| Course | IBF-5040 Corporate and Managerial Finance |
|---|---|
| Module | Module 2 |
| Paper type | Module 2 written assignment: financial performance, planning and forecasting |
| Length | About 563 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | MBA in Finance |
| Updated | October 2026 |
Free sample paper for IBF 5040 Module 2
Reading Passaic Precision's Ratios and Forecasting the Money Growth Will Require
Student Name
MBA in Finance, Thomas Edison State University
IBF-5040: Corporate and Managerial Finance
Mentor Name
Month Day, Year
Reading Passaic Precision's Ratios and Forecasting the Money Growth Will Require
Introduction
Passaic Precision reported sales of $640 million and net income of $36.3 million in 2024, with total assets of $600 million and equity of $240 million. Before deciding between a buyback and an automation project, as Module 1 described, management needs to know how the company is performing and how much money growth will consume. The figures below use year-end 2024 balances from the company's statements. Where an industry benchmark helps, the paper compares Passaic with median figures for small precision machining firms, which typically carry less debt and turn inventory faster.
Ratio Analysis
Liquidity is comfortable. Inventory is the weak point: 91 days of cost of goods sold sit in raw bar stock, work in process and finished parts, a long cycle typical of job shops with many part numbers. Debt exceeds equity and interest is covered only 3.6 times, which limits how much more the company can borrow, a constraint relevant to the activist's buyback proposal.
| Category | Ratio | 2024 |
|---|---|---|
| Liquidity | Current ratio | 2.44 |
| Activity | Days sales outstanding | 50 days |
| Activity | Days inventory outstanding | 91 days |
| Activity | Total asset turnover | 1.07 times |
| Debt | Total debt to equity | 1.08 |
| Debt | Times interest earned | 3.6 times |
| Profitability | Net profit margin | 5.7% |
| Profitability | Return on assets | 6.1% |
| Profitability | Return on equity | 15.1% |
The DuPont Identity
For Passaic, margin times turnover times the equity multiplier gives return on equity: 5.68 percent times 1.067 times 2.50 gives 15.1 percent. Much of the return comes from borrowing: the equity multiplier of 2.50 means assets are two and a half times equity. A competitor with the same margin and turnover but less debt would earn about 9 percent on equity. Moyer et al. (2018) note that the identity shows whether a high return comes from operations or from financial risk; for Passaic, improving turnover, especially of inventory, would raise returns without adding risk.
Forecasting Additional Funds Needed
With the plants close to full, assets and spontaneous liabilities such as payables and accruals are assumed to rise in step with sales. For 10 percent growth, from $640 million to $704 million:
Growth of 10 percent therefore requires about $28.4 million of outside financing. If Passaic instead cut inventory to 75 days, it would release about $20 million of cash, covering most of the need without new debt. Fama and French (2002) found that firms tend to finance investment first with retained earnings and debt, consistent with the pecking order, which matches Passaic's options here.
| Item | Amount, $ millions |
|---|---|
| Required increase in assets: $600 / $640 x $64 | 60.0 |
| Less spontaneous increase in liabilities: $76 / $640 x $64 | (7.6) |
| Less retained earnings: 5.68% x $704 x 60% retention | (24.0) |
| Additional funds needed | 28.4 |
Conclusion
The ratios show a profitable company whose return on equity depends heavily on debt and whose inventory ties up too much cash. Growth of 10 percent would need about $28 million of outside funds, much of which better inventory management could supply internally. These findings argue against adding debt for a buyback before the company's working capital and capacity needs are settled. Shleifer and Vishny (1997) note that creditors and large shareholders both watch debt levels closely, so a lender reviewing these ratios would likely ask the same question the paper raises: why borrow more before releasing cash already tied up in the business?
References
Fama, E. F., & French, K. R. (2002). Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Studies, 15(1), 1-33. https://doi.org/10.1093/rfs/15.1.1
Moyer, R. C., McGuigan, J. R., & Rao, R. P. (2018). Contemporary financial management (14th ed.). Cengage.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Reading the IBF 5040 Module 2 assignment instructions
The second IBF-5040 written assignment covers evaluating financial performance and financial planning and forecasting. Prompts ask for ratios in every family with interpretation, a DuPont split of return on equity and a funds-needed forecast, usually built as a percent of sales. Problems may give statements or ask you to use a public company's filings. Give the formula beside every ratio, set it against a peer or prior year and say what it means for management. State the assumptions behind any forecast, since the answer depends on them. If you choose a public company, use its most recent Form 10-K and say which fiscal year the figures come from. Compute ratios from the same statements so the numbers reconcile with one another. A short paragraph on what the company does helps the reader judge whether a ratio is high or low for its industry.
How the IBF 5040 Module 2 example is put together
The paper introduces the company's size and the decision ahead. A ratio table covers liquidity, activity, debt and profitability, and the text interprets the weak points. A DuPont section decomposes return on equity and shows how much comes from debt. A forecasting section computes additional funds needed for 10 percent growth in a table and shows how inventory reduction could supply much of it. The conclusion links the analysis back to the buyback decision from Module 1, so the course's thread continues. Each forecast line traces back to the opening statements. The paper also tests an alternative, a shorter inventory cycle, to show how much the forecast depends on one assumption. Research on how firms finance growth places the result in context, and each section ends with a sentence that says what the reader should take from it.
IBF 5040 Module 2 rubric: what earns full marks
Mentors grade this assignment on correct ratio calculations, meaningful interpretation, accurate use of the DuPont identity and a sound forecast with stated assumptions. Answers that connect ratios to decisions, such as borrowing capacity or working capital, earn more than tables alone. Explaining what drives return on equity, and how the forecast changes under different assumptions, shows understanding. Clear tables with units, and a conclusion that uses the numbers, make the analysis easy to follow and grade. Papers that test what happens when one input changes, such as inventory days or the payout ratio, earn credit for judgment. Mentors also notice whether the student understands that the percent-of-sales method suits a company running near capacity and becomes less accurate when spare capacity exists, so stating that limit in a sentence shows maturity.
Common IBF 5040 Module 2 mistakes, and how to avoid them
Marks slip when ratios go unexplained, when average and year-end balances are mixed silently or when a forecast hides its assumptions. Others forget that retained earnings depend on the forecast year's sales. Show formulas and units. Compare with a benchmark or prior year. Write the percent-of-sales assumptions in a sentence. Test how the funds needed change if one assumption changes, such as inventory days. Some also treat the equity multiplier as a measure of profitability rather than of indebtedness, which inverts its meaning. Recheck any surprising ratio against the statement line it came from before interpreting it. A free first sample on your own IBF-5040 Module 2 statements is available on request.
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IBF 5040 Module 2 questions, answered
Where can I find a free IBF 5040 Module 2 sample paper?
Ratios, a DuPont breakdown and a funds-needed forecast for the parts maker are worked above.
What is the DuPont identity?
Passaic's 15.1 percent return on equity is its 5.7 percent margin times 1.07 turnover times a 2.5 equity multiplier.
What is the percent-of-sales method?
A forecasting method that assumes assets and spontaneous liabilities grow in proportion to sales, to estimate financing needs.
How is additional funds needed calculated?
Required increase in assets, less the spontaneous increase in liabilities, less the addition to retained earnings.
Why does debt raise return on equity?
Borrowed money increases the assets earning returns for each dollar of equity, but it also raises financial risk.