Business Case Studies
Case 10: Dietrich & Mercer, Inc.
The company’s liquidity would be evaluated as very viable provided that there is a high rate of turnover of the manufactured products. For instance, it manufactures a large number of products within the same time span of operation. Additionally, the company has many operations in different parts of the world such as China. The amount realized in 2011 shows liquidity growth rate which is imminent. For example, the company realized $58 million from the sales (Longenecker, 2007). Another clear indicator of its liquidity is production of several products. The verities of products can be invested and maintain the liquidity levels in comparison to the available assets.
The company has had an excellent growth rate. It is indicated that the company has experienced growth rate. Based on ‘finished products are shipped to a network of 18 warehouses and 6 showrooms throughout the United States by means of a fleet of 25 company-owned’. The growth is matched to its medium-to-low pricing of different products in separate regions. The pricing policy enables the company to penetrate deep markets regardless of the customers’ purchasing power. Nonetheless, the provision of different varieties of goods and services indicates that the company has been growing and expanding its market with time. Its growth may also be based on the fact that there are less or nil cases of losses. (Longenecker, 2007).
The business is financed by different sources such as assets. Additionally, stocks such as the manufactured products are liquidated to guarantee the operational cost. Debtors too serve as a source of finance. The named 400 consistent customers in the business have to assist in financial generation whenever there is need (Longenecker,2007). Realization on profits is the other source of finance. The realized profits in the financial statement are plowed back into the business operations. The other alternative source is owners’ capital. The invested capital at the onset contributed to the starting capital. The capital acted as the initial and operating capital during putting up of the company. Finally, there is a chance of buying shares by investors this backed by the fact that Dietrich & Mercer is a limited company. In summary, debtors, stocks, and owners’ capital are the major sources of finance to the company.
Case 11 Missouri Solvents
Cash Flow for Missouri Solvents for 2010 Projections. https://courses.corporatefinanceinstitute.com.
|Cash flow operations||Amount ( $)|
|Decrease in Accounts receivables
Increase in Accounts Payables
Increase in Tax payables
|Subtractions from cash|
|Increase in Inventory||( 30,000 )|
|Net cash from operations||2,012,000|
|Cash flow from investing|
|Cash flow from Financing|
|Cash flow for the Year End Dec 2010||
Balance sheet Missouri Solvents As at 2010
current assets current liabilities cash and cash equivalents Accounts payable
Receivables Accrued liabilities
Inventory Unearned revenues
prepaid expenses and others accrued income taxes
Equipments and properties long-term debts
Less accumulated depreciation obligation under lease
property and equipment net total current liabilities
Total current assets Long terms’ debt
Property and equipment at cost long obligation under lease
Building and improvements Differed income taxes
Fixture and Equipment minority interest
Transportation equipment shareholders’ equity
Total Property and Equipment preferred stocks
Less Accumulated Depreciation common stock
Property and equipment net capital in excess per value
accumulated amortization Accumulated comprehensive income
Property under capital lease Retained Earnings
Goodwill total shareholders’ equity
Total Assets Total liabilities and shareholder’s equity
Ratio analysis would as below.
|Current Ratio|| Analysis = Current Assets
The company receives a lot of return on equity returns in terms of share. The higher returns of equity are alluded in the varied investments spread across the United States area. In Dallas and Texas, there is a total of 24 warehouses with proper business networks (Longenecker, 2007). Moreover, the variety of products and services such as the showcase rooms in various regions allow for ease in spreading equity. In Dietrich & Mercer Inc. there are close to 40% distribution chains which support the high equity rate of return in all its regions (Longenecker, 2007).
The cash flow statement Exhibit C11 shows the cash provided and used by the operating, investing, and financing activities of a company for the 2010 period. Operating activities relate to a company’s primary revenue generating activities. In essence, cash flows from operating activities are the cash effects of transactions included in the determination of income. Investing activities include lending money, collecting loans, and buying and selling securities. On the other hand, financing activities include borrowing money from creditors and repaying the amounts borrowed. Additionally, it includes obtaining resources from owners, and providing them with a return on their investment.
The Financial Accounting Standards Board (FASB) allows both direct and indirect approaches to report cash flows from operating activities. FASB encourages the use of the direct approach (Lehrman, 2017). However, the indirect approach is the best method to be used in displaying cash flow activities. FASB provides for the use of the indirect method and in this case used it allow the solvent company to know and understand its operations more clearly.
The next step would be an evaluation of the company’s activities. The company should avoid excessive borrowing as this is likely to affect the operating capital. When there is borrowing in excess it translates to high debt to pay after a very short period of operation. The company can take several steps to avert the mentioned scenario. For instance, it should ensure that its borrowing does not affect the cash flows in and out the company. Additionally, the company must only focus on the operating capital balance and maintain it at a low debt budget. Nonetheless, the company has a high rate of turn over which is excellent for business operation. Moreover, the enterprise focuses on attaining stability before moving to external operations.
It is unethical to delay suppliers’ pay after agreeing to the terms. Since the delayed payment may result in conflicting liquidity measures. The larger payables balance will lower the current ratio; a result, it leads to lower liquidity. On the other hand, the extended payment period will reduce the company’s cash conversion cycle (CCC). Moreover, the vendors may opt out due breaching of the terms of the trading agreements and this will affect trading activities negatively.
