Financial case study – read carefully!!
Please be reminded that in order to get the full points for the questions, you need to provide the correct answers, with relevant working (calculation(s) and explanation(s) etc.). Please read the Case Study – Assessment Rubric which had been re-posted to Modules > Weekly Lessons on Canvas for Week Four (Week of September 14) before you work on this case study. Your case report (including the answers to the questions and the summary of the case background) should be well-typed using MS Office 2013 – Word and should be submitted to the corresponding tab under Assignments on Canvas by the deadline. All your work must be submitted in a single MS Word file. Up to 25% of the case study possible points (i.e. 40 points) will be deducted if you submit your work otherwise. An embedded Excel file in your MS Word file will be considered the same as a separate Excel file submitted. So, if you embed an Excel file in your MS Word file, the same penalty will be given. All the answers as well as the case background summary, except the formulas, must be in your own words. Copy and paste sentence(s)/paragraph(s) from any source, except your own source, is totally unacceptable. Answers submitted in such a way will be subject to heavy penalty.
For this case study, please study the Minicase of Chapter 4 on Page 123 of the textbook (can be accessed from the eBook tab on McGraw-Hill Connect) and the answers to the questions of the minicase (already posted to Modules > Weekly Lessons on Canvas for Week Four (Week of September 14).
The minicase is a VERY CLOSE example for this Case Study 1. Please print the minicase from eBook on McGraw-Hill Connect and its solution from Modues > Weekly Lessons on Canvas and study them well before you work on this case study.
Requirements: You have to provide (i) a brief summary (must be 350 words or more) (10 points) of the case background description (in your own words) of this case study in the next two pages and (ii) the answer (in your own words) to each attached question. You should write up the summary before you work on the answer to any of the questions in this case study.
For the summary, I expect you to write in your own words summarizing what are presented in the case study. I want to make sure that you understand everything in this case study and what you are asked to do about it. Only when you understand what are presented and what you are asked to do, then you can do well. Right?
I do not require you to mention anything about your findings (that is, your answers to the questions) in your summary. You are not expected to add anything new (such as your opinions, explanations etc.) to your summary. I just want to see whether you understand the case study and whether you understand the requirements or not. Therefore, you are expected to restate or summarize in your own words (350 words or more) the background description of this case study including what you are asked to do about it only. In your summary, you need to cover the information contained in the paragraph above the income statement and balance sheet, what information you see in the income statement and balance sheet (please do not copy and paste the income statement and balance sheet from the case study to your summary), the information contained in the short paragraph below them, the information contained in the questions and what you are asked to do by the questions. Thank you!
01 F15 BUS-F301 Case Study 1 – Description and Requirements 2/3
Richmond Coffee, Inc. was founded by Gail McCornell and his wife in 2010 in Richmond, Indiana. Due to the lack of the related expertise, the company has not been using much financial planning for its investment needs. Therefore, RC is currently undergoing some hard times resulted in some severe cash flow problems. In addition to losing sales, RC is also falling short of profit to pay salaries to the founders. So, there is an urgent need for the company to prepare a financial plan for the next year to cope with the anticipated investment requirements.
Richmond Coffee, Inc. 2015 Income Statement Sales $6,854,000 Cost of goods sold 5,231,000 Other expenses 472,000 Depreciation 186,000 EBIT $965,000 Interest 124,800 Taxable income $840,200 Taxes (40%) 336,080 Net income 504,120 Dividends $201,648 Add to retained earnings 302,472
Richmond Coffee, Inc. 2015 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash $282,000 Accounts payable $265,000 Accounts receivable 342,000 Notes payable 168,000 Inventory 650,000 Total current liabilities $433,000 Total current assets $1,274,000 Long-term debt $2,080,000 Fixed assets Net plant and equipment $2,854,000 Shareholder equity Common stock $450,000 Retained earnings 1,165,000 Total equity $1,615,000 Total assets $4,128,000 Total liabilities and equity $4,128,000
RC is looking forward to a growth rate of 14 percent in 2016 (i.e. its sales is expected to increase by 14%). The firm has decided to hire you as a financial consultant to fix all the cash flow problems for them. 1. You are expected to calculate the internal growth rate and sustainable growth rate for RC, and explain to the founders what these numbers mean. (20 points) 2. RC is currently operating at full (100%) capacity. Gail McCornell, one of the founders of the company, would like you to advise them on what amount of external financing will be needed (EFN) for 2016 and whether RC’s sales can rise at this particular rate of growth?
01 F15 BUS-F301 Case Study 1 – Description and Requirements 3/3
Please be reminded to include the necessary assumptions, pro forma income statement and pro forma balance sheet in your answer in addition to other workings. (50 points) 3. RC’s fixed assets can only be acquired in multiples of $1,500,000 (i.e. adding a new product line will call for an additional investment of $1,500,000 in new equipment) once RC has reached its full operating capacity. Gail is eager to know what the new external financing needed (EFN) should be as the firm is now already operating at its full capacity. In addition, he also asks you to estimate the new level of capacity utilization of the fixed assets for RD in next year when the new production line has been implemented. Please be reminded to include the new pro forma income statement and pro forma balance sheet in your answer in addition to other workings. (50 points) 4. Gail is interested in knowing as well how the firm’s ROE will change from 2015 to 2016 according to the projected growth rate (subject to the condition that the firm can only acquire the required fixed assets in multiples of $1,500,000, the owners are not going to put in more capital and the firm’s payout ratio remains at the 2015 level). You are expected to do a Du Pont analysis comparison between the two years. For the Du Pont analysis, you must include both the calculations and the explanations. (30 points)
Important Reminder “If you choose to turn in a late case study, you will lose 25% of the points for each day pastdue for that case study. Penalty will be given immediately after the deadline. As I need to return the case studies and post the answers to the case studies, no case study will be accepted for grading after 4 days past-due” – 4-day penalty rule. It is your own responsibility to make sure that you do turn in the case studies and submit the right case study files when you turn them in. You are required to save frequently at least one backup copy of your case studies before you submit them. Past-due submission because of computer crash, misplacing of your memory stick (jump drive) or failing to submit the correct file by the deadline will be penalized according to the above-mentioned 4-day penalty rule. After you have made your submission of the individual case studies, you should see a short message immediately under Assignments telling whether you have submitted your work successfully or not. It is your responsibility to make sure that you have turned in your work files successfully before you leave the Assignments webpage. If you fail to do so, your subsequent submission will be subject to the 4-day penalty rule mentioned above.
Planning for Growth at S&S Air
After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The income statement and balance sheet are shown here:
Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean?
S&S Air is planning for a growth rate of 12 percent next year. Calculate the EFN for the company assuming the company is operating at full capacity. Can the company’s sales increase at this growth rate?
Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume S&S Air is currently producing at 100 percent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?