Case Study 1: Saffron City Conglomerates, Inc.Situation:June Holburn, a graduate of the University of Oregon with 5 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Saffron City Conglomerates, Inc. (SCC), a multinational conglomerate corporation with fifteen major subsidiaries.In an effort to streamline operations and stay competitive, SCC has recently spun off 100% of its augmented reality subsidiary at a price of $2.50/share, resulting in dramatic changes to the corporations financial statements. As a result, its managers, directors, and investors are concerned about the firms survival. At the boards insistence, June Holburn was given the job of assistant to Geralt River, a retired banker who was SCCs chairman and largest stockholder. River agreed to give up a few of his hunting days and to help assuage the fears of the investors, with Holburns assistance.SCCs 2015 and 2016 balance sheets and income statements, projections for 2017, and industry average data are shown in the following tables. The 2017 projected financial statement data represent Holburns and Rivers best guess for 2017 results.Input Data:201520162017EYear-end common stock price$12.75$10.00$11.25Year-end shares outstanding100,000100,000100,000Tax rate40%40%40%Lease payments$50,000$50,000$50,000Balance Sheets (thousands)Assets201520162017ECash and equivalents$87,350$42,740$56,780Accounts receivable$192,620$216,950$223,620Inventories$529,820$404,940$380,620Total current assets$809,790$664,630$661,020Gross Fixed Assets$1,515,760$1,207,240$1,150,360Less Accumulated Dep.$334,930$285,110$247,750Net Fixed Assets$1,180,830$922,130$902,610Total Assets$1,990,620$1,586,760$1,563,630Liabilities and equityAccounts payable$180,620$130,540$140,280Accruals$112,600$90,520$82,760Notes payable$175,260$132,680$127,790Total current liabilities$468,480$353,740$350,830Long-term bonds$680,440$540,640$460,720Total liabilities$1,148,920$894,380$811,550Common stock (100,000 shares)$640,000$640,000$640,000Retained earnings$201,700$52,380$112,080Total common equity$841,700$692,380$752,080Total liabilities and equity$1,990,620$1,586,760$1,563,630Case Study 1: Saffron City Conglomerates, Inc.June Holburn, a graduate of the University of Oregon with 5 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Saffron City Conglomerates, Inc. (SCC), a multinational conglomerate corporation with fifteen major subsidiaries.In an effort to streamline operations and stay competitive, SCC has recently spun off 100% of its augmented reality subsidiary at a price of $2.50/share, resulting in dramatic changes to the corporations financial statements. As a result, its managers, directors, and investors are concerned about the firms survival. At the boards insistence, June Holburn was given the job of assistant to Geralt River, a retired banker who was SCCs chairman and largest stockholder. River agreed to give up a few of his hunting days and to help assuage the fears of the investors, with Holburns assistance.SCCs 2015 and 2016 balance sheets and income statements, projections for 2017, and industry average data are shown in the following tables. The 2017 projected financial statement data represent Holburns and Rivers best guess for 2017 results.Income Statements201520162017ENet sales$5,723,000$3,834,400$4,035,600Costs of Goods Sold$3,891,000$2,847,500$2,943,830Other Expenses$1,413,000$720,000$612,960Depreciation and amortization$170,540$131,820$124,000Total Operating Cost$5,474,540$3,699,320$3,680,790Earnings before interest and taxes (EBIT)$248,460$135,080$354,810Less interest$54,430$43,250$36,860Earnings before taxes (EBT)$194,030$91,830$317,950Taxes (40%)$77,612$36,732$127,180Net Income before preferred dividends$116,418$55,098$190,770EPS$1.164$0.551$1.908DPS$1.250$1.260$1.280Book Value Per Share$8.417$6.924$7.521RatioCurrent1.8Quick0.9Inventory Turnover8.5Days sales outstanding22Fixed assets turnover4.5Total assets turnover2.8Debt-to-capital ratio48%TIE28Operating margin5.50%Profit Margin3.60%Basic earning power12.40%ROA10.70%ROE16.10%ROIC14.00%Price/earnings15.4xMarket/book1.6xBook value per share7.2Industry AverageHolburn must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.e. Calculate the profit margin, basic earning power (BEP), return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) for 2015, 2016, and 2017E. What can you say about these ratios?Holburn must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.a. Briefly list the five major categories of ratios and why ratios are helpful.b. (1.) Calculate the current and quick ratios for 2015, 2016, and 2017E based on the projected balance sheet and income statement data.(2.) What can you say about the companys liquidity position? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?c. Calculate the inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover for 2015, 2016, and 2017E. How does SCCs utilization of assets stack up against other firms in its industry?d. Calculate the debt-to-capital and times-interest earned ratios for 2015, 2016, and 2017E. How does Celadon compare with the industry with respect to financial leverage? What can you conclude from these ratios?e. Calculate the profit margin, basic earning power (BEP), return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) for 2015, 2016, and 2017E. What can you say about these ratios?f. Calculate the price/earnings ratio, price/cash flow ratio, and market/book ratio for 2015, 2016, and 2017E. Do these ratios indicate that investors are expected to have a high or low opinion of the company?g. Use the extended Du Pont equation to provide a summary and overview of SCCs projected financial condition. What are the firms major strengths and weaknesses?h. What are some potential problems and limitations of financial ratio analysis?i. What are some qualitative factors analysts should consider when evaluating a companys likely future financial performance?j. Describe the overall effects of the spinoff. Ultimately, was this a good move for SCC? Explain.k. Provide recommendations on how SCC might achieve their desired goals in the future