Spencer Sporting Goods (SSG) is a local wholesaler of sporting goods. Their customers are small Mom...

 

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Spencer Sporting Goods (SSG) is a local wholesaler of sporting goods. Their customers are small "Mom & Pop" stores. SSG has expected Sales of about $1,000 per year forever. Cost Of Goods Sold (COGS) is typically about $0.80 per dollar of Sales. Selling, General, and Administrative Expenses (SG&A) is about $.20 per dollar of Sales. SSG has a 'normal' inventory balance of around 30 day's worth of Sales or around $82. SSG's customers typically take about 60 days to pay for shipments, for a normal A/R balance of about $164. SSG has fixed assets that could be sold for about $50. The book value of SSG's fixed assets is $80. SSG has depreciation expense of about $10 per year and Capital Expenditures (CAPEX) of $10. Sales are not expected to grow and SSG expects no investments in either inventory or Accounts Receivable. The discount rate for companies with similar risk to SSG is 12%. Spencer, CEO of SSG, owns 100% of the equity in SSG. SSG has no debt. You may find it helpful to organize your answer with a schematic diagram. Please address the following questions: a. What is SSG's expected annual Earnings Before Interest and Taxes (EBIT)?: b. What is SSG's expected annual Free Cash Flow (FCF)? c. What is SSG's working capital? d. What are SSG's future expected FCFs worth to the capital market? e. What is SSG's Value Add? f. What is the value of Spencer's equity in SSG? 1:3/8/2021 Page: 1 g. Suppose that SSG is suddenly forced by competition to hold more inventory. What will be the immediate impact on SSG's FCF? What will be the impact on SSG's Value Add? Explain briefly. h. Suppose that SSG's COGS rises as a fraction of Sales. What is the immediate impact on SSG's FCF? What is the impact on Value Add? Explain briefly. i. Spencer, the CEO of SSG, claims that he has a competitive advantage because both his customers and suppliers think he is a 'great guy. What do you think? Based on the above, do think SSG has a competitive advantage? Spencer Sporting Goods (SSG) is a local wholesaler of sporting goods. Their customers are small "Mom & Pop" stores. SSG has expected Sales of about $1,000 per year forever. Cost Of Goods Sold (COGS) is typically about $0.80 per dollar of Sales. Selling, General, and Administrative Expenses (SG&A) is about $.20 per dollar of Sales. SSG has a 'normal' inventory balance of around 30 day's worth of Sales or around $82. SSG's customers typically take about 60 days to pay for shipments, for a normal A/R balance of about $164. SSG has fixed assets that could be sold for about $50. The book value of SSG's fixed assets is $80. SSG has depreciation expense of about $10 per year and Capital Expenditures (CAPEX) of $10. Sales are not expected to grow and SSG expects no investments in either inventory or Accounts Receivable. The discount rate for companies with similar risk to SSG is 12%. Spencer, CEO of SSG, owns 100% of the equity in SSG. SSG has no debt. You may find it helpful to organize your answer with a schematic diagram. Please address the following questions: a. What is SSG's expected annual Earnings Before Interest and Taxes (EBIT)?: b. What is SSG's expected annual Free Cash Flow (FCF)? c. What is SSG's working capital? d. What are SSG's future expected FCFs worth to the capital market? e. What is SSG's Value Add? f. What is the value of Spencer's equity in SSG? 1:3/8/2021 Page: 1 g. Suppose that SSG is suddenly forced by competition to hold more inventory. What will be the immediate impact on SSG's FCF? What will be the impact on SSG's Value Add? Explain briefly. h. Suppose that SSG's COGS rises as a fraction of Sales. What is the immediate impact on SSG's FCF? What is the impact on Value Add? Explain briefly. i. Spencer, the CEO of SSG, claims that he has a competitive advantage because both his customers and suppliers think he is a 'great guy. What do you think? Based on the above, do think SSG has a competitive advantage?

Answer rating: 100% (QA)

a To calculate SSGs expected annual Earnings Before Interest and Taxes EBIT we need to subtract the Cost of Goods Sold COGS and Selling General and Administrative Expenses SGA from the expected sales ... View the full answer