Holly Fashions

Master Program in Business Administration Financial Management

“Holly Fashions Case”

By: Yousef Jabr Student number: 1085448

Dec 2011

Question One Financial ratios for holly company 1993-1996: 

Liquidity ratios 1993

1994

1995

1996

3.8 2.4

3.7 2.4

3.4 1.6

3.6 2.0

1993

1994

1995

1996

41.1 8.0

37.7 8.5

35.3 11.6

31.1 15.7

1993

1994

1995

1996

6.4

6.4

4.8

5.1

30.0

29.3

30.1

29

2.8

2.8

2.7

2.7

55

55

51

62.0

25

32

31

31.0

1993

1994

1995

1996

24 3

23.5 2.6

24.9 2.6

25 2.7

14.3

11.6

10.8

10.7

8.4

7.2

7

7.3

6.8

6

6.1

5.9

Current Quick 

Leverage ratios

Debt (%) Time interest earned 

Activity ratios

Inventory turnover Fixed assets turnover Total assets turnover Average collection period Days purchase outstanding 

Profitability ratios

Gross margin(%) Net profit margin (%) Return to equity (%) Return to total assets (%) Operating margin (%)

Question Two i. The limitations of comparative financial analysis are: 1. It is wrongly believed that as long as the firm being analyzed with a value better than the industry average, it can be viewed favorable, It’s therefore important to investigate significant deviation either side of the industry standard. 2. Industry average is not particularly useful for analyzing firms with multiproduct lines. In the case of multiproduct firms, its difficult to select the appropriate benchmark industry. 3. Ratios with large deviations from the norm only indicate symptoms of a problem. Additional analysis is typically needed to isolate the causes of the problem, the fundamental point is: ratio analysis merely directs attendance to potential area of concern, it doesn’t provide conclusive

evidence as to the existence of a problem. 4. The ratios being compared should be calculated using financial statements that published in the same date and same year. Otherwise it will provide wrong outputs ii. Industry comparisons are made for the following reasons: 1. A single ratio doesn’t generally provide sufficient information from which the judge the overall performance of the firm, only when a group of ratios is used can reasonable judgment can be used, however, if an analysis is considered only with citrine specific aspects of the firm financial position, one ratio can be sufficient. 2. Cross sectional analysis involve the comparison of different firms financial ratio at the same point in time, analysts are often interested in how will a firm has performed in relations to the other firms in its industry. Frequently, a firm will compare its ratio value to those of key competitors to it.

Question Three White’s reluctance to use much interest bearing debt has no effect “will not hurt” the firm’s profitability. The firm’s interest bearing debs measures the firm’s ability to make contractual interest payment or to fulfill its interest obligations and has no relation to its profitability.

Question Four The Company is frequently offered terms of 1\10,net 30, that is , the company one percent discount if  the is paid in 10 days and in any event full payment is expected within 30 day. White i takes these discounts he want to on the firm cash as soon as possible, in add ition , the discount isn’t especially generous and 99 percent of the bill must be paid. The decision is considered a wise financial move.

Question Five

  

Book value per share for common stock: $329,800\5000 share = $65.96 per share.

Market to book value ratio (MV\BV)= $55\65.06 =$ 0.833 per share.   65\65.96 = $0.985 per share. This mean that the investors are paying $0.833 to $0.985 for each $1 of book value of holly fashions 

stocks.

Question Six 1. Hamilton thinks that the profitability of the firms to th e owners has been hurt by white’s reluctance to use much interest bearing debt. 2. Hamilton suspect that HF’s inventory is “excessive” and that “capital is unnecessarily tied again inventory”.

3. Hamilton thinks that white has been generous in granting payment extensions to customers, and at one point nearly 40 percent of the company’s receivables were more than 90 day

overdue. 4. Hamilton wonders about the wisdom of passing up trade discount. HF is frequently offered terms of 1\10, net 30. That is, the company receives a one percent discount if bill is paid in 10 days and in any payment is expected within 30 days.

Question Seven 1. White’s position in a large inventory is necessary to provide speedy delivery to customers. he argues that their customers expect quick service and a large inventory to them to provide that. 2. White has been generous in granting payment extensions to customers because he doesn’t want to lose sales and that the rough time these retailers face are only temporary. 3. White rarely takes cash discount because he wants to hold onto their cash as long as possible. Hamilton notes that the discount isn’t especially generous and 99 percent of the

bill must be paid.