Report onFinancial Analysis of Omni Services Incorporated

Financial Analysis of Omni Services Incorporated

Prepared for:M. Sadiqul Islam, Ph.D.Course instructorF-307: Analysis of Security InvestmentLecturerDepartment of financeUniversity of Dhaka

Prepared by:

Zarin Tasnim17-009Tamanna Nigar 17-031Fatema-Tuj-Johora Shorna 17-119Samanta Haque 17-191

Date of Submission: February 18, 2014

Department of FinanceFaculty of Business StudiesUniversity of Dhaka

AcknowledgementIn the preparation of this report, we constantly meet many stumbling blocks. However, the presence of various people helped to simplify matters and hence made the completion of this report possible.

Firstly, we would like to thank our course instructor, M. Sadiqul Islam, Ph.D. (Professor of department of finance), whos constant presence and words of encouragement inspired us to do our very best. Without his guidance and availability, this report would not have been possible and gave the directions we needed to prepare this report.

Secondly, we would also like to take this opportunity to acknowledge the help provided to us by some personals of those we surveyed for giving us time from their busy schedule, providing us with information that was required to complete the report.

Finally, we would like to thank each individual group member and the numerous people who offered us help and kindly answered all the questions in our survey and gave advice and suggestions to ensure that we provide an in-depth report on the analysis of business environment of cement industry and its cost behavior.

18th February, 2014M. Sadiqul Islam, Ph.D. ProfessorDepartment of FinanceFaculty of Business StudiesUniversity of Dhaka

Subject: Submission of group report on Financial Analysis of Omni Services IncorporatedDear Sir:Here is the group report on the Financial Analysis of Omni Services Incorporated that you asked us to prepare as a part of requirement of our BBA Program Analysis of Security Investment course F-307. In presenting this report, we have tried our level best to include all the relevant information and the examples to make the report informative and comprehensive.This report was assigned to us with a view to scrutinizing our skill and flamboyance when it comes to banking know-how. Moreover, the purpose of this term paper was to extract our inner ability & enhance our banking related potentials. The information of this paper is directly collected from the case manuscript provided to us & our course textbook & should not go beyond the norm.We hope you will find the report in appropriate manner. Looking forward to know your feedback.Sincerely yours,.Samanta Haque(On behalf of the group)B.B.A. 17th Batch University of Dhaka

Executive summaryAs a course requirement for Analysis of Security Investment course, F-307 the report is on a Financial Analysis of Omni Services Incorporated, which is assigned to us by our honorable course teacher, M. Sadiqul Islam, Ph.D., Professor, Department of Finance, University of Dhaka.The report deals with the study, and research we have done on the case that was given to by our honorable course instructor. The case is on Omni Services Incorporation which is traditionally considered to be a part of industrial laundry business but now known as textile lessors. As Omni Services INC is an USA company at first the economic analysis of the country is portrayed. After portraying the economic analysis company analysis is included following by an elaborate description of the company in question Omni Services INC. To understand the company better ratio analysis is included. The information was available in the case for ratio analysis. We have done Dupont analysis to get a broader picture f the return earned by the company. Then the SWOT analysis is provided with the help of the industry analysis which we have done in the earlier part. We have prepared problem statement which is the most important part of the report. after studying the case thoroughly we came to determine the problem faced by Omni Services INC. the problem was to determine whether the company should go for merger with a strong French company also in rental linen business The Societe Generale de Location et Services Textiles (Textiles). We have figured out the best possible solution for this problem by using valuation methods such as FCFF (free cash flow to firm), FCFE ( free cash flow to equity) and DDM ( dividend discount model) to determine the price per share of Omni via the valuation of the firm. Income statement, balance sheet was given from the year 1973 to 1979. But we had to calculate the price per share of 1985 so we have prepared forecasted income statement, balance sheet from 1980 to 1985. We have assumed growth rate from historical trends. After describing elaborately the solution of the problems and alternative course of action we have given a recommendation for the merger decision which according to us will benefit both the parties. We have come to the decision by calculating the share price of Omni. In the recommendation we have provided the merger price for both year 1980 and 1985. And have calculated the prices of the total shares. And justified our recommendation with proper explanation.

Table of Contents1.Introduction21.1.Origin of the Report21.2.Objective of the Report21.3.Scope of the Report:31.4.Methodology:31.5.Limitations:32.Economic analysis of USA:6Trade & Investment:7Unemployment:8Inflation:92.1.Financial industry crisis:92.2.Political fallout:123.Company overview:153.1.Management body of Omni:153.2.Omnis products and services:153.3.Areas served by Omni Services INC:153.4.Location of Omni Subsidiaries:163.5.Specialty of Omni Services INC:164.Industry analysis:184.1.Market characteristics:184.2.Porter five forces Model194.3.PESTEL analysis:214.4.Key Players:244.5.Competitive Advantage:265.Ratio Analysis285.1.Liquidity ratio:285.2.Solvency Ratio:305.3.Profitability Indicator Ratio:335.4.Debt Ratios:365.5.Operating Performance Ratios:395.6.Cash-Flow Indicator Ratios:415.7.DuPont Analysis425.8.SWOT Analysis of Omni Services:436.Comparison of Omni Services INC with industry:477.Problem Statement:628.Solution to problem no 1:658.1.Finding out the value of the firm:658.2.Finding out the value of Stock:669.Solution to problem using FCFF ( Free cash flow to firm):699.1.Finding out the value of the firm:6910.Alternative method (Using FCFE Method):7411.Alternative method (Using Dividend Discount Model):7712.Recommendations:7913.Conclusion:8214.References:83

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Chapter 1Introduction of report Origin of the report Objection of the report Scope of the report Methodology LimitationFinancial Analysis of Omni Services Incorporated1. IntroductionThe report attempts to explain the problems faced by Omni Services Incorporated which is trying to survive the competitive market of industrial laundry business now known as textile lessors. To survive this competitive market the company needs to implement some strategies. There are some problems that Omni Services have faced and our report requirement is to give solution for those problems 0. Origin of the ReportAs a course requirement for Analysis of Security Investment course, F-307 the report is on the empirical analysis of Omni Services INC. which is assigned to us by our honorable course instructor, M. Sadiqul Islam, Ph.d. Professor, Department of Finance, and University of Dhaka.0. Objective of the ReportThe report deals with the study, and research we have done on the case that was given to by our honorable course instructor. The case is on Omni Services Incorporation which is traditionally considered to be a part of industrial laundry business but now known as textile lessors. We, the group members, are trying our level best to obtain the precise and related facts. The subsequent group report was assigned as a part of mandatory requirement for F-307 course. Some more definite objectives of the report were to:1. To analyze the background and main features of 1. To depict an industry analysis to understand the position of Omni Service in the industry 1. To point out the problems faced by the company in current situations and giving solutions to the problems.1. To provide sufficient data either in support of merging or against with a French company called the Societe Generale de Location et Services Textiles1. To give an overall overview of the companys position in comparison with its competitors. 0. Scope of the Report:The report mainly examines the current financial position of Omni Services Incorporation and gives solution to the problems faced by the company. 0. Methodology:This report has been completed by taking information from different relevant sources. However, this report also consists of a significant amount of data obtained from both primary and secondary sources. We have collected the data mainly from two sources. These sources are given below:i. Primary Data Source:The case was given to us by our honorable course instructor M. Sadiqul Islam, Ph.d, which is used as primary source. This case deals with a textile lessors company named Omni Services, Incorporated. The theoretical segments were mainly ascertained from the textbooks suggested under this course.ii. Secondary Data Source:In addition to the aforementioned two sources of data, different websites and related articles were taken into consideration for preparing the report.

0. Limitations:The most important factor constraining our study was the difficulty regarding getting the face to face data exclusive to the risk factor. Thats why, despite our utmost efforts possible; we couldnt come up with satisfactory level of different data.On the other hand Research work is very much comprehensive. It is an accumulation of both information and estimation of different factors. It requires a great effort and long sound planning to make this report. It is true that we got help from many responsible people. But still we faced some problem. Because of some unavoidable reasons; we, sometime, face problem in some portion of the report. But we tried our level best to overcome this. The report was on financial planning of Omni Services INC. we have prepared an elaborate company overview, industry overview for this report. In this respect there may be some lacking in the report because of our knowledge limitation. We tried to write the report in a sequential way but there may be some problems in the sequence of the report. But all these errors are totally unintentional. At the end we are very happy to present this report to the readers and its success will depend on the positive response of the readers.

