a promise to make a series of interest payments and then to repay the amount that it has borrowed. If profits rise, the debt holders continue to
The problem with Hobby Horse Company is that they were having a tough year throughout 2011. The company has $45 million loan that is due at the end of September, however the company does not have the means to cover the cost of the loan. Looking at the financial statement the company has fairly high leverage where their equity is not as strong. In addition, their current assets don’t cover current liabilities—meaning that the company is not as liquid. For the year 2011, shareholders would not be better off in terms of investing in this company due to low return on capital for that year. For shareholders to actually benefit from this, earning a higher return would allow them to invest on their own in financial markets. Shareholders want the companies to invest only in projects for which the return on capital is at least as great as the cost of capital.
2. What questions do the financial ratios suggest that Ms. Platt and Mr. Green need to address during their meeting with HH Management.
Some questions Ms. Platt and Mr. Green need to address during their meeting with HH management is the asset turnover in order to measure the efficiency of the entire asset base in order to turn them over more quickly. Looking at the operating profit margin would allow the company to measure the proportion of the sales that are in the profits and create plans to increase them each year. In analyzing the debt ratio, the managers need to take a deeper look into measuring the financial leverage due to their debt situation with the $45 million dollar loan being due at the end of September. This would put the company at risk for future borrowing since debt increases returns to shareholders in good times and reduces them in bad times. When Hobby Horse borrows money it makes a promise to make a series of interest payments and then to repay the amount that it has borrowed. If profits rise, the debt holders continue to