UNIVERSIDAD DE MONTERREY

División de Negocios

Finanzas Corporativas

“Caso Chrysler”

Oswaldo Solórzano - 593353

“Doy mi palabra que he realizado esta actividad con integridad académica”

Case Studies in Finance
Case 5: Chrysler
Ratio Analysis

Before Chysler merged to become DaimlerChrysler AG, they were presented with a takeover
bid of $55 per share by MGM billionaire Kirk Kerkorian and former Chrysler chairman Lee
Iacocca. Kirk Kerkorian was a stockholder in Chrysler and an experienced takeover financier
who apparently found Chrysler to be a good buy. Chrysler rejected the offer, however, stating
that the firm was not for sale. Further, many Wall Street experts felt that Kerkorian could not
come up with the $20 billion necessary to complete the deal.

After Chrysler rejected Kirk Kerkorian's bid of $55 per share, Kerkorian decided to have his
people repeat the analysis of the firm's financial performance over the two most recent years to
determine if he should increase his bid in this friendly takeover attempt. To measure the
financial performance of Chrysler over the past two years, key financial ratios will have to be
computed and compared with industry averages. To help in this endeavor, Chrysler's financial
statements are found on the following pages.

Chrysler Corporation's Balance Sheet

for the year ending December 31 (in millions)
This Last
year year
Assets
Current Assets
Cash and cash equivalents $ 5,543 $ 5,145
Marketable securities $ 2,582 $ 3,226
Accounts receivable $ 2,003 $ 1,695
Inventories $ 4,448 $ 3,356
Prepaid taxes $ 985 $ 1,330
Finance receivables $13,623 $12,433
Total Current Assets $29,184 $27,185
Property & equipment $20,468 $18,281
Less: Accumulated Depreciation $ 7,873 $ 7,208
Net Plant & Equipment $12,595 $11,073
Other Assets
Special tools $ 3,566 $ 3,643
Intangible assets $ 2,082 $ 2,162
Deferred tax assets $ 490 $ 395
Other assets $ 5,839 $ 5,081
Total Assets $53,756 $49,539

Liabilities
Current Liabilities
Accounts payable $ 8,290 $ 7,826
Short-term debt $ 2,674 $ 4,645
Accrued liabilities $ 7,032 $ 5,582
Other payments $ 1,661 $ 811
Total Current Liabilities $19,657 $18,864
Long-term Liabilities
 Long-term debt $ 9,858 $ 7,650
Accrued employee benefits $ 9,217 $ 8,595
Other non-current liabilities $ 4,065 $ 3,736
Total Long-term Liabilities $23,140 $19,981
Total Liabilities $42,797 $38,845

Stockholder's Equity
Preferred stock $ 0 $ 2
Common stock (at $1 par) $ 408 $ 364
Additional paid-in capital $ 5,506 $ 5,536
Retained earnings $ 6,280 $ 5,006
Treasury stock ($1,235) ($ 214)
Total Shareholder's Equity $10,959 $10,694

Total Liabilities and Share. Equity $53,756 $49,539

Chrysler Corporation's Income Statement

for the year ending December 31, (in millions)
This Last
year year
Sales revenue $53,195 $52,235
Less: Cost of goods sold $41,304 $38,032
Gross profits $11,891 $14,203
Less: Operating expenses
Selling & admin. $4,064 $3,933
Pension $ 405 $ 714
Nonpension post ret. $ 758 $ 834
Depreciation $1,100 $ 994
Amort. of tools $1,120 $ 961
Total operating expenses $ 7,447 $ 7,436
Operating profits $ 4,444 $ 6,767
Less: Interest expenses $ 995 $ 937
Net profit before taxes $ 3,449 $ 5,830
Less: Taxes (40%) $ 1,380 $ 2,332
Net profit after taxes $ 2,069 $ 3,498

Industry Average Financial ratios this year and last year

This Last
year year
Liquidity
Net Working Capital $5,056 $4,892
Current Ratio 1.78 1.69
Quick Ratio (Acid Test) 1.55 1.51

Activity
Inventory Turnover 7.41 7.58
Average Age of Inventory .021 .021
Average Collection Period 22.8 23.4
Fixed Asset Turnover 1.54 1.62
Total Asset Turnover .89 .91

Debt
Debt 75% 77%
Times Interest Earned 6.4 7.0

Profitability
Gross Profit Margin 24% 28%
Net Profit Margin 4.7% 4.9%
Return on Total Assets 4.6% 4.7%
Return on Equity 20.7% 33.8%

Questions

1. Compute Chrysler's financial ratios for the past two years.

2. Compare these ratios to the industry's average. Comment on Chrysler's strengths and
weaknesses by ratio category.
3. Should Kerkorian have pursued the purchase of Chrysler?
4. If Kerkorian did not want to takeover Chrysler, what other reasons might he have had
for trying to convince other people that Chrysler was a takeover candidate?

