Overview of the Case:

Holly Fashion is a famous garments company located in Cherry Hill, New Jersey. Holly Fashion (HF) was
started 14 years ago by William Hamilton and John White, who had over
25 years of experience with a major garments manufacture. Their
partnership blended very well. Hamilton, reserved, is extremely creative
with a rear flair for merchandising. As a result of his genius the HF level
is synonymous with quality. White, outgoing and forceful, has
contributed important merchandising and marketing ideas. Hamilton has
had little interest in the financial aspect if the company. He preferred to
work on designing new fashions and the development of marketing
strategies. But a few months ago he deiced that he involved with the companys financials. His motivation is
twofold, and these are--

First his considering the sale of 50% interest in HF.

He thought that he can better judge the managerial competence of White.

When Hamilton got involved in companys financial decision, some arguments between White and Hamilton
got differ, as Hamilton was in companys creative site and White was in the chief operating officer. When HF
was small Hamilton thought White did a fine job but now he wonders whether White is capable of running a
large firm or not, as company will face tougher time in the next few year. On the other hand as White was
dealing virtually all major operating and financial decision he decided 3 years age to retire all long term debt as
business risk was increasing. He also concerns the firm size and difficulty maintaining stable bank relationship
due to increasingly strict federal regulations of some banks.

Hamilton suspects that HF inventory is excessive while White position is that a large inventory is necessary to
provide speedy delivery to customer. Hamilton always interested in giving trade discount while White rarely
takes these discount decision because he wants to hold onto their cash as long as possible.

However, the relationship between the two partners has been relatively smooth over the years. Hamilton admits
that he may be unduly critical oh Whites management decisions.

Question and Answer:

1. Calculate the Firms 1996 ratios listed in Exhibit 3

Answer: Financial Ratios for the year 1993-1996 are bellow: -

A. Liquidity Ratios:-

Liquidity ratios are used to determine a company's ability to pay off its short-terms debts
obligations.
Years 1993 1994 1995 1996

Current 3.8 3..7 3.4 3.6

Quick 2.4 2.4 1.6 2.0

B. Leverage Ratios:

A leverage ratio is any one of several financial measurements that look at how much capital
comes in the form of debt (loans), or assesses the ability of a company to meet financial
obligations

years 1993 1994 1995 1996

Debt ratio % 41.1 37.7 35.3 31.1

Time interest earned 8.0 8.5 11.6 15.7

C. Activity Ratios:

Activity ratios are accounting ratios that measure a firm's ability to convert different accounts
within its balance sheets into cash or sales. Activity ratios are used to measure the relative
efficiency of a firm based on its use of its assets, leverage or other such balance sheet items.
These ratios are important in determining whether a company's management is doing a good
enough job of generating revenues, cash, etc. from its resources

Years 1993 1994 1995 1996

Inventory turnover 6.4 6.4 4.8 5.1

Fixed asset turnover 30..0 29.3 30.1 29

Total asset turnover 2.8 2.8 2.7 2.7

Average collection period 55 55 51 62.0

Days purchase outstanding 25 32 31 31.0

 D. Profitability Ratios:-

Profitability ratios are used to assess a business's ability to generate earnings as compared to its
expenses and other relevant costs incurred during a specific period of time.

Years 1993 1994 1995 1996

Gross margin% 24 23.5 24.9 25

Net profit margin % 3 2.6 2.6 2.7

Return on equity % 14.3 11.6 10.8 10.7

Return on total asset % 8.4 7.2 7 7.3

Operating margin % 6.8 6 6.1 5.9

2. Part of Hamiltons evaluation will consists of comparing firms ratios to the industry number
shown in Exhibit 3-
a) Discuss the limitation of such a corporate financial analysis
b) In the view of these limitations why such industry comparisons are so frequently made?

Answer:

a) The limitations of comparative financial analysis are:

I. 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, its therefore important to investigate
significant deviation either side of the industry
standard.
II. 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
III. 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
doesnt provide conclusive evidence as to the existence of a problem.
IV. 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
 b) Industry comparisons are made for the following reasons:

I. A single ratio doesnt 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.
II. 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

3. Hamilton thinks that the profitability of the firm to the owners has been hurt by Whites
reluctance to use much interest bearing debt. Is this a reasonable position? Why?

Answer: Whites reluctance to use much interest bearing debt has no effect and will not hurt the
firms profitability. The firms interest bearing debts measure the firms ability to make
contractual interest payment or to fulfill its interest obligations and have no relation to its
profitability.

