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Coffee Call is a small, independent coffee shop. It is run by two brothers, Erin and Carl Shutter. They are keen to increase sales by using the shop space more effectively and installing three new tables. This will, however, require a significant investment and the brothers have approached the bank with a business plan for the expansion with the aim of securing loan finance. The brothers have also been approached by a venture capitalist who is willing to fund the expansion in return for a 20%20 \% stake in Coffee Call. The brothers are concerned to keep the liquidity of the business secure during the expansion.

The following cash flow data have been produced by Coffee Call's accountant for the period January to June:

  • Sales for the first three months of the year will be $20000\$ 20000, rising to $40000\$ 40000 in the following three months once Coffee Call has installed the extra seating.

  • Material costs are 50%50 \% of sales and are paid each month.

  • Electricity and gas cost $4000\$ 4000, with half paid in February and the remainder in September.

  • Staff wages of $2000\$ 2000 are paid each month, but these will rise to $3000\$ 3000 after three months once Coffee Call has expanded.

  • Erin and Carl draw $10000\$ 10000 each out of the business in March and December.

  • Marketing costs of $500\$ 500 are paid each month.

  • A loan of $20000\$ 20000 is taken out in February to fund the expansion.

  • The $20000\$ 20000 cost of fitting the new tables is paid in March.

Draw up a cash flow forecast for Coffee Call for the first six months of the year.

Vulcan Materials Company, a member of the S&P 500 Index, is the nation’s largest producer of construction aggregates, a major producer of asphalt mix and concrete, and a leading producer of cement in Florida. The given exhibit (6.19) presents Vulcan’s summarized income statement.

In Note 2 to the consolidated financial statements, "Discontinued Operations," Vulcan describes a June 2005 sale of substantially all assets of its Chemicals business, known as Vulcan Chemicals, to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. Basic Chemicals assumed certain liabilities relating to the chemicals business, including the obligation to monitor and remediate all releases of hazardous materials at or from the Wichita, Geismar, and Port Edwards plant facilities. The decision to sell the chemicals business was based on Vulcan’s desire to focus its resources on the construction materials business. The amounts reported as discontinued operations are not revenues and expenses from Vulcan operating the discontinued segment. Instead, the amounts represent a continual updating of the amount payable by the segment buyer. The receivable held by Vulcan from the sale is dependent on the levels of gas and chemical prices through the end of 2012. Vulcan classifies this financial instrument as a derivative contract that must be marked to market. The derivative does not hedge an existing transaction; therefore, its value changes are reflected in income as part of discontinued operations. As of 2008, Vulcan reported that final gains on disposal (if any) would occur after December 31, 2008.

Goodwill impairment relates to Vulcan’s cement segment. Vulcan explains the need for the impairment as arising from the need to increase discount rates due to disruptions in credit markets as well as weak levels of construction activity.


  • a. Discuss the appropriate treatment of the following when forecasting future earnings of Vulcan Materials: (1) goodwill impairment; (2) discontinued operations; and (3) loss (gain) on sale of property, plant, and equipment and businesses (net).
  • b. Prepare common-size income statements for Vulcan Materials. Interpret changes in profit margin over the three-year period in light of the special items.

Go to to find information about Vulcan Materials Company (VMC), Southwest Airlines (LUV), Honda Motor Company (HMC), Nordstrom, Inc. (JWN), and Abbott Laboratories (ABT). Download the most recent income statement and balance sheet for each company. a. Calculate the operating profit margin (operating profit/sales) and the asset turnover (sales/assets) for each firm. b. Calculate the return on assets directly (ROA = Operating profit/Total assets), and then confirm it by calculating ROA = Operating margin ×\times Asset turnover. c. In what industries do these firms operate? Do the ratios make sense when you consider the industry types? d. For the firms that have relatively low ROAs, does the source of the problem seem to be the operating profit margin, the asset turnover, or both? e. Calculate the return on equity (ROE = Net income/Equity) for each firm. For the two firms with the lowest ROEs, perform a DuPont analysis to isolate the source(s) of the problem.


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