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Chapter 2 Analysis of Economy: USA 83 | Page

Economic analysis of USA: The economy of the United States is the world's largest single national economy. Its GDP at purchasing power parity is also the largest of any single country in the world, approximately a fifth of the global total. The United States has a mixed economy and has maintained a stable overall GDP growth rate, a moderate unemployment rate, and high levels of research and capital investment. Its five largest trading partners are Canada, China, Mexico, Japan, and Germany.The recession which occurred in the early 1980's was the most severe and the most significant in terms of economic policy of the post-World War II recessions.The economic upheaval of the 1970s had important political consequences. The American people expressed their discontent with federal policies by turning out Carter in 1980 and electing former Hollywood actor and California governor Ronald Reagan as president.The early 1980s recession was a severe recession in the United States which began in July 1981 and ended in November. The primary cause of the recession was a contractionary monetary policy established by the Federal Reserve System to control high inflation. The wake of the 1973 oil crisis and the 1979 energy crisis, stagflation began to afflict the economy of the United StatesThe real GDP from 1980 onward was fluctuating up and down and on average not trending in either direction. It is perhaps best to refer to this condition as an economic malaise rather than a recession because the economy was in difficulty more than a year before it was officially an economic recession.The immediate cause of the Great Depression of the 1930's was the catastrophic collapse of investment purchases. There were prior causes, such as the real interest rate stemming from restrictive monetary policy, but it is in investment purchases that these factors have their effect.The profile for mid-1981 to 1982 was especially disturbing. It is the classic picture of a catastrophic collapse in progress.What the GDP statistics show is that prior to 1979 the GDP had been growing by about fifty to a hundred billion dollars per quarter. In 1979 the growth continues but at a slower rate, about thirty billion per quarter. Then after the second quarter of 1980 there is an actual fall in GDP of about five billion and then another fall of nine billion in the next quarter. The economy then recovers in the fourth quarter of 1980 and adds a hundred billion and another hundred billion in the first quarter of 1981. The economy then falls in the second quarter only to rise in the third and fall in the fourth. The erratic pattern continues in 1982 but in 1983 the economy commences to grow again.Only part of the period would fit the notion of recession as a period of decline in GDP and even less of it would fit the strict definition of a recession as a period in which the GDP declined for two quarters or more. But clearly the whole period of 1980-82 is one of an economic malaise and represents an episode of economic difficulty. Although recessions are defined in terms of output (GDP) they are felt in terms of the unemployment rate.There was a perceptible rise in the unemployment rate in 1980. The unemployment rate rose as the period of no growth in output persisted while the labor force grew. The peak unemployment rates persisted after the economy began to grow again in 1983 because of the backlog of unemployed workers that had accumulated during the period of no growth. Perhaps most important, after the recovery of growth the unemployment rate stayed at a higher level than it had been at before the recession.So far there has been no mention of the cause of the recession or malaise or whatever one wants to call it. The cause clearly was Paul Volcker's tight money policy which the Fed carried out to kill the chronic inflation that had developed in the U.S. economy during the 1970's. The real interest rate is the key variable because it determines the level of investment. However, the level of investment is an accumulation of work on past initiated investment projects as well as the current ones so the level of investment has a lagged response to the real interest rate.A subsidiary issue is the impact of the Reagan administration's fiscal policy. Some taxes were cut, government expenditures in some fields were also cut and the net impact has to be evaluated. There were record high levels of deficits, but macroeconomic analysis indicates that governmental actions attempting to stimulate the economy will not be effective unless there are deficits.There was also a trade deficit that worried politicians. The trade deficit was an effect of the high value of the dollar relative to other currencies and this in turn was the result of the high real interest rates in the U.S. compared to other countries. Trade & Investment:The key variable affected by the high real interest rates was the level of investment purchases. Investment purchases started to drop in the third quarter of 1979, the quarter in which the policy of more severe constraint on monetary growth was announced, and continued downward to the third quarter of 1980. From then there was a partial recovery until the third quarter of 1981. Thereafter investment purchases turned downward and continued downward until the fourth quarter of 1982. By that quarter investment purchases were off the previous peak of the second quarter of 1979 by almost $61 billion. Had there been no compensating increases in the other components of aggregate demand the GDP would have been down almost $134 billion. This would have led to an unemployment rate of about 10.4 percent instead of the 8 percent rate that prevailed.Had there been no compensating increases in the other components of aggregate demand the levels of investment and GDP would have continued downward and there would have been a full blown depression. But there were compensating changes. The most publicized was the Reagan Tax Cut. There were cuts in some fields of Federal government purchases but increases, notably in defense, in others.The tax cut was justified in terms of Supply-side Economics but equally well could have been justified in terms of demand-side stimulation of the economy. The increase in government purchases along with the tax cut led one economist to characterize the economic policy of the Reagan administration as being "Keynesianism on steroids." Regardless of how the policies were publicized and characterized the end result is that they kept the anti-inflation policy of the Volcker Fed from recreating the conditions of 1929-1930 when the Fed precipitated the Great Depression. For more on the role of Fed policies in creating the Great Depression see Depression Money.It is to be noted that the deficits of the Federal Government did not "crowd out" private investment. On the contrary, the expectations of economic recovery and growth induced higher levels of investment purchases. In other words, private borrowing was enticed in. Where did the funds come from for businesses to borrow? They came from the increased savings generated by the recovery of the economy. It is also to be noted that the increased deficits of the Federal government did not lead to increased inflation. On the contrary during the time of the increased deficits the chronic inflation of the 1970's collapsed and did not re-emergeThe nation endured a deep recession throughout 1982. Business bankruptcies rose 50 percent over the previous year. Farmers were especially hard hit, as agricultural exports declined, crop prices fell, and interest rates rose. But while the medicine of a sharp slowdown was hard to swallow, it did break the destructive cycle in which the economy had been caught. By 1983, inflation had eased, the economy had rebounded, and the United States began a sustained period of economic growth. The annual inflation rate remained under 5 percent throughout most of the 1980s and into the 1990s.Unemployment:Unemployment had risen from 5.1% in January 1974 to a high of 9.0% in May 1975. Although it had gradually declined to 5.6% by May 1979, unemployment began rising again thereafter. It jumped sharply to 6.9% in April 1980 and to 7.5% in May 1980. A mild recession from January to July 1980 kept unemployment high, but despite economic recovery unemployment remained at historically high levels (about 7.5%) through the end of 1981. In mid-1982, Rockford, Illinois had the highest unemployment of all Metro areas with 25%. In September 1982, Michigan led the nation with 14.5%. Alabama was second with 14.3% and West Virginia was third with 14.0%. The YoungstownWarren Metropolitan Area had an 18.7% rate, the highest of all Metro areas. Stamford, Connecticut had the lowest with 3.5% unemployment.The peak of the recession was in November and December 1982, when the nationwide unemployment rate was 10.8%, highest since The Great Depression. As of 2013, it is still the highest since the 1930s. In November, West Virginia and Michigan had the highest unemployment with 16.4%. Alabama was in third with 15.3%. South Dakota had the lowest unemployment rate in the nation, with 5.6%. Flint, Michigan had the highest unemployment rate of all Metro areas with 23.4%. In March 1983, West Virginia's unemployment rate hit 20.1%. In the Spring of 1983, thirty states had double digit unemployment rates. When Reagan won re-election in 1984, the latest unemployment numbers (August 1984) showed West Virginia still had the highest in the nation, 13.6%, with Mississippi in second with 11.1%, and Alabama in third with 10.9%.Inflation:Inflation, which had averaged 3.2% annually in the post-war period, had more than doubled after the 1973 oil shock to a 7.7% annual rate. Inflation reached 9.1% in 1975, the highest rate since 1947. Inflation declined to 5.8% the following year, but then edged higher. By 1979, inflation reached a startling 11.3% and in 1980 soared to 13.5%. A brief recession occurred in 1980. Several key industriesincluding housing, steel manufacturing and automobile productionexperienced a downturn from which they did not recover through the end of the next recession. Many of the economic sectors that supplied these basic industries were also hard-hit. Each period of high unemployment was caused by the Federal Reserve, as it substantially increased interest rates to reduce high inflation; each time, once inflation fell and interest rates were lowered, unemployment slowly fell.Determined to wring inflation out of the economy, Federal Reserve chairman Paul Volcker slowed the rate of growth of the money supply and raised interest rates. The federal funds rate, which was about 11% in 1979, rose to 20% by June 1981. The prime interest rate, a highly important economic measure, eventually reached 21.5% in June 1982.

