Financial Analysis Custom Snowboards Paper

Preferred Due Date Nov 14

Task 5

In this task you will prepare a presentation for the chief financial officer (CFO) to present to a bank vice president who may consider extending a long-term loan to Custom Snowboards, Inc.  The CFO has requested that you analyze the financial statements to arrive at a selection of key financial statement line items, a risk assessment and ratios that the banker may use to assess and, if the loan is granted, track the progress of the company’s ability to repay the loan

You will prepare another presentation to present directly to the chief executive officer (CEO) of Custom Snowboards Inc. and the board of directors. The presentation will include a recent history of the company and a recommendation on how to proceed with the expansion plans.

 Task:

A.  Create a presentation or report for the chief financial officer in which you do the following:

1.  Summarize the key points of the company’s financial picture that could impact the bank officer’s decision.

2.  Explain how any financial risks pointed out by the bank loan officer could be mitigated by the company.

3.  Analyze the ratios that will indicate the ability to repay the principal and interest on the loan.

B.  Create a presentation or report with your recommendations on the European expansion of Custom Snowboards Inc. for the chief executive officer (CEO) by doing the following:

1.  Present a historical analysis of past performance.

a.  Analyze what the historical analysis indicates about future performance.

2.  Discuss how the current operations can be improved through better cost controls.

Note: Multiple cost controls should be discussed to address how operations can be improved.

3.  Discuss both the internal risks and external risks that Custom Snowboards, Inc. will face with any expansion alternative into the European market.

a.  Recommend strategies and techniques that can be used to mitigate those risks.

4.  Discuss the potential returns of procuring a new plant in Europe that must be presented to and considered by the CEO and company board in your presentation.

5.  Custom Snowboards, Inc. has the opportunity to enter the European market by procuring a new production plant, merge with European SnowFun, Inc. via a stock swap, or acquire European SnowFun, Inc. outright via a stock purchase. After analyzing the data provided select the best option for expanding operations into Europe.

6.  Based on the option selected in #5 above present a final financing recommendation to the CEO.

Custom Snowboards Inc.

EXPANSION INTO EUROPE

The management of Custom Snowboards, Inc. is considering an expansion to Europe. The

percentage of the total sales from Europe has grown and the growth is expected to
continue. The company could pursue this expansion from a variety of different options.

Business Risk Assessment:

The CEO is concerned about the risks of expansion into Europe. In particular, he wonders
about what affects a European expansion will have on the internal operations of the

European entity and how the company can react to external issues that any company
expanding into Europe will encounter.

Expansion Options:

1. Custom Snowboards has investigated expanding into Europe by procuring a building
and equipment and creating a new manufacturing facility. This would involve
purchasing a building and equipment for $800,000. An additional $200,000 of
working capital would need to be acquired for starting up operations. There are

some additional considerations that the company can consider:
a. Build a facility and install equipment.
b. The company has researched alternatives of paying for the building and

equipment on a time basis. They have identified an option of entering into a
sale-leaseback and an option that will involve a straight purchase over time.

2. European SnowFun Inc. is currently operating in Europe and has heard about your

expansion plans. European SnowFun has proposed to combine businesses with
Custom Snowboards. European SnowFun’s product is less durable, but the company
sales are relatively strong based on offering a personalized paint job on snowboards

that are special ordered. The two alternatives are under consideration:
a. A merger where the shareholders of European SnowFun Inc. would receive one

share of Custom Snowboards Inc. stock for each three shares they hold at the
time of the merger. (stock swap)

b. An Acquisition. European SnowFun Inc. has offered to be acquired. Custom
Snowboards Inc. is considering this option at $2.40/share. (stock purchase)

The solution includes data calculations for many of the options in the expansion decision.

The company uses a 10% cost of capital (hurdle rate) for the expansion analysis. The
company can also continue to operate in Europe without an expansion and can continue to
license the European Snowfun painting technology.

The CEO is expecting your recommendation regarding which expansion option the company
should pursue when you make the presentation.

Financing:

Custom Snowboards, Inc. has decided to fund its expansion into Europe through increasing
its capital structure. It has concluded that it can raise the working capital though the

issuance of long-term debt or through sale of common stock shares. It’s also willing to do
so with a combination of debt and stock. The CEO would like a recommendation for the
option that would maximize the value for shareholders of the company.

