Detailed Questions and Plan of Action: 1. What is going right with this business? What concerns you?
Question:
Detailed Questions and Plan of Action:
1. What is going right with this business? What concerns you?
a. Examine the financial ratios in Case Exhibit 2.
b. Calculate any additional ratios we have previously learned that you think would be useful. Use an organizing framework for the ratios to help provide clarity.
c. What is Maggie's target cash balance at year-end 2015? How does it compare with the actual cash balance?
d. Review the working capital policies. What's going on with those accounts?
2. Where is the cash going?
a. You will note that Exhibit 1 does not include a cash flow statement. Construct cash flow statements for 2013, 2014, and 2015.
b. Reinforce the conclusion from part a by computing the Cash Conversion Cycle for 2012, 2013, 2014, and 2015.
3. Will strong business performance in 2016 improve the cash position?
a. Extend the financial statements through 2016, assuming that Bob Brown grows revenues by 30%. Note: Make cash to be the plug. Calculate it as:
Current liabilities + Net worth - Accounts receivable - Inventory - Other current assets - Net fixed assets. Include a cash flow statement for 2016.
b. Assume that the minimum cash balance is Maggie's 8% of revenue.
Include a new account called "Long-term Debt" between Current Liabilities and Net Worth. Make sure the balance sheet balances and that no accounts are negative.
Use the same "Trial Plug" methodology as in the Body Shop case.
4. Do you agree with Maggie Brown's Accounts-Payable policy?
a. What is the effective annual cost of foregoing the discount?
Calculate the dollar amount of the discount on a reasonable estimate of 2016's expected purchases.
If Maggie foregoes the discount, by how much would Accounts Payable increase? Calculate:% Cost of foregoing discount = $ amount of discount / Accts Payable increase Note: The $ amount of the discount = % discount x Estimate of 2016's purchases b. Now, what would you compare the % cost of foregoing the discount with and what would you conclude?
5. What are the alternatives for solving the business's cash flow problem?
a. Enumerate various alternatives and discuss the feasibility of each.
Case Studies in Finance Managing for Corporate Value Creation
ISBN: 978-0077861711
7th edition
Authors: Robert F. Bruner, Kenneth Eades, Michael Schill