Financial industry crisis:The recession had a severe effect on financial institutions such as savings and loans and banks. Banks:The recession came at a particularly bad time for banks due to a recent wave of deregulation. The Depository Institutions Deregulation and Monetary Control Act of 1980 had phased out a number of restrictions on banks' financial practices, broadened their lending powers, and raised the deposit insurance limit from $40,000 to $100,000 (raising the problem of moral hazard). Banks rushed into real estate lending, speculative lending, and other ventures just as the economy soured. By mid-1982, the number of bank failures was rising steadily. Bank failures reached a post-depression high of 42 as the recession and high interest rates took their toll. By the end of the year, the Federal Deposit Insurance Corporation (FDIC) had spent $870 million to purchase bad loans in an effort to keep various banks afloat.In July 1982, Congress enacted the GarnSt. Germain Depository Institutions Act of 1982 (GarnSt. Germain), which further deregulated banks as well as deregulating savings and loans. The GarnSt. Germain act authorized banks to begin offering money market accounts in an attempt to encourage deposit in-flows, removed additional statutory restrictions in real estate lending, and relaxed loans-to-one-borrower limits. The legislation encouraged a rapid expansion in real estate lending at a time when the real estate market was collapsing, increased the unhealthy competition between banks and savings and loans, and encouraged overbuilding of branches. The recession affected the banking industry long after the economic downturn technically ended in November 1982. In 1983, another 50 banks failedeasily beating the Great Depression record of 43 failures set in 1940. The Federal Deposit Insurance Corporation (FDIC) listed another 540 banks as "problem banks" on the verge of failure.In 1984, the Continental Illinois National Bank and Trust Company, the nation's seventh-largest bank (with $45 billion in assets), failed. The FDIC had long known of Continental Illinois' problems. The bank had first approached failure in July 1982 when the Penn Square Bank, which had partnered with Continental Illinois in a number of high-risk lending ventures, collapsed. But federal regulators were reassured by Continental Illinois executives that steps were being taken to ensure the bank's financial security. After Continental Illinois' collapse, federal regulators were willing to let the bank fail in order to reduce moral hazard and encourage other banks to rein in some of their more risky lending practices. But members of Congress and the press felt Continental Illinois was "too big to fail." In May 1984, federal banking regulators were forced to offer a $4.5 billion rescue package to Continental Illinois.Continental Illinois may not have been "too big to fail," but its collapse could have caused the failure of some of the biggest banks in the United States. The American banking system had been significantly weakened by the severe recession and the effects of deregulation. Had other banks been forced to write off loans to Continental Illinois, institutions such as Manufacturers Hanover Trust Company, Bank of America and perhaps Citicorp would have been insolvent? The S&L crisis:The recession also significantly worsened a crisis in the savings and loan industry. In 1980, there were approximately 4,590 state- and federally chartered savings and loan institutions (S&Ls) with total assets of $616 billion. Beginning in 1979, S&Ls began losing money due to spiraling interest rates. Net S&L income, which totaled $781 million in 1980, fell to a loss of $4.6 billion in 1981 and a loss of $4.1 billion in 1982. Tangible net worth for the entire S&L industry was virtually zero. The Federal Home Loan Bank Board (FHLBB) regulated and inspected S&Ls, and administered the Federal Savings and Loan Insurance Corporation (FSLIC), which insured deposits at S&Ls. But the FHLBB's enforcement practices were significantly weaker than those of other federal banking agencies. Until the 1980s, savings and loans had limited lending powers. The FHLBB was, therefore, a relatively small agency overseeing a quiet, stable industry. Accordingly, the FHLBB's procedures and staff were inadequate to supervise S&Ls after deregulation gave the financial institutions a broad array of new lending powers. Additionally, the FHLBB was unable to add to its staff because of stringent limits on the number of personnel it could hire and the level of compensation it could offer. These limitations were placed on the agency by the Office of Management and Budget, and were routinely subject to the political whims of that agency and political appointees in the Executive Office of the President. In financial circles, the FHLBB and FSLIC were called "the doormats of financial regulation.Because of its weak enforcement powers, the FHLBB and FSLIC rarely forced S&Ls to correct poor financial practices. The FHLBB relied heavily on its persuasive powers and the states to enforce banking regulations. With only five enforcement lawyers, the FHLBB was in a poor position to enforce the law even had it wanted to.One consequence of the FHLBB's lack of enforcement abilities was the promotion of deregulation and aggressive, expanded lending to forestall insolvency. In November 1980, the FHLBB lowered net worth requirements for federally insured S&Ls from 5% of deposits to 4%. The FHLBB further lowered net worth requirements to 3% in January 1982. Additionally, the agency only required S&Ls to meet these requirements over a 20-year period. This phase-in rule meant that S&Ls less than 20 years old had practically no capital reserve requirements. This encouraged extensive chartering of new S&Ls, because a $2 million investment could be leveraged into $1.3 billion in lending.Congressional deregulation worsened the S&L crisis. The Economic Recovery Tax Act of 1981 encouraged a boom in commercial real estate building projects. The passage of DIDMCA and the GarnSt. Germaine act expanded the authority of federally chartered S&Ls to make acquisition, development, and construction real estate loans and eliminated the statutory limit on loan-to-value ratios. These changes allowed S&Ls to make high-risk loans to developers. Beginning in 1982, many S&Ls rapidly shifted away from traditional home mortgage financing and into new, high-risk investment activities such as casinos, fast-food franchises, ski resorts, junk bonds, arbitrage schemes, and derivative instruments.Federal deregulation also encouraged state legislatures to deregulate state-chartered S&Ls. Unfortunately; many of the states which deregulated S&Ls were also soft on supervision and enforcement. In some cases, state-chartered S&Ls had close political ties to elected officials and state regulators, which further weakened oversight.As the risk exposure of S&Ls expanded, the economy slid into the recession. Soon, hundreds of S&Ls were insolvent. Between 1980 and 1983, 118 S&Ls with $43 billion in assets failed. The Federal Savings and Loan Insurance Corporation (FSLIC), the federal agency which insured the deposits of S&Ls, spent $3.5 billion to make depositors whole again. The FSLIC pushed mergers as a way to avoid insolvency. From 1980 to 1982, there were 493 voluntary mergers and 259 forced mergers of savings and loans overseen by the agency. Despite these failures and mergers, there were still 415 S&Ls at the end of 1982 that were insolvent.Federal action initially caused this problem by allowing these institutions to get involved in creating wealth through unhealthy fractional reserve practices, a.k.a. lending out much more money than they could ever afford to pay back out to customers if they came to withdraw their money. This ultimately led to S&Ls failure. Later, the governments inaction worsened the industry's problems. Responsibility for handling the S&L crisis lay with the Cabinet Council on Economic Affairs (CCEA), an intergovernmental council located within the Executive Office of the President. At the time, the CCEA was chaired by Treasury Secretary Donald Regan. The CCEA pushed the FHLBB to refrain from re-regulating the S&L industry, and adamantly opposed any governmental expenditure to resolve the S&L problem. Furthermore, the Reagan administration did not want to alarm the public by closing a large number of S&Ls. These actions significantly worsened the S&L crisis.The S&L crisis lasted well beyond the end of the economic downturn. The crisis was finally quelled by passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The estimated total cost of resolving the S&L crisis was more than $160 billion.Political fallout:The recession was nearly a year old before President Ronald Reagan stated on October 18, 1981, that the economy was in a "slight recession". The recession, which has been termed the "Reagan recession coupled with budget cuts (which were enacted in 1981 but began to take effect in 1982), led many voters to believe that Reagan was insensitive to the needs of average citizens. In January 1983, Reagan's popularity rating fell to 35%approaching levels experienced by Richard Nixon and Jimmy Carter at their most unpopular. Although his approval rating did not fall as low as Nixon's during the Watergate scandal, Reagan's reelection seemed unlikely.Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a corporate tax increase in 1982. However, he refused to raise income taxes or cut defense spending. The Tax Equity and Fiscal Responsibility Act of 1982 instituted a three-year, $100 billion tax hikethe largest tax increase since World War II.The 1982 mid-term Congressional elections were largely viewed as a referendum on Reagan and his economic policies. The election results proved to be a setback for Reagan and the Republicans. The Democrats gained 26 House seats, which at the time was the most for the party in any election since the "Watergate year" of 1974. However, the net balance of power in the Senate was unchanged.The Size of the Government:The central theme of Reagan's national agenda, however, was his belief that the federal government had become too big and intrusive. In the early 1980s, while he was cutting taxes, Reagan was also slashing social programs. Reagan also undertook a campaign throughout his tenure to reduce or eliminate government regulations affecting the consumer, the workplace, and the environment. At the same time, however, he feared that the United States had neglected its military in the wake of the Vietnam War, so he successfully pushed for big increases in defense spending.The combination of tax cuts and higher military spending overwhelmed more modest reductions in spending on domestic programs. As a result, the federal budget deficit swelled even beyond the levels it had reached during the recession of the early 1980s. From $74,000 million in 1980, the federal budget deficit rose to $221,000 million in 1986. It fell back to $150,000 million in 1987, but then started growing again. Some economists worried that heavy spending and borrowing by the federal government would re-ignite inflation, but the Federal Reserve remained vigilant about controlling price increases, moving quickly to raise interest rates any time it seemed a threat. Under Chairman Paul Volcker and his successor, Alan Greenspan, the Federal Reserve retained the central role of economic traffic cop, eclipsing Congress and the president in guiding the nation's economy.