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ustom

Snowboards Inc.

ears 12, 13, and 14

00

nits Sold

ENUE:

oods Sold

rofit

PER

ING E

PENSES

Expenses

0

,500

Selling Expense

90,000 90,000 90,000

ebsite Creation and

aintenance

12,000 12,000

Expense

100,000 100,000

&

s

0,000

8,000

Income

(Expense):

Interest Income 300

E

ORE INCOME TAXES

es

,800

43,000

Regular Custom

Year 14 Year 13 Year 12

1

0

Sales

abor

00

4000

3000

Direct Direct
Year 14 Year 13 Year 12 Materials Labor Overhead

.06

A

B 41200

C

D

42800 42700

25.94

E

41900

26.43

F

41600 40700

27.21

G 45700 41600 40700 27.96 52.20 27.21 107.38

42600 41800 40500

I 39700 39200 41900

60.09 26.43

43200 42800 42700 29.58 55.22 25.94 110.74

40400 42100 41900 31.63 59.05 26.43 117.12

L 39800 41200 41000 32.11 59.94 27.01 119.06
M 41200 41600 40700 31.02 57.90 27.21 116.14
N 39700 39200 41900 32.19 60.09 26.43 118.72
O 43200 42800 42700 29.58 55.22 25.94 110.74
P 40400 42100 41900 31.63 59.05 26.43 117.12

42600 41800 40500 30.00 56.00 27.35 113.35

R 42600 41800 40500 30.00 56.00 27.35 113.35
S 39800 41200 41000 32.11 59.94 27.01 119.06
T 41200 41600 40700 31.02 57.90 27.21 116.14
U 39700 39200 41900 32.19 60.09 26.43 118.72
V 44700 42800 42700 28.59 53.37 25.94 107.90
W 40400 42100 41900 31.63 59.05 26.43 117.12
X 44700 42800 42700 28.59 53.37 25.94 107.90
Y 44700 42800 42700 28.59 53.37 25.94 107.90

39700 39200 41900

39800 41200 41000

Low

40400 42100 41900

Mid

41200 41600 40700

Mid

42600 41800 40500

43200 42800 42700

44700 42800 42700

45700 41600 40700

	R	i	D																																0	7	20	Student	N	Sam
	E
		C
Income Statement
December 31,	Y
				42600					4			18					40500
	U
											Year 14											Year 13										Year 12
RE	V
Net			Sales					6,858,600				6,729,800				6,520,500
	Cost of	G			4,771,200			4,681,600		4,53		6,000
Gross	P			2,087,400			2,048,200			1,984,500
	O	A	T	X
Sellin	g
Transportation ($5 per board)	234,								30			229,900			222,750
			Sales Commissions			3			19			313,500			303,750
			Advertising			255,600			250,800	2			43,000
					Total			809,400		7	94,200		7	6	9,500
		General and Admin Expenses
Administrative Payroll	2					50,000		2	20,000		2	10,000
		Executive Compensation		21				5,000	1			95,000	1									90,000
		Research and Development
	W	M										12,000
			Depreciation																						100,000
	Utilities	Service	2			60,000	2													55,000			238,000
		Other General and Admin Expenses						17						15			120,500
		Total General and Admin Expenses			1,097,000	1,0					30,000			960,500
		Total Operating Expenses			1,906,400			1,824,200			1,730,000
		OPERATING INCOME			181,000			224,000			254,500
					Interest
		3,200			2,500
		Interest Expense			-75,000			–		80,000			-85,000
		Interest, net	-74,	700			-76,800			-82,500
	EARNINGS	B	F			106,300			147,200			172,000
		Provision for Income	Tax			26,575								36
		NET EARNINGS					79,725					110,400		12	9,000
	Selling Price
										Regular
	Trade	Discounts
	0.6	0.5
6858600	6729800	6520500					16
		Direct	Materials	Direct		L			Overhead		Total	Costs
			Cost of Goods Sold	1278000	238					56	1107600	4771200	2540800
All boards – Year 14		125	2340800	1086800	4681600
All boards – Year 13	1215000	2268000		105	4536000
All boards – Year 12
Year 14 Unit Costs
Initial				39800								41200				41000			32.11			59.94			27.01				119
				44700									42800									42700				28.59				53.	37							25.94				107.90
						41600							40700			31.02			57.90					27.21			116.14
				40400					42100										41900				31.63				59.05								26.43				117.12
			43200			29.58			55.22			110.74
				39700					39200	2	4.00				6	0.09	110.53
		45700		27.96		52.20		107.38
H			30.00			56.00			27.35			113.35
		32.19			118.72
J
K
Q
Z
Lowest	Data Summary by First Initial (Categorized by Year 14 data)
LowLow	F, J, O, V
		Mid	A, M, T
D, L, Q, X
C, N, U
MidHigh	I, R, S
HighHigh	K, E, P
Highest	B, W, Y, Z
G, H

Enter first initial and hit the ‘Enter’ key.

BalanceSheets

e g i

, Inc.

