UNIVERSITY OF NAMIBIA

NAMIBIA BUSINESS SCHOOL

FINANCIAL MANAGEMENT STRATEGY

CASE STUDY 2020. Due date: 5th June 2020

Watson Leisure Time Sporting Goods manufactures golf clubs, baseball bats, basketball goals,
and other similar items. The company’s income statements for the past three years are
indicated in Exhibit 1. The balance Sheets for the same period are shown in Exhibit 2.

Exhibit 1
WATSON LEISURE TIME SPORTING GOODS
Income Statement
2017 2018 2019
Sales (all on credit)………………………… $1,500,000 $1,800,000 $2,160,000
Cost of goods sold……………………… 950,000 1,120,000 1,300,000
Gross profit………………………………… 550,000 680,000 860,000
Selling and administrative expense……… 380,000 490,000 590,000
Operating profit…………………………… 170,000 190,000 270,000
Interest expense……………………..... 30,000 40,000 85,000
Net income before taxes………………… 140,000 150,000 185,000
Taxes………………………………………… 46,120 48,720 64,850
Net Income…………………………….. $93,880 $101,280 $120,150
Shares……………………………………… 40,000 40,000 46,000

WATSON LEISURE TIME SPORTING GOODS has made the following projections 2020. All
sales are on credit

March $24,000 June $28,000

April 16,000 July 35,000
May 18,000 August 38,000

Sales in January and February were $27,000 and $26,000, respectively. Experience has shown
that of total sales, 40 percent are collected in the month of sale, 40 percent are collected in the
following month, and 20 percent are collected two months after sale. Total annual sales for the
year 2020 are forecasted to be $2,500,000.

Monthly material purchases are set equal to 20 percent of forecasted sales for the next month.
Of the total material costs, 40 percent are paid in the month of purchase and 60 percent in the
following month. Labour costs will run $6,000 per month, and fixed overheads is $3,000 per
month. Interest payments on the debt will be $4,500 for both March and June. Finally, Watson’s
sales force will receive a 3 percent commission on total sales for the first six months of the year,
to be paid on June 30. A cash dividend of $20,000 is scheduled to be paid in September. Tax
payments of $3,500 are due in June and September.

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Exhibit 2

WATSON LEISURE TIME SPORTING GOODS

Balance Sheet
Assets 2017 2018 2019
Cash……………………………………………… $20,000 $30,000 $20,000
Marketable securities………………………… 30,000 35,000 50,000
Accounts receivable……………………………… 150,000 230,000 330,000
Inventory…………………………………… 250,000 285,000 325,000
Total Current Assets……………………………… 450,000 580,000 725,000
Net Plant and equipment…………………………… 550,000 720,000 1,169,000
Total Assets……………………………………….. $1,000,000 $1,300,000 $1,894,000
Liabilities & Equity
Accounts payable……………………………. $100,000 $225,000 $200,000
Notes payable (bank)……………………………… 100,000 100,000 300,000
Total Current liabilities…………………………… 200,000 325,000 500,000
Long-term liabilities…………………………… 250,000 331,120 550,740
Total liabilities……………………………………… 450,000 656,120 1,050,740
Common stock ($10 par)…………………… 400,000 400,000 460,000
Capital paid in excess of par………………. 50,000 50,000 80,000
Retained earnings………………………………… 100,000 193,880 303,260
Total stockholders’ equity…………………………….. 550,000 643,880 843,260
Total liabilities and stockholders’equity……………… $1,000,000 $1,300,000 $1,894,000

WATSON LEISURE TIME SPORTING GOODS is trying to decide between two

potential small shopping centre purchases. Their choices are the Wrigley Village and
Croxley Square. The anticipated annual cash inflows for 2021 from each are as follows:

Wrigley Village Croxley Square

Yearly aftertax cash Probability Yearly aftertax cash Probability
inflow (in thousands) inflow (in thousands)
$10 0.1 $20 0.1
30 0.2 30 0.3
40 0.3 35 0.4
50 0.3 50 0.2
60 0.1

Required:

Question 1 (50 marks)

(a) Calculate the earnings per share for the years 2017 through 2019. (3 marks)
(b) Calculate the return on assets (ROA) ratio for the years 2017 through 2019. (3
marks)

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 (c) Calculate the proportions of assets financed by debt for years 2017 through
2019. (3 marks)

(d) Using the Du Pont System, describe the changes in the return on equity from
year to year. (10 marks)
(e) Construct the common size Income Statement for Watson Company for 2017
through 2019. (9 marks)
(f) Using the percent of sales method, prepare Watson Company’s Pro-Forma
Balance Sheet and Pro-Forma Income Statement for 2020 based on 2019
statements. (10 marks)
(g) Prepare Indexed Financial statements on Watson Company with 2017 as the
base year. (12 marks)

Question 2

Prepare a schedule of monthly cash receipts, monthly cash payments and a

complete monthly budget for March through June for Watson Company. (30
marks)

Question 3 (20 marks)

(a) What is the expected value of the cash flow from Wrigley Village and Croxley
square? (5 marks)
(b) What is the coefficient of variation for each shopping centre? (10 marks)
(c) Which shopping centre has more risk? Explain your answer. (5 marks)

END