Chapter 3 Company Overview: Omni Services Incorporation

Management body of Omni Omnis products and services Areas served by Omni Services INC Location of Omni Subsidiaries Specialty of Omni Services INC

Company overview:OMNI Services Inc. was a holding company for 12 companies. Each of the subsidiaries was called Rental Uniform Service and was located in the eastern United States. Mr. Martin had learned about the business while working for an industrial laundry in Cincinnati, Ohio. In 1954, he went into partnership with his father-in-law to operate a small uniform rental business in Roanoke, Virginia. In partnership with his father-in-law he opened the Culpeper plant in 1959, and Mr. Martin moved to Culpeper to operate it. It was quickly successful, and sales had grown at a rate of 20% almost every year since its founding. The only thing that seemed to stem growth of that operation had been plan fire in 1974.By 1968, Mr. Martin had started new operation in Hanover, Pennsylvania, and Morgantown, West Virginia. The three plants, each called Rental Uniform Service (RUS), were separately incorporated. Even though the shareholders and board members were virtually identical, the internal Revenue Service had treated them as separate entities, and the combined taxes were thus somewhat lower. By 1972, nine RUSs had been added, the separate incorporation tax advantages had disappeared, and the 11 separate operations had become subsidiaries of the newly formed Omni Services Inc.Management body of Omni: Omni had a total of 48 investors, although three were of primary importance: N.B. Martin, the founder, president, and chairman of the board, with 56% of the stock; T.Y. Martin, N.B.s brother, Omnis secretary treasurer, and president of the Culpeper RUS, who held 23%, and the Omni ESOP with 12.5%.Omnis products and services:Omni supplied industrial uniforms to 75000 people. Four days a week, a total of 150 trucks left the plants operated by Omnis 12 rental uniform services. Each day every truck had an established route in a nearby metropolitan area. The driver stopped at such places as service stations, garages, and automobile dealerships to deliver six packaged shirts and trousers delivered were the same as those that the driver had picked up the previous week. The employees names, and often the names of the companies, were stitched on the shirts. The soiled uniforms were returned to the plant for washing or dry cleaning and mending. In addition, Omni provided executive garments for office and management personnel, shop towels, walk mats, fender covers, and linen roll towels.Areas served by Omni Services INC:Most of Omnis business was located in large metropolitan areas, and 11 of its 12 subsidiaries were located on the fringes of those areas. The largest and oldest operation, the plant in Culpeper, served the Washington, D.C area as well as several less populated areas- Culpeper, Charlottesville, and Lynchburg, Virginia.Location of Omni Subsidiaries:OMNI Services Inc. was a holding company for 12 companies. Each of the subsidiaries was called Rental Uniform Service and was located in the eastern United States. The location of Omni Services Incorporated is given below: State college Allentown Alliance Hanover Morgantown Cumberland Culpeper Calhoun Griffin Birmingham Auburn AlbanySpecialty of Omni Services INC:Omni was the first firm of any size in Virginia to offer an employee stock ownership plan ( ESOP) a kind of profit sharing plan in which Omni stock was purchased and held in trust for each employee. None of Omnis 600 employees belonged to a union.

Chapter 4 Analysis of Industry: Textile lessor Industry Industry analysis:Firms like Omni were traditionally considered to be part of the industrial laundry business, but the industry had recently become known as textile lessors.Market characteristics:In the case which was given to us by our course instructor the name of five Rental Uniform Service firms was highlighted. as we were instructed to fins the solution for the problem only with the help of case and not from any other sources the 5 Rental Uniform Service firms along with Omni Services INC was regarded as industry. We have studied the information available to us and have prepared market at a glance diagram. The diagram is drawn below: Market at a glanceMarket at a glance

Market at a Glance

Porter five forces ModelThis model identifies and analyzes 5 competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. According to model the 5 forces that shape our service industry is described below:

Figure: Porters Five Forces model Threat of new entrants:Threat of new entrants is high. More new companies may enter in this market and imitate the products of Omnis. Successful business ideas are imitated a lot. And the sales volume of the industry is high so new companies can enter the market. Bargaining power of suppliers:Bargaining power of suppliers is high as the suppliers are incorporated. Suppliers can influence the quality and price of the goods and services. Bargaining power of customers:For a stable market bargaining power of customers needs to be low. If the number of competition is lower, customers might not have any option but buy the particular product at a high price. Omni is not the only company in the market. It has five more similar product providing competitors. So if the switching cost is lower, customers will buy products from Omnis competitors.

Threat of substitute:Threat of substitute is high. There are five similar rental uniform service firms in the market. The price is one of the most important determining factors. If Omni charges the same or only a bit higher than its competitors, customers will buy the substitute products.

Industry rivalry among the existing firms:There are five rental union service firms other than Omni in the market. These are: Unitog, Rentex, Means services, Servisco and National service industries. So the rivalry among them is high.

PESTEL analysis: A PESTEL analysis is a framework or tool used by marketers to analyze and monitor the macro-environmental (external marketing environment) factors that have an impact on an organization. The result of which is used to identify threats and weaknesses which is used in a SWOT analysis. PESTEL stands for: P Political E Economic S Social T Technological E Environmental L Legal

Figure: The PESTEL Model

All the external environmental factors (PESTEL factors):The external environmental factors of Textile lessor industry previously known as industrial laundry business are described below:

Political FactorsThese are all about how and to what degree a government intervenes in the economy. This can include government policy, political stability or instability in overseas markets, foreign trade policy, tax policy, labor law, environmental law, trade restrictions and so on. It is clear from the list above that political factors often have an impact on organizations and how they do business. Organizations need to be able to respond to the current and anticipated future legislation, and adjust their marketing policy accordingly. Political and regulatory changes in both USA & France will affect the decision of merger.

Economic FactorsEconomic factors have a significant impact on how an organization does business and also how profitable they are. Factors include economic growth, interest rates, exchange rates, inflation, disposable income of consumers and businesses and so on. These factors can further be broken down into macro-economical and micro-economical factors. Macro-economical factors deal with the management of demand in any given economy. Governments use interest rate control, taxation policy and government expenditure as their main mechanisms they use for this. Micro-economic factors are all about the way people spend their incomes. In our case, two countries are involved, USA & France. Omni services inc of USA and textile of France are interested in merger. So any economical change in either country will affect the merger. Social FactorsAlso known as socio-cultural factors are the areas that involve the shared belief and attitudes of the population. These factors include population growth, age distribution, health consciousness, and career attitudes and so on. These factors are of particular interest as they have a direct effect on how marketers understand customers and what drives them. Textile wants to spread their business in USA. So they want to merger with Omni. If the merger happens, customers of Omni will be affected too. Technological FactorsWe all know how fast the technological landscape changes and how this impacts the way we market our products. Technological factors affect marketing and the management thereof in three distinct ways: New ways of producing goods and services New ways of distributing goods and services New ways of communicating with target marketsBoth the companies will be able to use each others resources to make good products. Environmental FactorsThese factors have only really come to the forefront in the last fifteen years or so. They have become important due to the increasing scarcity of raw materials, pollution targets, doing business as an ethical and sustainable company, carbon footprint targets set by governments (this is a good example were one factor could be classes as political and environmental at the same time). These are just some of the issues marketers are facing within this factor. More and more consumers are demanding that the products they buy are sourced ethically and if possible from a sustainable source. Legal FactorsLegal factors include - health and safety, equal opportunities, advertising standards, consumer rights and laws, product labeling and product safety. It is clear that companies need to know what is and what is not legal in order to trade successfully. If an organization trades globally this becomes a very tricky area to get right as each country has its own set of rules and regulations.

