CASE ANALYSIS

Requirement:

Case Background/Story,

Analysis (including computations),

and Recommendation.

SANTOES, INC.

Eduardo Santos owns Santoes, Inc., a home-grown Filipino shoe company. His company has experienced tremendous growth since it has started its operations in 2009. With a growing demand for his products, Eduardo Santos is considering expanding his operations by opening his first production facility. Currently, he pays another company to manufacture the shoes he designs. He is contemplating to produce the shoes Santoes, Inc. facility, with the hope of lowering the cost of production. The company needs PHP10 million to finance this expansion and is at a tight cash position. Eduardo Santos is now wondering where to get the funds needed invite an investor or personally borrow from a bank?

Here are the comparative financial statements of Santoes, Inc.

Santoes, Inc. sold 3,300 pairs on 2016, 4,500 pairs on 2017, and 6,200 pairs in 2018. With the brands target market young professionals and college students, it can only sell it at the PHP1,000 to PHP2,000 price range per pair.

Eduardo is wondering whether owning his own manufacturing facility can really improve its profitability. Currently, he is producing his shoes at PHP475.00 pesos per pair. He expects that he can lower production costs to as much as PHP300.00 per pair if he will manufacture it himself. However, opening a new production facility will increase operating expenses (including depreciation) by 30%. Currently, most of his operating expenses are marketing and distribution costs.

To finance the PHP10 million facility, he has three options:

1. Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45% percent ownership of the business afterwards. Alex does not demand any specific return.

2. Short-term loan for 1 year for PHP10 million at 6% per annum from Ontime Bank.

3. Long-term loan for 5 years for PHP10 million at 10% per annum from Lively Bank.

Eduardo is very confident that his sales volume will still grow for the next 5 years. However, his confidence is tainted by his uncertainties over the impact of opening a new production facility. What must he do?