Zenith Creations
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Case 5: Zenith Creations
Synopsis:
Zenith Creations specializes in creative sales displays used to market point-of-purchase goods. It has several large customers, and the company is growing quickly. It has recently moved from a pure manufacturing firm to one that provides both manufacturing and creative services.
Recently large companies in the industry have been showing interest in acquiring Zenith, which has caused management to be particularly concerned with how the financial statements are interpreted by outside parties- especially the potential buyers, who will likely base their offers on assessments of Zeniths financial condition and performance. At the same time management is considering several actions and wants to know in advance how these actions will affect the financial statements, financial ratios, and outsider evaluations of Zeniths financial condition and performance. The actions are listed below:
Purchase treasury stock at current market price
Write off a relatively large uncollectible loan
Issue a 20 percent stock dividend
Redeem the remaining notes payable for 23,200,000
Sell the real estate received in the acquisition of Lyon Real Estate for 12,000,000
Change the inventory cost flow assumption from LIFO, to FIFO
In the following pages, first we will be giving our assessment concerning the possible acquisition of Zenith. We will be focusing on 1) the objective evaluation of Zeniths financial condition and performance, and 2) an assessment of how each of the actions listed above will affect the evaluation. Then we will be comparing Zeniths financial condition to that of a company in a similar industry. The company we chose to use as a comparison is a publicly traded advertising firm called Charm Communications.
Financial ratio analysis is critical in determining a companys financial standing. It is one of several techniques used to analyze a companys financial statements in hopes of gauging the earning power, solvency, and earning persistence of a company. After carefully assessment of the financial statements of Zenith Creations , we have determined the following ratios.