Copyright © 1995-2004 by Addison Wesley A division of Pearson Education Legal Disclaimer

1. Compute Chrysler's financial ratios for the past two years.

Net working capital = current asset - current liability (Capital Neto de Trabajo)

This year:

= 29,184 - 19,657 = 9,527

Last year:

= 27,185 - 18,864 = 8,321

Current ratio = current asset / current liability (Indice de Solvencia)

This year:

= 29,184 / 19,657 = 1.48

Last year:

= 27,185 / 18,864 = 1.44

Quick Ratio = Quick asset / Current liability (Prueba de Acido)

This year:

= 24,736 / 19,657 = 1.26

Last year:

= 23,829 / 18,864 = 1.26

Inventory Turnover = Cost of Goods Solds / Ave. Inventory (Rotacion de Inventario)

This year:

= 41,304 / 4,448 = 9.29

Last year:

= 38,032 / 3,356 = 11.32

Ave. age of inventory = Inventory turnover / # of busn. Days (Plazo Promedio de

Inventario)

This year:

= 7.41 / 360 = .021

Last year:

= 7.58 / 360 = .021

Ave. Collection Period = # of busn. days / A/R turnover (Plazo Promedio de CxC)

This year:

= 360 / 22.8 = 15.79

Last year:

= 360 / 23.4 = 15.39

Fixed asset turnover = Net sales / Ave. fixed asset (Rotacion de Activos Fijos)

This year:

= 53,195 / 12,595 = 4.22

Last year:

= 52,235 / 11,073 = 4.72

Total asset turnover = Net sales / Ave. total assets (Rotacion del Activo Total)

This year:

= 53,195 / 53,756 = .99

Last year:

= 52,235 / 49,539 = 1.05

Debt ratio = Total liabilities / Total assets (Razón de Enduedamiento)

This year:

= 42,797 / 52,756 = 80%

Last year:

= 38,845 / 49,539 = 78%

TIE = EBIT / Interest (Veces que se ha ganado el interés)

This year:

= 4,444 / 995 = 4.47

Last year:

= 6,767 / 937 = 7.22

GPM = Gross profit / Net sales (Margen Bruto de Utilidades)

This year:

= 11,891 / 53,195 = 22%

Last year:

= 14,203 / 52,235 = 27%

NPM = Net profit / Net sales (Margen Neto de Utilidades)

This year:

= 2,069 / 53,195 = 3.9%

Last year:

= 3,498 / 52,235 = 6.7%

Return on total asset = Net income / Total assets (Rendimiento del Activo Total)

This year:

= 2,069 / 53,756 = 3.8%

Last year:

= 3,498 / 49,539 = 7.1%

Return on equity = Net income / Total equity (Rendimiento de la Inversion)

This year:

= 2,069 / 10,959 = 18.9%

Last year:

= 3,498 / 10,694 = 32.7%

2. Compare these ratios to the industry's average. Comment on Chrysler's strengths

and weaknesses by ratio category.

Chrysler tiene un índice de liquidez promedio más bajo que el de liquidez de la industria

Chrysler puede tener un capital de trabajo neto mayor que el estándar o el promedio de la
industria. Pero su índice de solvencia y prueba de ácido es inferior a la media de la industria.
Así que llegamos a la conclusión de que, al parecer, el activo actual es un poco bajo en relación
con su responsabilidad.

El plazo promedio de inventario y el plazo promedio de cuentas por cobrar de Chrysler es

inferior a la media de la industria. Esto significa que el inventario y la rotación de las cuentas
por cobrar es mayor o mayor que el promedio de la industria, lo cual es bueno. Esto sucede
porque se cobra el crédito y se vende el inventario rápidamente.

La razón de endeudamiento de Chrysler es más alta que la relación de deuda de la industria.

Pero el interés acumulado de los tiempos es menor que el de la industria. Sin embargo, es
bastante bueno porque aún es lo suficientemente alto para cumplir con su obligación de deuda.

El beneficio neto y el margen de beneficio bruto son un poco más bajos que el promedio. Y los
rendimientos son más bajos también. Pero esto no será una amenaza para Chrysler porque la
diferencia no es tan alta

3. Should Kerkorian have pursued the purchase of Chrysler?

Según el análisis, Chrysler no tenía ningún problema financiero. Por lo que debió de perseguir
la compra de Chrysler.

4. If Kerkorian did not want to takeover Chrysler, what other reasons might he have
had for trying to convince other people that Chrysler was a takeover candidate?

Kerkorian tenía una gran participación en las acciones ordinarias de Chrysler. Cada vez que
surgen rumores de que una compañía está experimentando una fusión o adquisición, el precio de
las acciones de esa compañía tiende a aumentar. Es posible que Kerkorian tuviera la intención
de vender sus participaciones de Chrysler y solo quisiera que el precio de las acciones subiera
cuando él las vendió.