Key Players: The company we are focusing on is Omni Services INC. we have learned from the previous section that Omni Services INC is in industrial laundry business. The industrial laundry business is fragmented. Now the industry is known as textile lessors. As multidivisional firms like Omni Services were in direct competition with local businesses that bought their uniforms and serviced their customers in a limited geographical area. Many of Omnis major competition were closely held, and a little financial information was available about those operations. The major competitors of Omni Services INC were:

A brief description of these companies is given below: Rentex:Rentex provided laundry and rental services, linen-supply services and dust control services thought nine facilities. Rentals comprised 100 percent of revenues. There were 640 stockholders and 950 employees. Headquarters in Philadelphia, Pennsylvania.

Servisco:Servisco manufactured, rented and laundered work clothes and uniforms, machine wiping clothes, fender covers and linens. It also provides contract building maintenance, housekeeping consultant services and guard security services. Its main office as in Hillside, New Jersey and it operated through 27 full service panel plants. There were 1501 stockholders and 6300 employees.

Means Services:Means Services provided textile maintenance services by rental to businesses in mid western states, with a concentration on providing work garments, industrial wiping clothes, dust control textiles, bed and table linens, towels, aprons uniforms and continuous towel cabinets. The rental business was 100 percent of its revenues. It has 25 processing plants, 2718 stockholders and 3900 employees. Headquarters in Chicago, Illinois.

National Service Industries ( NSI):NSI obtained 26 percent of revenues from renting table linens, bed linen, operating room packs, towels, uniforms and dust control materials, but lighting equipment and chemical products were also manufactured. NSI was further diversified into insulation service, mens apparel, envelopes, furniture marketing services, safety products, furniture leasing and amusement parks. NSI headquarters were in Atlanta, Georgia and it had 10,994 employees.

Unitog:Unitog manufactured, rented and sold heavy duty, soil resistant uniforms for service station employees, route drivers and salesme. Rental business operated out of nine locations and comprised 38 percent of revenues. Headquarters in Kansas city Missouri. Approximately 420 stockholders and 2189 employees.

Competitive Advantage:Despite this strong competition, Omni Services INC provides superior value to its clients because of its competitive advantage. The following include competitive advantage:

Superior service to clients: Omni provides superior services to their clients. That is the reason Omni Services INCs profit was almost double of industry average profit before taxes. employee stock ownership plan: Omni was the first firm of any size in Virginia to offer an employee stock ownership plan ( ESOP) a kind of profit sharing plan in which Omni stock was purchased and held in trust for each employee. None of Omnis 600 employees belonged to a union. This is the second competitive advantage of Omni Services. Attracting dependable and productive employees:Omnis major shareholder Mr. Martin always believed that their locations allowed them to attract employees that were more dependable and productive than the transient and high paid city worker. Omnis Success ca from the edge loyal employees gave the firm.

Chapter 5 Ratio AnalysisSWOT AnalysisRatio AnalysisRatio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. So using the Balance Sheet and Income statement information of Omni Services the Ratio Analysis is done as follows:Liquidity ratio:Liquidity ratios measure your companys ability to cover its expenses. The two most common liquidity ratios are the current ratio and the quick ratio. Both are based on balance sheet items. Current Ratio:The current ratio is a reflection of financial strength. It is the number of times a companys current assets exceed its current liabilities, which is an indication of the solvency of the business.Here is the formula to compute the current ratio:Current Ratio = Total current assets / Total current liabilities.The Current ratio of Omni services Inc. from the year 1973 -1979 is shown in the table below and then graphically represented:

1973197419751976197719781979

Current Ratio1.7211952.3374581.6224491.6267311.6054421.4451021.475243

Quick Ratio:The quick ratio is also called the acid test ratio. Thats because the quick ratio looks only at a companys most liquid assets and compares them to current liabilities. The quick ratio tests whether a business can meet its obligations even if adverse conditions occur.Here is the formula for the quick ratio:Quick Ratio = (Total Current Assets - Total Inventory) / Total Current LiabilitiesThe Quick ratio of Omni services Inc. from the year 1973 -1979 is shown in the table below and then graphically represented: 1973197419751976197719781979

Quick Ratio1.0725461.7919011.2813411.1288091.2442181.0123791.16165

Solvency Ratio:Solvency ratios measure the stability of a company and its ability to repay debt. These ratios are of particular interest to bank loan officers. They should be of interest to us, too, since solvency ratios give a strong indication of the financial health and viability of business. Some of the solvency ratio of Omni Services Inc. is analyzed below: Debt-to-Worth ratio:The Debt-to-Worth Ratio (or Leverage Ratio) is a measure of how dependent a company is on debt financing as compared to owners equity. It shows how much of a business is owned and how much is owed.The Debt-to-Worth Ratio is computed as follows:Debt-to-Worth Ratio = Total Liabilities / Net WorthThe debt to worth ratio of Omni Services Inc. from the year 1973-1979 is listed and then presented graphically below:19731974197519761977197819791973

Debt to worth Ratio0.93 0.85 0.76 0.91 0.77 0.65 $0.69 0.93

Working Capital:Working capital is a measure of cash flow and is not a real ratio. It represents the amount of capital invested in resources that are subject to relatively rapid turnover (such as cash, accounts receivable and inventories) less the amount provided by short-term creditors.Working capital should always be a positive number. Lenders use it to evaluate a companys ability to weather hard times. Loan agreements often specify that the borrower must maintain a specified level of working capital.Working capital is computed as follows:Working Capital = Total Current Assets - Total Current LiabilitiesThe working capital of Omni Services shows the following position from the year 1973-1979:1973197419751976197719781979

Working Capital5071189854905890827979

Net Sales to Working Capital:The relationship between Net Sales and Working Capital is a measurement of the efficiency in the way working capital is being used by the business. It shows how working capital is supporting sales.It is computed as follows:Net Sales to Working Capital Ratio = Net Sales/Net Working Capital

The Omni Services Inc. possesses the following Net Sales to Working Capital Position:1973197419751976197719781979

Net Sales to working Capital$13.90 $7.05 $12.00 $13.78 $16.86 $20.30 $20.61

Profitability Indicator Ratio:The profitability Indicator Ratio discusses the different measures of corporate profitability and financial performance. These ratios, much like the operational performance ratios, give us a good understanding of how well the company utilized its resources in generating profit and shareholder value. Operating profit Margin:The objective of margin analysis is to detect consistency or positive/negative trends in a company's earnings. Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive its stock price. It is calculated as:Operating Profit Margin = Operating profit / Net sales (revenue)

The operating profit margin of Omni Services shows the following position: 1973197419751976197719781979

operating profit margin$5.87 $8.89 $6.86 $8.12 $7.55 $7.56 $8.73

Return on Equity:This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors.It is calculated as follows:Return on Equity = Net Income/ Average Shareholders Equity1973197419751976197719781979

Return on Equity0.22 0.13 0.24 0.20 0.22 0.19 0.19

The ROE of Omni Service Inc From the 1973 to 1979 is found to be in the following position:

Return on Assets:This ratio indicates how profitable a company is relative to its total assets. The return on assets (ROA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage.Here is the Formula to calculate ROA:Return On Assets (ROA) = Net Income/Average total assetsThe ROA position of Omni service from the year 1973 to 1979 is as follows:1973197419751976197719781979