4. The case mentions that White rarely takes trade discount which are typically 1/10, net 30. Does
this seem like wise financial move? Explain

Answer: The Company is usually offered terms of 1\10, net 30, that is, the companys one percent
discount if it is paid in within10 days and in any event full payment is expected within 30 days.
White takes these discounts he wants the liquidity or cash as soon as possible, in addition, the
discount isnt especially generous and 99 % of the bill must be paid. The decision is considered a
wise financial move

5. Calculate the companys market to book (MV/BV) ratio. (there are 5000 shares of
common stock)

Answer:

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 means that the investors are paying $0.833 to $0.985 for each $1 of book value of holly
fashions stocks.
 6. Hamiltons position is that White is not competently managed the firm. Defend this
position using your previous answers and other information in the case.

Answer:

Hamilton thinks that the profitability of the firms to the owners has been hurt by Whites
reluctance to use much interest bearing debt.
Hamilton suspect that HFs inventory is excessive and that capital is unnecessarily tied
again inventory.
Hamilton thinks that white has been generous in granting payment extensions to
customers, and at one point nearly 40 percent of the companys receivables were more
than 90 days overdue.
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 in10days and in any payment is expected within 30 days.

7. Whites position is that effectively managed the firm. Defend this position using your previous
answers and other information in the cases

Answer:

Whites 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.
White has been generous in granting payment extensions to customers because he doesnt
want to lose sales and that the rough time these retailers face is only temporary.
White rarely takes cash discount because he wants to hold onto their cash as long as
possible. Hamilton notes that the discount isnt especially generous and 99 percent of the
bill must be paid.

8. Play the role of an arbitrator. Is it possible based on a examination of the firms

ratios and other information in the case to assess Whites managerial competence?
Defend your position

Answer: Looking at the comparison and analysis of the ratios with different years the Holly
Fashions has experienced a lot of ups and downs within four years. There is increase and
decrease in all ratios one cant identify and realize any stable financial position, for example
there is increase in inventory turnover and the Average collection period has been extended
almost to 62 which is more and is not a good sign of sound Cash cycle and this can cause poor
liquidity. On the other hand, the firms interest bearing debts measure the firms ability to make
contractual interest payment or to fulfill its interest obligations and have no relation to its
profitability. White gave discount on the faster repayment which will motivate the borrowers to
pay their liabilities on time and fast which will help them decrease the 62 days of collection and
then they can pay the HF account payables.

9. a) Are the ratios you calculated based on market or book values? Explain
b) Would you prefer ratios based on market or book values? Explain

Answer:

a)

All the calculated ratios are based on Book values which are recorded in the books of the firm.

b)

The calculations either to be book value or Market value depends on the firms Companies with
lots of machinery, like railroads, or lots of financial instruments, like banks, tend to have large
book values. In contrast, video game companies, fashion designers or trading firms may have
little or no book value because they are only as good as the people who work there. Book value
is not very useful in the latter case, but for companies with solid assets it's often the No.1 figure
for investors. The following difference about the relationships between book value and market
value can highlight which one to apply:

1. Book Value Greater Than Market Value:

The financial market values the company for less than its stated value or net worth. When this is
the case, it's usually because the market has lost confidence in the ability of the company's assets
to generate future profits and cash flows. In other words, the market doesn't believe that the
company is worth the value on its books. Value investors often like to seek out companies in this
category in hopes that the market perception turns out to be incorrect. After all, the market
is giving you the opportunity to buy a business for less than its stated net worth.

2. Market Value Greater Than Book Value:

The market assigns a higher value to the company due to the earnings power of the company's
assets. Nearly all consistently profitable companies will have market values greater than book
values.

3. Book Value Equals Market Value:

The market sees no compelling reason to believe the company's assets are better or worse than
what is stated on the balance sheet
Recommendation

Throughout the case we find that Hamilton and White have two different professional
background and both wanted to take part in decision making so they differ in some argument. So
we can say that-

Since the company is going through tough times, Hamilton should reduce the risk of not
selling the company share.
As Hamilton was from creative site so he should generate new idea to diversify their
product.
White always working with customers, he has the opportunity to maintain customers
satisfaction so he should focus more on that site.
Hamilton and White working together since 14 years, if they want to run their firm in a
proper way they should keep their personal conflict aside.