The Case of the Unidentified Industries 2006

Case 1:

The Case of the Unidentified Industries-2006

By: Ming Yan (Sherry) Chi Roxana Muratalla Rodriguez Raymond Salvatierra

Finance 434 April 17, 2014 Professor Yi

1.

Advertising Agency –E

We believe the matching industry is Company E. As a service firm it does not contain inventory. It will also have zero inventory turnover. Through research we learned that the media purchase is made on behalf of the client which means that the accounts receivable and accounts payable would be roughly equal to one another. In addition, the receivable collection period (RCP) is greater than 30 days which is common in business to business firms. Also, the firm has a low debt to asset ratio and this is again because the advertising agency industry has no inventory. 2. Airline Industry-M We feel like industry M best suits this industry. Similar to the advertising industry the Airline industry the airline industry is also a service industry. Meaning the level of inventory is also zero. More importantly however, this industry’s main assets include fleets of airplanes and this will reflect a high plant and equipment percentage. The receivables collection period (days) for industry M is 12, because in this service industry the receivables collection period is short this. Also, most of the sales are processed quickly many in cash therefore their account receivables will also reflect a low number. For this reason we feel that letter M fits the description for the airline industry. 3. Bookstore Chain-B The matching industry is B. Bookstore chains are part of the retail market and their plant and equipment is relatively high. Also, the inventory of the book store is relatively high. Another indication that letter B corresponds with the bookstore chain is that if we take a look at the inventory turnover, which can be found by dividing the cost of goods sold over inventory, this helps indicate how often the company sells and replaces the inventory. Because books are not everyday items nor are they perishable one can observe that the accounts receivable is low. 4. Commercial Banks-N We believe the matching industry is letter N. Commercial banks are also in the service industry and therefore they have no or very little inventory. Banks operate by using other people’s money or deposits. Therefore, commercial banks have very high accounts receivables from the interest payments it receives when they make loans to its customers. Another observation is that commercial banks also have high number of notes payable, this is due to the loan contracts they have engaged in. If one calculates the total debt/total assets ratio one can observe that this number very high at .88. Which means that this bank is highly leveraged and thus profitable but this particular set up also creates an insolvency risk. 5. Computer Software Developer-D

Firms involved in the creation of software development tend to have no preferred stock and only common stock. Industry D’s financial data reflect such case. This industry tends to finance their projects by issuing stocks rather than invest in long-term debt. The case might also be that since many of the software companies are not well established obtaining a loan might seem difficult. In addition, computer software companies tend to generate their revenue by selling their products online as a result their receivable collection periods tend to be high. Industry D’s financial statement reports 68 days for collections 6. Department Store Chain (with own brand charge card) - I The department store chains that have its own brand charge card would typically have a higher accounts receivable compared. They encourage the customer to sign up for their card and have promotions for them to use their cards. Additionally, these department store chains usually have a large portion of their assets in plant and equipment for the stores itself as well as warehouses. The stores would also have a high number of inventories. We focused on these factors and decided that it would be industry I. 7. Electric & Gas Company - H For electric and gas company, there would be not much inventory and not much current assets. Their plan and equipment however will be very high. Also they would have a high common stock. Also their inventory turnover would be low because the inventory does not expire. The receivables collection period will also be low because these are commodities that people would need to pay current in order to live every day. Therefore we concluded that Industry H would be a good fit for Electric and Gas Company. 8. Family Restaurant Chain- L A family restaurant chain will have high plant and equipment and low inventories. The inventory turnover rate will also be very high because the items are time sensitive. There would be a rather high long term debt due to the properties that the company owns. A restaurant chain have multiple locations spread out country wide, and will have mortgage loans to pay off. We chose Industry L for the family restaurant chain because it meets the points suggested. 9. Health Maintenance Organization- G Health maintenance organizations were pretty easy to identify. We thought that HMOs will have no inventory, and will have a relatively high accounts receivable. The company earns money based on the premiums paid/yet to be paid. The company will also have a low plant and equipment because it usually has only one office location in a few states or maybe just one main office somewhere. The company will also have some common stocks and accounts payable. The accounts payables are to medical providers to pay for the clients’ services under their policies. We chose G because it was pretty much right on these points. 10. Online Bookseller- K

The online bookseller we think would be in Industry K. The online booksellers would have high number in inventory and high number in plant and equipment for the warehouses located across country. The accounts receivable would also be a number to look at since the customers will be paying using credit. Additionally the inventory turnover is low because books are often harder to sell and can stay in the inventory for a long period of time. 11. Online Direct Inventory to Customer Personal Computer Vendor - J We believe the matching industry for this would be J. An online direct to customer computer vendor would have a high inventory to be able to supply the demand of online sales especially if more than half of sales were to business customers. Plant and equipment would also be high because they would need a place to do their business from in addition to storing inventory. We also noticed that inventory turnover was low which explained why inventory was a bit high. 12. Pharmaceutical Manufacturer – A We believe the matching industry would be A. Being a manufacturing company they would need plenty of raw material to make these products and a place for manufacturing, which would help explain numbers in the Plant & Equipment and Other Assets category. We also considered inventory since a manufacturing company would have a large supply of items being manufactured. 13. Retail Drug Chain – F We believe the matching industry for this would be F. Due to medication being expensive we felt the Accounts Receivable would be fairly high along with a high RCP since a lot of these purchases would be made using credit cards. We also considered the low inventory turnover because drugs are not an everyday item that is purchased unless someone is sick. 14. Retail Grocery Chain – C We believe the matching industry would be C. For this industry we concentrated and looked closely at Inventory Turnover, which would relatively be high for a grocery store due to all food that must be sold before it spoils. We also noticed that the RCP was fairly low which would be consistent with this type of business since transactions normally involve cash. These were the main factors considered when comparing to the other industries.