This wasn’t perfectly ideal to Windsor as they would loose interest income and Passage’s management flatly refused the idea cause of the high fixed interest rates offered and accompanying covenants of the deal that could cause Budget to violate the terms without any mismanagement. Passage’s management was happy with the 90-day note arrangement and could not understand why the arrangement needed to be restructured. Windsor continues to desire to find covenants/collateralizing that would reduce their exposure in amount of credit they have extended and still be agreeable to Budget, and maintain a valued customer.

Assumptions All dollar values within the document and in Appendix A are in thousands of Lars unless otherwise specified. At the time of this writing an RAM Book to compare industry averages of ROE, ROAR, A/E, total asset turnover, and net profit margins was unavailable. While the industry averages would be preferable, given that the values provided in the case were 26+ years old, current industry percentages would not be an accurate measurement for comparison. Exhibits 1 , 2, and 3 were taken as true and accurate at face value and used in the calculations presented within this text and the accompanying Appendix A.

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Given Windrow’s desire to reduce it’s exposure and maintain its valued client, Windsor will be willing to work with Passages management to come up with creative solutions. Given Passage’s need to maintain its loans they will be open to restructuring the notes to long-term debt barring the restructuring will not contain covenants like those presented in the life insurance financing that were beyond Passage’s control. Method of Analysis Without industry averages, the basis for the findings presented here consist Of horizontal analysis Of Passage’s financial statements and ratios using the figures provided in the case in Exhibits 1, 2, and 3.

Making comparisons cross years and noting significant changes or trends. Where significant change was observed vertical analysis was used to express components of Passages assets and liabilities in terms of percentage of sales or percentage of assets respectively. Discussion of Results Starting with liquidity ratios I noticed that both the current ratio and quick ratio were declining in subsequent years with the largest decline occurring between the years of 1986 and 1987.

The large discrepancy between the current and quick ratio caught my attention and is the result of the large and increasing amount of inventory Budget carries. A large portion of Passages liquidity exists in inventory. These assets would have to first be converted to accounts receivables before becoming cash. Plus inventory value will decline over time especially in the face of increased competition. Expressing inventory in terms of total assets I discovered that as of 1 988, Passages invent accounted for 46% of its total assets using the following equation: Inventory $14,360 0. 6 46% Total Assets $30,994 A larger inventory turnover might justify inventory accounting for such a large percentage of total assets but with the existing turnover rate, inventory counting for 46% of the company’s total assets seems excessive. Better management of inventory levels would improve Passage’s quick ratio. An inventory turnover of 1. 71 where the average age of inventory has grown to 213. 5 days (see Appendix A) is further evidence that better inventory management would improve the company’s liquidity and be more attractive to creditors.

Reducing inventories while maintaining or growing sales will substantially improve the company’s productivity (total asset turnover). In terms of solvency and debt used the times interest earned (TIE) ratio and he debt ratio respectively. The TIE ratio focuses on payment of interest working under the assumption that the principal will be refinanced. Passage’s TIE has been declining dramatically as is shown in Appendix A. This is due to its increase use of debt but still appears healthy at 13. 31 in 1988.

Budget could actually endure a decline in earnings and still meet the interest obligations. Passage’s debt ratio has grown considerably over the last four years as seen in Appendix A. As of 1988 the ratio has grown to 40% showing the company’s increasing reliance on creditor financing. The bulk of this financing being carried on 90-day notes and classified as short-term debt on “Exhibit 2 Balance Sheet” and is better visualized looking at Passage’s short-term and long-term debt separately each expressed as a percent of total liabilities.