Finance case study help

Hello,

 

this is a finance case study.

 

I just have to work on question 1 .. CASE A … the question in part 2. So need help on it.

 

you will have to read the case, which is pretty small… and answer the question below:

 

II. Point out that working capital is often viewed by companies simply as cost, and as a result, the company management tends to react to a “cash squeeze” by slashing working capital expenditure without carefully considering its implications for sales, profitability and growth. At the other end, there is also a tendency to invest too much in working capital to maximize short-term profit. Instead what you want to promote is an integrated and value-creating approach to working capital management in which all elements of tied-up capital across the balance sheet (fixed assets, inventories, receivables, payables, and cash) have to be considered as a whole. For example, it may be advantageous to acquire a new and more flexible machine (fixed asset) in order to reduce inventories.

 

Thats about it.

   

MBA7404, Winter 2013

Case Assignments

Discussions on both cases must remain confined within a group.

You must

not engage in discussion with members of another group when working on

these cases. Your submission must be typed with reasonable margin on the

left.

The deadline for the submission of both cases will be will be 4PM on

Tuesday, March 12, 2013.

Case A: Preparing a Memo on the Meanings, Importance and Management

of Working Capital

Background

About a year ago soon after graduating with a college degree in finance, you

joined a manufacturing company as an aide to the Vice President (Strategy).

Your boss does not have any formal training in finance, but she has always

been very receptive to new ideas that could improve the overall performance

of the company. She is convinced that good financial strategy is a key

component of the company’s overall growth strategy.

During the past year, you have had the opportunity to accompany your boss

to several high level policy meetings. You noticed that when it came to

finance-related items in the agenda, most attention was focused on long-term

fixed investment and the company debt policy. Even though working capital

in the company was running at around 34% of sales and was trending up

over the past few years, you noticed an absence of awareness, not to speak

of urgency, about this matter. There were only occasional brief discussions

in passing about how to improve the performance of the receivable

department or the need to negotiate better terms with the suppliers.

Since you were somewhat familiar with several well-known companies that

had successfully introduced innovations in managing their working capital

with remarkable results for the enterprise value, you felt that a new approach

was needed for your company to achieve better control over working capital

level, which you considered was way too high. You have since done some

readings of the related literature and have done some brainstorming. Now

you want to prepare a brief memo for your boss on this subject, highlighting

the need for a new attitude toward working capital management.

Working capital position is often interpreted as an indicator of how easily

company can meet its short-term obligations. Creditors generally subscribe

to this view of working capital. That is to say, working capital has traditionally

been seen as a metric for evaluating a company’s operating liquidity, even

though it is generally agreed that a company’s current assets may not often

be easily liquidated in the short term. The idea of working capital as an

indicator of liquidity is more meaningful in the context of a company facing

liquidation than for a company as a going concern.

In your memo, you should, among other things:

I. Clarify the meaning(s) of the term working capital and explain what it

means for the operation, profitability and growth of the company.

You would like to use a simple cash conversion model to identify

different components of operating cycle and show how these

components can be influenced to better manage working capital.

II. Point out that working capital is often viewed by companies simply as

cost, and as a result, the company management tends to react to a

“cash squeeze” by slashing working capital expenditure without

carefully considering its implications for sales, profitability and

growth. At the other end, there is also a tendency to invest too much

in working capital to maximize short-term profit. Instead what you

want to promote is an integrated and value-creating approach to

working capital management in which all elements of tied-up capital

across the balance sheet (fixed assets, inventories, receivables,

payables, and cash) have to be considered as a whole. For example,

it may be advantageous to acquire a new and more flexible machine

(fixed asset) in order to reduce inventories.

III. Highlight the significance of efficient management of working capital

(shown as short-term investment) for the company’s long-term

growth by showing working capital management as a lever for

freeing up cash from inventory, accounts receivable, and accounts

payable. By effectively managing various components of working

capital, a company can reduce its dependence on outside funding for

further investments and/or acquisitions.

IV. Point out how inventory has received a lot attention in recent years.

Excess inventory is one of the most overlooked sources of cash,

some evidence suggesting that better inventory management can

http://www.qfinance.com/dictionary/balance-sheet

http://www.qfinance.com/dictionary/fixed-asset

http://www.qfinance.com/dictionary/fixed-asset

potentially account for almost half of the savings from a working

capital optimization process. By streamlining processes within the

company—as well as processes involving suppliers and customers—

companies can optimize inventory throughout the value chain. A

best-practice NWC optimization is not just a pure reduction of NWC.

It requires the applications of enhanced forecast accuracy and

demand planning, advanced delivery and logistics concepts and

optimized production processes to reduce work-in-progress

inventory.

Against this background, it is time for you sit down to prepare your memo!

First, you will need to think through and develop the structure of your memo.

Additional reading materials posted in D2L should help you organize your

thoughts. Additional web search is strongly recommended to identify real

world evidence on best-practice working capital management as far as

possible. You need to identify and retrieve more information to supplement

what you already know.

You should like to keep your memo short, and to the point. It should be

limited to a maximum of 7 pages (single-spaced), including a one-page

executive summary. The summary should be placed at the beginning of your

submission.

http://www.qfinance.com/dictionary/best-practice

CASE B: Financial Ratios

Data for Barry Computer and its industry average follow.

a. Calculate the indicated ratios for Barry.

b. Construct the Du Pont equation for both Barry and the industry.

c. Outline Barry’s strengths and weaknesses as revealed by your analysis.

d. What kind of financial strategy is being pursued by Barry- matching,

aggressive or conservative?

Your answers must be typed.

Balance Sheet as of December 31, 2011 (in Thousands $)

Cash 77,500 Accounts payable 129,000

Receivables 336,000 Notes payable 84,000

Inventories 241,500 Other current liabilities 117,000

Total Current Assets 655,000 Total current liabilities 330,000

Net fixed assets 292,500 Long-term debt 256,000

Common equity 361,000

Total assets 947,500 Total liabilities and equity 947,500

Income Statement for Year Ended December 31, 2011 ( In Thousands $)

Sales 1,607,500

Cost of goods sold 1,392,500

SGA expenses 145,000

EBIT 70,000

Interest expense 24,500

EBT 45,500

Taxes (40%) 18,200

Earnings after taxes 27,300

Ratio Barry Industry Average

Current assets/current liabilities __________ 2.0x

Days’ sales outstanding
a
__________ 35 days

Sales/inventory __________ 6.7x

Sales/fixed assets __________ 12.1x

Sales/total assets __________ 3.0x

EAT/sales __________ 1.2%

EAT/total assets __________ 3.6%

EAT/common equity __________ 9.0%

Total debt/total assets __________ 60.0%

a = Calculation is based on a 365-day year.