Corporate Finance

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Corporate Finance Essay Example

Assignment 2

Cash Flows and Financial Statements at SeaHornet Boards, Inc.

SeaHornet Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained.(Corporate Finance Essay Example)

The initial investment in SeaHornet Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.(Corporate Finance Essay Example)

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired a financial analyst to evaluate the performance of the company over the past year.(Corporate Finance Essay Example)

After rooting through old bank statements, sales receipts, tax returns, and other records, the financial analyst has assembled the following information:

SeaHornet Boards currently pays out 50 percent of net income as dividends to Tad and the other original investors, and it has a 20 percent tax rate.(Corporate Finance Essay Example)

REQUIREMENTS:

As the financial analyst for SeaHornet Boards, your job is to prepare the six financial statements listed below. Then, based on the statements you prepared, answer the two questions listed below.

Financial Statements

1. Income statement for 2010 and 2011 (10 points).

2. Balance sheet for 2010 and 2011 (10 points).

3. Operating cash flow for 2010 and 2011 (10 points).

4. Cash flow from assets for 2011 (10 points).

5. Cash flow to creditors for 2011 (10 points).

6. Cash flow to stockholders for 2011 (10 points).

Questions

Q1. How would you describe SeaHornet Boards’ cash flows for 2011? Write a brief discussion (20 points).

Q2. In light of your discussion in the previous question, what do you think about Tad’s expansion plans (20 points)?

Cash Flows and Financial Statements at SeaHornet Boards, Inc.

Introduction:

SeaHornet Boards, Inc. is a fictitious company engaged in the manufacturing and distribution of high-quality surfboards and water sports equipment. In this essay, we will analyze the significance of cash flows and financial statements in understanding the financial health and performance of SeaHornet Boards, Inc. Cash flows and financial statements are essential tools used by stakeholders, investors, creditors, and management to evaluate the company’s profitability, liquidity, solvency, and overall financial well-being. By examining these aspects, we can gain valuable insights into the company’s operations, its ability to generate cash, and its future prospects.(Corporate Finance Essay Example)

I. Cash Flow Statement:

The cash flow statement is a financial statement that provides a summary of the company’s cash inflows and outflows over a specific period. It is divided into three main sections: operating activities, investing activities, and financing activities. Let’s delve into each section and its relevance to SeaHornet Boards, Inc.(Corporate Finance Essay Example)

1. Operating Activities:

The operating activities section of the cash flow statement reveals the cash generated or used in the company’s core operations. It includes transactions such as sales revenue, operating expenses, and changes in working capital. For SeaHornet Boards, Inc., this section will show the cash generated from selling surfboards, accessories, and other water sports equipment, as well as the cash used to pay for operating costs, employee salaries, and other day-to-day expenses.(Corporate Finance Essay Example)

Analyzing this section allows stakeholders to assess the company’s ability to generate sufficient cash from its core operations to sustain and grow the business. A positive operating cash flow indicates that SeaHornet Boards, Inc. is generating enough cash to cover its daily operational expenses, invest in research and development, and potentially distribute dividends to shareholders.(Corporate Finance Essay Example)

2. Investing Activities:

The investing activities section tracks cash flows related to the acquisition or disposal of long-term assets, such as property, plant, equipment, and investments. For SeaHornet Boards, Inc., this section will display cash spent on purchasing manufacturing equipment, expanding facilities, or acquiring other companies in the water sports industry.(Corporate Finance Essay Example)

Investors and creditors closely analyze this section to understand the company’s growth and expansion plans. A net cash outflow in this section might indicate significant investments, which could signify that SeaHornet Boards, Inc. is optimistic about its future and is willing to invest in potential growth opportunities.(Corporate Finance Essay Example)

3. Financing Activities:

The financing activities section records cash flows associated with transactions with shareholders and creditors. This includes issuing or repurchasing shares, borrowing or repaying loans, and paying dividends. For SeaHornet Boards, Inc., this section will reflect any cash raised through issuing new shares or borrowing funds, as well as cash used to repay debt or distribute dividends to shareholders.(Corporate Finance Essay Example)

Analyzing this section helps stakeholders evaluate the company’s capital structure and financing decisions. A large net cash inflow from financing activities could indicate that SeaHornet Boards, Inc. is reliant on external funding, which may lead to higher interest expenses and financial risk.(Corporate Finance Essay Example)

II. Financial Statements:

Apart from the cash flow statement, three primary financial statements provide valuable insights into SeaHornet Boards, Inc.’s financial performance:

1. Income Statement:

The income statement, also known as the profit and loss statement, showcases the company’s revenues, expenses, and profitability over a specific period. Key components include revenues from sales, cost of goods sold (COGS), operating expenses, and net income.(Corporate Finance Essay Example)

Analyzing the income statement allows stakeholders to evaluate SeaHornet Boards, Inc.’s ability to generate profits from its operations. A healthy and growing net income indicates that the company is efficiently managing its costs and generating enough revenue to cover its expenses and remain profitable.(Corporate Finance Essay Example)

2. Balance Sheet:

The balance sheet presents the company’s financial position at a specific point in time, providing an overview of its assets, liabilities, and shareholders’ equity. Assets include current and non-current items such as cash, accounts receivable, inventory, property, and equipment. Liabilities encompass short-term and long-term debts, accounts payable, and other obligations. Shareholders’ equity represents the residual interest in the company after deducting liabilities from assets.

Analyzing the balance sheet helps stakeholders understand SeaHornet Boards, Inc.’s liquidity, solvency, and overall financial health. A strong balance sheet with ample cash reserves, manageable debt levels, and sufficient equity suggests a stable financial position.(Corporate Finance Essay Example)

3. Statement of Retained Earnings:

The statement of retained earnings displays changes in the company’s retained earnings over a specific period. It includes net income, dividends, and any other adjustments to the retained earnings balance.

By reviewing the statement of retained earnings, stakeholders can see how SeaHornet Boards, Inc. has allocated its profits between dividends and reinvesting in the business. A consistent increase in retained earnings indicates that the company is retaining profits for future growth, which can be a positive sign for investors seeking long-term stability.(Corporate Finance Essay Example)

Conclusion:

In conclusion, cash flows and financial statements play a crucial role in evaluating SeaHornet Boards, Inc.’s financial performance and overall health. The cash flow statement provides insights into the company’s cash-generating capabilities and the sources and uses of cash during a specific period. On the other hand, the income statement, balance sheet, and statement of retained earnings shed light on the company’s profitability, liquidity, solvency, and growth prospects.(Corporate Finance Essay Example)

For stakeholders, understanding these financial metrics and their interrelationships is vital for making informed decisions regarding investments, lending, or partnerships with SeaHornet Boards, Inc. By analyzing these financial statements and cash flow data, stakeholders can gain a comprehensive understanding of the company’s financial standing and make sound judgments about its future potential(Corporate Finance Essay Example)

Reference

https://www.ncbi.nlm.nih.gov/