Return on Assets0.22 0.12 0.23 0.18 0.20 0.21 0.18

Debt Ratios:These ratios give users a general idea of the company's overall debt load as well as its mix of equity and debt. Debt ratios can be used to determine the overall level of financial risk a company and its shareholders face. In general, the greater the amount of debt held by a company the greater the financial risk of bankruptcy. Debt Ratio:The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. It is calculated using the following formula:Debt Ratio = Total liabilities / Total assetsThe Debt ratio of Omni services Inc is as follows:1973197419751976197719781979

Debt Ratio0.48 0.46 0.43 0.48 0.44 0.39 0.41

Debt-Equity Ratio:The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.It is calculated by the following formula:Debt-Equity Ratio = Total Liabilities / Shareholders EquityThe Debt -Equity Ratio of Omni services Inc. is as follows:1973197419751976197719781979

Debt-Equity Ratio0.9342760.8533380.7623110.9088270.7734140.6490510.682208

Capitalization Ratio:The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth.Here is the formula:Capitalization Ratio = Long-term Debt/Long-term debt + Shareholders EquityThe capitalization Ratio of Omni Services is as follows1973197419751976197719781979

Capitalization Ratio0.3996330.3388980.256980.3485110.3112780.2366840.262611

Operating Performance Ratios:These ratios have differing inputs and measure different segments of a company's overall operational performance, but the ratios do give users insight into the company's performance and management during the period being measured. Fixed Assets Turnover Ratio:This ratio is a rough measure of the productivity of a company's fixed assets (property, plant and equipment or PP&E) with respect to generating sales.Here is the formula:Fixed Asset Turnover = Revenue / Property, Plant and EquipmentThe fixed Asset Turnover of Omni Services Inc .for the years 1973-1979 is as follows:1973197419751976197719781979

Fixed Asset Turnover2.29 3.19 2.97 2.44 2.44 2.48 2.43

Sales/Revenue per employee:As a gauge of personnel productivity, this indicator simply measures the amount of dollar sales, or revenue, generated per employee.It is calculated using the following formula:Sales/Revenue per employee = Revenue / Number of Employees (average)

1973197419751976197719781979

Sales / Revenue per employee11.75 13.97 17.08 20.78 25.01 27.98 33.63

Cash-Flow Indicator Ratios: These ratios are cash flow indicators, which focus on the cash being generated in terms of how much is being generated and the safety net that it provides to the company. These ratios can give users another look at the financial health and performance of a company. Dividend payout Ratio:This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend payment.It is calculated as follows:Dividend Payout Ratio = Dividend per Common share /Earnings per shareThe Dividend payout Ratio of Omni Services is as follows:1973197419751976197719781979

Dividend Payout Ratio0.16 0.26 0.18 0.19 0.15 0.16 0.16

These are the key ratio analysis of Omni services which gives us a clearer view of their financial strength ability and position.

DuPont AnalysisDuPont analysis is an extended analysis of a company's return on equity. DuPont equation provides a broader picture of the return the company is earning on its equity. It tells where a company's strength lies and where there is a room for improvement. It concludes that a company can earn a high return on equity if: It earns a high net profit margin; It uses its assets effectively to generate more sales; and/or It has a high financial leverage

According to DuPont analysis:Return on Equity = Net Profit Margin Asset Turnover Financial Leverage

Return on Equity =Net IncomeSalesTotal Assets

SalesTotal AssetsTotal Equity

The DuPont Analysis of Omni Services Inc. from the year 1973-1979the following results:1973197419751976197719781979

ROE0.2227740.1279830.2146310.1852480.1973820.1795790.178649

When graphically represented it is as follows:

SWOT Analysis of Omni Services:SWOT stands for Strengths, Weaknesses, Opportunities and Threats, and is an important tool often used to highlight where a business or organization is, and where it could be in the future. It looks at internal factors, the strengths and weaknesses of a business, and external factors, the opportunities and threats facing the business. The process can give you on overview of where the business, and the environment it operates in, is strategically. This is an important, yet too simple to understand tool used by many students, businesses and organizations for analysis.The analysis shows Omni Services Inc. Strengths, Weaknesses, Opportunities and Threats. The SWOT analysis will give us a clear picture of the business environment Oni services In. is operating in.Strengths:The strengths of a business or organization are positive elements, something they do well and is under their control. The strengths of a company or group add value to it, and can be what gives it the edge in some areas over the competitors. The following section will outline main strengths of Omni services Inc. are: Highly experienced owner-operator Very high gross margin A very loyal employee base Operates business in large Metropolitan areas Located on the fringes of large metropolitan areas Locations attracted employees that were more dependable and productive than higher paid city worker First firm in Virginia to offer employee stock ownership plan (ESOP) Innovative in managing employees

Weaknesses:Weaknesses of a company or organization are things that need to be improved or performed better, which are under their control. Weaknesses are also things that place it behind competitors, or stop it from being able to meet objectives. The weaknesses of Omni services Inc. are: Not located in the large metropolitan cities High transportation costs Very little flexibility in pricing Increased transportation time

Opportunities:

Opportunities are external changes, trends or needs that could enhance the business or organizations strategic position, or which could be of a benefit to them. This section will outline opportunities that Omni services Inc was facing.. The opportunities are: Ability to develop additional RUSs Affiliate relationships with vendors Development of proprietary products Development in expertise of linen towel sales Sale of a business for a significant P/EThreats:

Threats are factors which may restrict damage or put areas of the business or organization at risk. They are factors which are outside of the company's control. Being aware of the threats and being able to prepare for them makes this section valuable when considering contingency plans and strategies. This section will outline main threats our Omni services Inc. The increasing competition in industry The fragmented nature of industry Increase in the labor costs of the fringed areas New entrance in the uniform rental business that locate in the Metropolitan areas Changes in regulations can impact the businessFinancial Risks:Financial Risks is the possibility that shareholders will lose money when they invest in a company that has debt, if the company's cash flow proves inadequate to meet its financial obligations. Omni services inc. has a moderate level of business risk. These are the factors that may be considered to be risky in future for Omni services Inc. General economic factors may adversely affect their financial performance. Increased competition could adversely affect our financial performance. Risks associated with the suppliers from whom their products are sourced could adversely affect their results of operations. An inability to open new, cost effective operating facilities may adversely affect their expansion efforts. Compliance with environmental laws and regulations could result in significant costs that adversely affect their results of operations.

Business Risk:Business Risk is the possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, and overall economic climate and government regulations. In this case Omni services Inc. has a lower business risk because its sales growth are growing very significantly. For example the industry profit before taxes was about 5.5 percent, while Omnis was almost double. Analyzing the financial statements also gives evidence that Omni services Inc. is facing a lower level of business risk than the industry and competitors.

Chapter 6 Omni Service INC. Comparison with Industry

Comparison of Omni Services INC with industry: In exhibit 3 some financial information regarding these 5 companies are given. we have assumed that industrial laundry business industry is comprised of these six companies. We used the financial information available to for calculating industry average and then we have posted the items in graphs for comparing Omni Services INS with the same of industry. We compared Omni Services ratio with Industry average to overlook how Omni is doing in the relevant industry. These 5 are the major competitors of Omni Services and with the financial information available to us we have done a comparison. The bases of the comparisons are:

5- Year Growth in After-Tax Net Profit 5- year growth in Revenues Current ratio 1978-1979 Growth in net worth Net Profit on sales Debt to common Equity EPS ( Earning per share) Dividend Payout Ratio Average Yield Book value per share Return on Common equity Sales ( in millions): P/E Ratio Percent of Sales in LaundryNow Omni Services performance in the industry is evaluated in comparison with the industry. Omni services information with Industry average is plotted n graphs are the results are compared to see the position Omni Services INC holds in the industry.

5- Year Growth in After-Tax Net Profit:Net Profit After tax is a more accurate look at operating efficiency for leveraged companies. It does not include the tax savings many companies get because they have existing debt. In the following graph we have plotted the data of Omnis 5 year growth in after tax Net profit against the industry growth in after tax net profit. Net Profit After tax = Operating Income x (1 - Tax Rate)

Figure: comparison of Omni Services INC with industryAnalysis: Growth in after tax net profit of Omni Services is higher than industry by more than double, which is good that means Omni Services will strive in the industry in the long run There are many scopes of Omni Services in the future.

5- year growth in Revenues:Revenue growth illustrates sales increases/decreases over time. It is used to measure how fast a business is expanding. More valuable than a snapshot of revenue, revenue growth helps investors identify trends in order to gauge revenue growth over time.