Case 12: Moon Works, From Gutters to Home Remodeling
An investment line of credit was the technique applied. Using the investment line of credit, the Bank RI backed the Moon’s sales work and their rate of turnover in the current period. The company was eligible to credit due to investments proceeds and with provision that the company had paid the credit borrowed, it would get loan. Moreover, the company had chosen the little pay ups of the borrowed loan and this made the Bank RI to give loan. On the other hand, the bank used the collateral legal rule. This rule outlines the rates at which money could be borrowed and the interest to be accrued over a specified period. The other legal rule was the use of a guarantor, which was Weiner. The choice was thoughtful because in the event of closure or collapse of the business, as a result of losses, the guarantor would still pay for the credits. The bank would, therefore, remain unexposed to debts.
Foremost, a history credit worthiness, moral character, and the expected continued debtors’ ability to repay would prompt the RI Bank to allow debts. Secondly, the size of the debt burden matters; the size of the debt is necessarily limited by the available resources. Therefore, creditors prefer to maintain a safe ratio of debt to capital. Finally, the social and community considerations. Where the laying of shelters helps members of the community. The Bank RI may accept an unusual level of risk because of the social good resulting from the use of the loan. In the case above, the debtors participating in low-income housing initiated by the company.
The “fives C” in credit encompass character, capacity, capital, collateral, and conditions. These are related and act as determinants of whether loans should be awarded to a client. Character entails debtor’s past records in line with the credit worthiness. While capacity entails the contractual and legal obligations by the debtor, capital entails the amount needed to initiate the desired project and productivity of the project. Additionally, collateral is what may serve as security for the loan issued. Finally, conditions are the measures that add to credit credibility.
CEO Jim Moon did not observe a number of factors, for instance, the issue of regional competition. The competition adopted was not in match with merger of the business partners. Additionally, CEO Jim Moon could not sustain the technological changes. The technology they adopted could not keep up with the changing times both in England and in the U.S. For instance, it is explained that in the case that the adopted technology was not fit for the business “to set the stage for future growth, the company’s management began implementing industry-leading business system. The tide started to change in 2006’ (Longenecker 2007). Finally, the management proved cumbersome for him. For instance, the business started crumbling after the year 2006.
Moon Associates would survive through the legal operations conducted amongst themselves. The technique of business association would make the business run smoothly. That is, a high share associate in the business becomes the parent and carries the business operations. While the non-controlling associate uses the higher associate’s influence to trade. Moon Associates could have obtained the needed capital to not only keep the company running but also expand its Renewal by Andersen. Alternatively, Moon would adopt mortgage loan to operate its businesses. This would be achieved through paying the mortgage loans as soon as the business picked and boomed. The other pay approach would be to pay through a trail of payment profits done through contracts and building of good relationship with the lender. Therefore, Moon association only needed business-oriented advice and approach.
Case 13: Greenwood Dairies
The person who purchased the Greenwood dairies was a Strategic buyer who specialized in business product venture (Lehrman, 2017). This is based on the argument that he was willing to have the brands and to absorb the previous operations. By Selling to a strategic buyer, David’s family got one major advantage which is command of a higher selling price. In normal circumstances, strategic selling often pays a premium for the synergies that make a business a natural fit alongside the owner (Lehrman,2017). From the case study, it is true that David and the wife got a lump sum from the sale of the dairy. David’s family used the lump sum in buying home and taking their children to private colleges.
Reason for buying Greenwood Dairies was that the buyer is for the outlook for acquisition targets. The main strategy here would be to purchase a business venture that would sell or produce other products. Another reason would be to facilitate a lucrative exit in case the business venture does not perform as expected. As a result, the owner has no concern with the company’s future direction with regards to its employees. This is evident in the large number of employees who were sacked after the dairy started performing dismally.
The advice one would offer Greenwood Dairies at the time for selling is that: a family business should be an investment for a single wealthy family. This comes with a focus on the industry net and the family’s fortune. Secondly, a family business must remain a primary objective in ensuring that familial wealth spans for generations. In the case above, both David and his wife should continue with their business operation rather than selling it. Most stable businesses owe their success to family ties since there is need and urge to hold the family wealth and prestige.
With the couples’ age, it was not very advisable for them to rebuy the dairy. This is because of the reduced energy needed to keep up with demand and a changing business environment. With the two leading the team, the workforce will lack the energy to be productive. In a competitive market, therefore, the business will stand little chance of thriving. In its declining stage, the business would need more effort with only a few failures. However, if it is purchased back for their younger family members, then the case would be different. If the children in colleges had same business interests and effort, then it would be a profitable and long-term consideration. Nonetheless, a business venture only thrives within its product’s life circle. If the sibling adopts the technique of steady business life cycle it results in the dairy success.
The objective of buying back the business would be for the maintenance of brand recognition and creation of brand loyalty among customers. With brand loyalty, the company is able to compete effectively with other brands. This helps the company to avoid being edged out of the market. Another reason for buying back the business is for expansion purposes. In this case, it is to ensure that familial wealth does not diminish. The expansion would incorporate various activities such as an advertisement, use of technology, and maintaining brand quality (Lehrman, 2017). In the societal philosophy approach, buying it back was for reinstating the sacked employees who lost their source of income. Finally, the need to regain the lost reputation of the dairy would mean an investment in business goodwill. Besides, a change of reputation would require a new face of the operation, which is different from the previous owner.
Lehrman, Peter, and Read more. “The 6 Types of Buyers for Your Business.” Entrepreneur. N.p., 2017. Web. 14 Aug. 2017. https://courses.corporatefinanceinstitute.com
Longenecker, J. G., Petty, J. W., Palich, L. E., Moore, C. W., & Baylor, A. (2007). Small Business Management: Launching and Growing Entrepreneurial Ventures, 15th.https://courses.corporatefinanceinstitute.com
“Google Images.” Google.com. N.p., 2017. Web. 14 Aug. 2017. http://www.casewareafrica.com