I'm learning how to evaluate a firm's performance by reviewing its financial statement mostly its income statement. I need to know how to evaluate the effectiveness of working capital management, how a firm makes investment and decisions that deal with risk, and what leverage means to a firm and how it determines and appropriate level of debt using Hasbro as a target company. We are going to have to know how to do this for examine at the end of this class. Some of the calculations are done. Please explain your answers so I can learn.
Using the information for Hasbro financial statements for its fiscal year ending December 31, 2007.
On www.hasbro.com click on "Corporate Information" at the bottom of the page. Click on "2007 Annual Report PDF" at the right hand side of the page and then click on "Download PDF" at the top of the page..
I. Sales and Margins
Identify trends in sales and margins by creating a common sized income statement for the past two years and doing a comparison between the two years
What drove the major variances in revenues and expenses between years? Explain these variances.
What would be gained by evaluating their margin performance from an EBITDA standpoint? Any comments?
II. Working Capital Management
The working capital ratios for this company specifically liquidity ratios plus the Operating Cycle statistics are as follows:
Ratio 2006 2007
Current Ratio 1.9 2.1
Acid Test 1.7 1.8
Accounts Receivable Days 64 62
Inventory Turnover 6.4 6.1
Inventory Days 57 60
Accounts Payable Days 44 53
Operating Cycle 121 122
Cash Conversion Cycle 77 69
What are the highlights of their working capital performance? Would you consider this company to be a well run company from a working capital standpoint? Which company or companies would you compare these ratios to?
Examine their annual report carefully for any mention of their accounts receivable, inventory, accounts payable and liquidity policies. What have they done with receivables? How has their accounts receivable securitization program changed their working capital outlook? Who do they sell to? What is the sourcing of their inventory? What policies do they have with respect to payables? What is their short term liquidity outlook?
III. Capital Spending
Calculate an appropriate Weighted Average Cost of Capital (WACC) assuming you worked at Hasbro and were assigned the task of setting their WACC for the purpose of analyzing the feasibility of their investments.
Here are the major assumptions to be used:
Cost of debt = 6.6%
Tax rate = 40%
Cost of equity = 13%
Debt/Total capital = 16%
Equity/Total capital = 84%
What is the minimum rate of return they should require from their investments?
Would you recommend they use a different required rate of return if they were faced with making the following investment decisions?
a) A relatively safe product line extension of their Monopoly board game.
b) A relatively risky product line of their Monopoly board game as an Internet game application.
Would you lend money to HAS if you were a commercial bank? Our revolver has capacity of $300 million and is supported by nine banks in our bank group.
Its debt and coverage ratios are as follows:
Debt/Total capital = 16%
Times interest earned 13.4 14.8
Fixed payment coverage 6.4 4.2
It this a creditworthy firm? Why?
Examination of the firm's cash flow statements, balance sheets and the details of its outstanding debt might give you clues as this firm's ability to repay debt.
Does this firm generate enough cash flows to pay back its loans? What does their cash flow statement say? Is this a cash cow business or a cash hog?
Does it have any off balance sheet obligations which a lender should be aware of and take into account in evaluating this firm's credit worthiness?
Using Hasbro's cash flow statement for 2007, how would you transform this cash flow statement to reflect FREE cash flows?
More importantly, what is this free cash flow number for 2007?
This solution consist of Financial evaluatioin of Hasbro Inc.