Revenue Growth= (Revenue in Year 10 - Revenue in Year 1)/ Revenue in Year 1

Figure: comparison of Omni Services INC with industry revenue growth

Analysis: Growth in revenue should be higher if one wishes to see growth. The industry growth rate is 10% as industrial laundry service is a mature industry the growth is less than Omni Service though Omni has started early it still has not exhausted all its resources The 5 year growth in revenue shows potential for Omni Services. For the revenue level ever so increasing Omni wants to undertake a five year dividend growth plan.

Current ratio:The "current ratio' indicates the ability of a company to pay its current liabilities from current assets, and, thus shows the strength of a company's working capital position. The current ratio is significant to both short and long term creditors. Short term creditors are particularly interested in the current in the current ratio since the conversion of inventories and accounts receivable into cash is the primary source which the company obtains the cash to pay short-term credits. Long-term creditors are interested in the current ratio because a company that is unable to pay short term debts may be forced into bankruptcy.Current ratio = Current assets Current liabilities

Figure: comparison of Omni Services INC with industry Current ratioAnalysis: Generally, a current ratio of 2:1 is acceptable for most firms Normally 1.5 is essential for industrial companies. So Omni Services barely fits the marks. If we see industry average it is higher than 2 which are moderately good. This current ratio is capable of attracting long-term creditors. So Omni should improve its Current Ratio.

1978-1979 Growth in net worth:The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. In the business context, net worth is also known as book value or shareholders' equity.Net Worth = Total Assets - Total Liabilities

Figure: Comparison of Omni Services INC with industry Net growth in 1978-1979

Analysis: As the growth in net worth of Omni Service is higher than industry average it means the performance of Omni Service is good. In the graph the data used is for 1978-1979. This years Omnis total asset was greater than total liabilities which are a good sign for the business and it increases industry average which means the performance of the company exceeds industry.

Net Profit on sales:This ratio measures the ability of the revenue to sustain expenses and give a positive net income. It is helpful in identifying the proportion of sales units that remain after the expenses.Net Profit to net sales = Net Profit Net sales

Figure: comparison of Omni Services INC with industry Net Profit on sales

Analysis: A higher ratio indicates a more profitable company that has better control over its costs compared to its competitors. as we can see from the graph that Omni Services Net Profit on sales ratio is higher than industry average meaning Omnis control over its cost compared to its competitors is higher. From the graph it can be easily depicted that Omni is a profitable company as its net profit on sales is higher than its competitors.

Debt to common Equity:The debt to equity ratio expresses the relative equities of owners and creditors of a company. This ratio is important to creditors because it shows how much more the stockholders have contributed to the company than the creditors themselves.Equity to debt ratio = Equity Total Debt

Figure: comparison of Omni Services INC with industry Debt to common equity

Analysis: Purpose is measurement of company financial leverage as this ratio decreases , the company seems more attractive to the creditors Omnis debt to common equity ratio seems to be greater than the industry debt to equity ratios which means Omni must take some steps to decrease its debt to equity ratios.

EPS ( Earning Per Share):EPS is the amount of net income per share of the company's outstanding common stock .This is the most widely used index for a company's operations and is very important for both the potential and the existing shareholders.EPS = Earnings available to stockholders Average No. of shares outstanding

Figure: comparison of Omni Services INC with industry EPS

Analysis: EPS a popular measurement of profitability. As we can see from the graph that the earning per share of Omni Services is less than industry average which is not good. Omni Services EPS is not far behind from the industry average so Omni services should pay more attention to it as the EPS can increase if more attention is given.

Dividend Payout Ratio:The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings. The part of the earnings not paid to investors is left for investment to provide for futureearnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors.

Payout Ratio = (Dividends - Preferred Stock Dividends)/Net Income

Figure: comparison of Omni Services INC with industry Dividend Payout ratio

Analysis: The payout ratio indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends. We can clearly see that the dividend payout ratio of Omni Services is lower than industry average which is a very good sign for the company.

Average Yield:The average yield on an investment or a portfolio that results from adding all interest, dividends or other income generated from the investment, divided by the average of the investments for the year. The average annual yield is a particularly useful tool for floating-rate investments, in which the fund's balance and/or the interest rate change frequently.

Figure: comparison of Omni Services INC with industry Average yield

Analysis: Omni Service INCs average yield is not present in the case so for that the comparison is not possible

Book value per share:Thebook value per share formula is used to calculate the per share value of a company based on its equity available to common shareholders. The term "book value" is a company's assets minus its liabilities and is sometimes referred to as stockholder's equity, owner's equity, shareholder's equity, or simply equity.Book value per share = (total common equity/ average shares)

Figure: comparison of Omni Services INC with industry book value per share

Analysis:

If book value per share is higher than the currently traded stock price, the company can be considered undervalued. Should the company decide to dissolve, the book value per common indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid. The book value per share is lower than industry average which is not that good.

Return on Common equity:The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Figure: comparison of Omni Services INC with industry return on equity

Analysis: It is an important segment of DuPont analysis ROE is a measure of profitability of stockholders' investments. Higher values are generally favorable meaning that the company is efficient in generating income on new investment Omni Services Return on equity is higher than industry average which is considered as a good sign for the company.

Sales ( in millions):The total sales of Omni Services INC against the industry average are shown. the total sales of Omni in the year is plotted in the graph and the industry average is also showed in the graph. the industrial laundry business is very progressing business and that can be proved by showing the sales which is shown in millions.

Figure: comparison of Omni Services INC with industry Sales (in millions)Analysis: Total sales of 1979 is 20 million which is a big amount for Omni Services but in comparison to the industry the amount is not that big So Omni must take steps to increase its total sales if it wants to beat its competition more and be wants to be more established.

Percent of Sales in Laundry:

Figure: comparison of Omni Services INC with industry percent of sales in laundryAnalysis: Omni has 99% of sales in laundry where as Omnis major competitors Rentex and Means Services has 100 percent of sales in laundry. In case of industry the percentage is low it terms of Omni but other competitors use 100 percent so Omni must use the 100% as it wants to progress more and more in the future.

Chapter 7 Problem StatementProblem Statement:Examining key information for each company involved in the merger is a good idea. Looking over and analyzing the company and determining the information if it is a good investment decision. Decision should reflect a combination of the best interest for the company and the outside world. With the right information and relevant consideration of the facts, coming out ahead in the face of a merger can be a realistic goal. After studying the whole case again and again we the group members have found one major problems in the company and for the solution of that problem two new problems have raised. Mr Leducq was considering buying a majority interest in Omni, with his eventual ownership position to reach two-thirds or better. In 1979 he was in the midst of meeting the Omni management and visiting the Culpeper plant and had engaged a New York firm to calculate the value of Omnis closely related stocks. Mr. Leducq believed that the rental uniform market in France was where the U.S market had been in the early 1950s quite a different business from what is was today. At first the mergers offer provided by Mr. Leducq, the owner The Societe Generale de Location et Services Textiles (Textiles) to Omni Services Incorporation includes:i. Mr. leducq considered uniform rental to hold great promise in France furthermore, he believed Textiles skill in the roll towel business might be useful to Omni, which had little expertise in linen towel sales. ii. Mr. leducq has stated that if Textiles buy a majority of Omnis stock, they would want to set the maximum ESOP ownership at 25 % of the stock. iii. Mr. Leducq has also stated that he would want reassurance that Mr. Martin and the rest of Omni management would stay. iv. The owner of textile Mr. leducq wanted assurance that martin would continue to operate the business as had been planned seeking new business and making new plan and making capital investment outlays and dividend payment detailed in 5 year plan.v. Mr. Landucq had proposed that Textiles purchases 51 percent of Omnis share in 1980. In 1985, Textiles would make an additional purchase of 90000 shares brining the ownership to 66 percent. Of the remaining shares, up to 170000 more could be sold to Textiles in 1985 at the previously agreed price, if any shareholder wished to sell.vi. This agreement would spread the purchase over 5 years, so the price of the shares in 1985 would be determined during the current negotiation. Mr. Martin wanted a floor price set, below which 1985 price would not drop:

Should Omni accept the merger offer of the The Societe Generale de Location et Services Textiles (Textiles)?Omni Services INC. is a multimillion dollar company. The major problem that Omni is facing now is whether they should merge with a French company named The Societe Generale de Location et Services Textiles (Textiles) a large strong French company that was also in rental linen business. Mr Leducq the owner of The Societe Generale de Location et Services Textiles (Textiles) had engaged a New York firm to value Omnis closely held stock. With this information Mr. Martin, Omnis founder and President was sure that the Frenchman was serious about his proposal. Though Mr Martin liked the idea of being the CEO of a $20 million business, having the company airplane at his disposal and being needed by the business on the other hand selling some of the stock via merger would provide him enough cash to allow him to pay off all his debts including the mortgage in the new house building. After evaluating all the information and the share price for both the year 1980 and 1985 the decision has to be made this will benefit both the parties. So to determine whether Omni should accept the merger offer we have to solve the following problems

What is the value of the company?The value of the company should first be determined. Using the information provided in the Income statement, statement of retained earnings and balance sheet the value of the company should be determined .To determine the value the different valuation techniques should be used i.e. FCF, DDM model etc. Using these techniques the value of the company will be found out.

What should be the price per share at the time of Merger?After finding out the value of the firm the price per share will be calculated. In the merger offer it is described that in 1980 that Textile will purchase 51% shares (total 306000 shares of Omni Services INC) and in 1985 Textile would make an additional purchase of 90000 shares. Because the agreement would spread over 5 years, the French government required that Textile show the ability to honor the contract by pledging stock or having a line of credit for the full amount of contractual obligation. The price of the share of 1985 will be calculated so that Omni does not incur loss by setting a lower floor price. So the price per share of 1985 would be determined during the current negotiation. Mr. Martin also wanted to determine a floor price set below which 1985 price will not drop.

Chapter 8Solution to the Problems Solution to problem no 1:The solution for the problem whether Omni should accept the merger offer of the The Societe Generale de Location et Services Textiles (Textiles) two new problems should be solved. The soltuin of those problems are given below: Finding out the value of the firm: The value of the firm should be calculated to determine the price of stock. Mr. Landucq and Mr. Martin both want to know the stock price of both 1980 and 1985 so that both the parties of merger will not face loss. We have to find the value of share of Omni in 1985 because The information available to us is the income statement, statement of retained earnings and balance sheet statement for the year 1973 to 1979. Textile proposed to buy the stocks of Omni Service in 1980 and the offer stretches to 5 year. In 1985 Textiles will buy additional shares. So we will have to find out the value of stock of 1985. Hence we have to find out the value of the firm for the year 1985. The information given in this report is the balance sheet up to 1979 and dividend plan up to 1984. But information is given like Omni would double its sale and profits by 1984. So we had to prepare forecasted income statement, balance sheet for the year 1980 to 1984. So find the value of the firm and the stock for the year 1985. We can find the value of the firm by using the following methods: Free cash Flow to Firm method ( FCFF) Free cash flow to equity method (FCFE) Dividend discount model ( DDM)i. FCFF (Free cash Flow to Firm) method:This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health.ii. FCFE (Free cash Flow to Equity) method:This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. FCFE determines the value of the firms equity. iii. Dividend discount model ( DDM):A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued.

For both FCFF and FCFE method we need to find the growth rate and cost of equity. The growth rate and cost of equity calculation is given below:Growth rate determination: Growth rate of 1984 = RR (Retention rate)* ROE (Return on equity) = (1- Dividend payout ratio) * ROE = (1-.128)*.21 = 18.312%Retention rate is calculated (1-dividend payout ratio) which is (1-.128) or .872 times the return on equity which is calculated by net income/total equity. The growth rate for 1984 is 18.312%. Another way to calculate the growth rate isAverage Growth Rate=-1 = -1 =.0923The dividend growth rate will be influenced by the age of the industry life cycle, structural life cycle, industry competition and economic trends. Information derived about managements plan, to expand the firm, diversity into new areas or change dividend policy provides useful input. Averaging growth rate dividend (9.23%) and the implied sustainable growth estimate 18.321% indicates a value of 13%. Since the firms firms estimated dividend grows at reasonably constant growth we have used the average 13% as there is a huge difference between the two methods. Discount rate of equity= Risk free return + = Risk Free Return + =.1+.9*(.20-.1) =.19Cost of Capital = .19 or 19%Finding out the value of Stock:After finding out the value of the firm the price per share will be calculated. We will calculate the per share price of both 1980 and 1985 by using FCFF method, FCFE method and DDM model. In the case Mr. Martin had put together a 5 year plan for Omni. There were 3 goals of the of the plan which helped us to calculate the share price and firms value for the year 1985. We will regard this plan even though it was taken before the Textile offer because Mr. Leducq wanted assurances that Mr. Martin would continue to operate the business as had planned: seeking new businesses and making the capital investment outlays and dividend payments detailed in the 5 year plan. The 5 year plan is given below:19801981198219831984

total dividend216000240000264000288000336000

dividend per share0.360.40.440.480.56

payout ratio(estimated)14.80%14.30%13.50%12.70%12.80%

The goals of Omni Services are: Double profits by 1984 Double sales by 1984 Reduce the debt-to-equity ratio substantiallyThese data had helped to prepare the forecasted income statement, balance sheet for the year 1980 to 1984. With these data and other data formed by estimation we have calculated the share price for 1985. Because as per merger offers the plan is spread for 5 year. In 1985 Textile will buy additional 90,000 shares of Omni. The French government required that Textiles show the ability to honor the contract by pledging stock or having a line of credit for the full amount of the contractual obligation. So it is necessary to know the price of shares of Omni Services in 1985.

Chapter 9 Solution to the Problems using FCFFSolution to problem using FCFF (Free cash flow to firm):The solution for the problem whether Omni should accept the merger offer of the The Societe Generale de Location et Services Textiles (Textiles) two new problems should be solved. The soltuin of those problems are given below: Finding out the value of the firm: The value of the firm can be determined through calculating FCF (Free cash flow). This method will enable us to determine the value of the firm from which we can further calculate the value of the stock. This step is necessary for determining the value of the stock. Firm value determination:We are using FCFF model to calculate the share price of OMNI services Inc for the beginning of the year 1980. Here available information source was the ending of the year 1984.FCFF= EBIT (1-tax) + Depreciation-Capital Spending-change in net working capital change in other assetsHere, EBIT= Earnings before Interest and TaxFrom the information available in the case we have calculated the flowing data: Earnings before Interest and Tax= 4148.60 (thousands of dollars) Tax rate= 44% Depreciation= 1005.04(thousands of dollars) Capital Spending= 2460.35 (thousands of dollars) Change in net working capital= 480.0687077 (thousands of dollars) change in other assets= 0 ( As we have assumed that no changes were made in other asset from 1980 to 1984)FCFF1984= 4148.60*(1-.44) +1005.04-2460.35-480.0687077-0 = 387.833 (thousands of dollars)Firm Value1985= For that we need to calculate the value of WACC and g( which means growth)WACC= = = .14 or 14%Here in finding the WACC the discount rate of equity is estimated by using the risk free rate and market risk premium and beta. We assumed the beta to .9 and the risk free rate 10% which is based on the current returns of treasury bonds. Risk premium is the difference between market risk and the risk free return which we have assumed to be 15%.The calculation of the discount rate of debt and discount rate of equity is given below.Discount rate of Debt = Interest rate *(1-.44) = .1445*(1-.44) = 8.092%Discount rate of equity = Risk free return + = Risk Free Return + =.1+.9*(.20-.1) =.19Growth rate determination:Growth rate of 1984= RR (Retention rate)* ROE (Return on equity)= (1- Dividend payout ratio) * ROE= (1-.128)*.21= 18.312%Retention rate is calculated (1-dividend payout ratio) which is (1-.128) or .872 times the return on equity which is calculated by net income/total equity. The growth rate for 1984 is 18.312%. Another way to calculate the growth rate isGrowth Rate=-1 = -1 =.0923The dividend growth rate will be influenced by the age of the industry life cycle, structural life cycle, industry competition and economic trends. Information derived about managements plan, to expand the firm, diversity into new areas or change dividend policy provides useful input. Averaging growth rate dividend (9.23%) and the implied sustainable growth estimate 18.321% indicates a value of 13%. Since the firms firms estimated dividend grows at reasonably constant growth we have used the average 13% as there is a huge difference between the two methods. Firm Value1985 = = = = 43825 (thousands of dollars)

Determining PV (Prese