Year 14 Year 13 Year 12

s

30,000

,448

95,000

100,000 100,000 100,000

800,000 800,000

300,000

1,000,000

55,000 55,000 55,000

800,000

50,000 55,000 60,000

750,000

5,240

Stock ($1.00 Par)

200,000 200,000 200,000

400,000 400,000 400,000

1,818,050 1,791,885 1,734,145

			Custom Snowboards
Balance Sheets
			December 31, Years 12, 13, and 14
		ASSETS
		Current Assets:
		Cash and Cash Equivalents			290,816			227,923			121,000
		Short-Term		Investment			180,000			150,000
		Accounts Receivable, net			205,758			201,894			195,615
		Raw Materials Inventory			38,340			37,620			36,450
		Finished Goods Inventory			143,136				140			136,080
		Other Current Assets			110,000			104,000
		Total Current Assets			818,050			891,885			734,145
		Property and Equipment, at cost:
		Land
		Manufacturing Plants and Offices														800,000
	Furniture, Fixtures and Equipment			500,000									300,000
1,										400,000		1,															200,000				1,200,000
		Less Accumulated Depreciation		(400,000)		(300,000)		(200,000)
		Net Property and Equipment													1,000,000			900,000
		TOTAL ASSETS						1,818,050						1,791,885						1,734,145
		LIABILITIES
		Current Liabilities:
		Accounts and Notes Payable			76,680			75,240			72,900
Current Portion of	Long Term	Debt
		Total Current Liabilities			131,680			130,240			127,900
		Long-Term Liabilities:
		Mortgage Payable					700,000						750,000
		Other Long-Term Liabilities
		Total Long-Term Liabilities			805,000			860,000
		Total Liabilities			881,680				93			987,900
		STOCKHOLDERS’ EQUITY:
				Common
		Paid In Capital
		Retained Earnings			336,370			256,645			146,245
		Total Stockholders’ Equity			936,370			856,645			746,245
		TOTAL LIABILITIES and EQUITY

Horizontal_Analysis

.

December 31, Years 12, 13, and 14

Year 14 Year 13 Year 14

Horizontal Analysis

Year 14 Year 13 Year 12

Change % Inc (Dec)

6,858,600 6,729,800 6,520,500

4.00

Cost of Goods Sold 4,771,200 4,681,600

1.91%

3.21%

2,087,400 2,048,200 1,984,500

1.91%

3.21%

11.0

229,900 222,750

1.91%

3.21%

Sales Commissions 319,500 313,500 303,750 6,000 1.91%

3.21%

Advertising 255,600 250,800

1.91%

3.21%

30.4%

Total Selling Expense 809,400

1.91%

3.21%

General and Admin Expenses

30,000

10,000

Executive Compensation

20,000

%

5,000

Utilities

238,000 5,000

0.09

Research and Development 90,000 90,000 90,000 0

0 0.00%

12,000 12,000 12,000 0 0.00% 0 0.00%

Depreciation Expense 100,000 100,000 100,000 0 0.00% 0 0.00%
Other General and Admin Expenses 170,000 158,000 120,500 12,000

2%

8.5%

Total General and Admin Expenses 1,097,000

960,500

69,500

Total Operating Expenses 1,906,400 1,824,200 1,730,000

94,200

OPERATING INCOME 181,000 224,000 254,500

0%

Interest Income 300 3,200 2,500

700

Interest Expense -75,000 -80,000 -85,000 5,000

5,000

Interest, net

-76,800 -82,500

106,300 147,200 172,000

Provision for Income Taxes 26,575 36,800 43,000

-27.79%

-14.42%

NET EARNINGS 79,725 110,400

-27.79%

-14.42%

Year 14 Year 13 Year 12 Horizontal Analysis Horizontal Analysis
ASSETS Years 14 and 13 Years 13 and 12
Current Assets: Change % Inc (Dec) Change % Inc (Dec)
Cash and Cash Equivalents 290,816 227,923 121,000

Short-Term Investments 30,000 180,000 150,000

30,000

Accounts Receivable, net 205,758 201,894 195,615

Raw Materials Inventory 38,340 37,620 36,450

1.9%

3.2%

Finished Goods Inventory 143,136 140,448 136,080

—

Other Current Assets 110,000 104,000 95,000 6,000

9,000

Total Current Assets 818,050 891,885 734,145

Property and Equipment, at cost:

Land 100,000 100,000 100,000 0 0.0% 0 0.0%
Manufacturing Plants and Offices 800,000 800,000 800,000 0 0.0% 0 0.0%

500,000 300,000 300,000 200,000

0 0.0%

1,200,000 1,200,000 200,000

0 0.0%

Less Accumulated Depreciation

(100,000)

Net Property and Equipment 1,000,000 900,000 1,000,000 100,000

(100,000)

TOTAL ASSETS 1,818,050 1,791,885 1,734,145

1.5% 57,740 3.3%

LIABILITIES
Current Liabilities:

Accounts and Notes Payable 76,680 75,240 72,900

1.9%

3.2%

55,000 55,000 55,000 0 0.0% 0 0.0%

Total Current Liabilities 131,680 130,240 127,900 1,440 1.1% 2,340

Long-Term Liabilities:

Mortgage Payable 700,000 750,000 800,000

(50,000)

Other Long-Term Liabilities 50,000 55,000 60,000

(5,000) -8.3%

Total Long-Term Liabilities 750,000 805,000 860,000

(55,000)

Total Liabilities 881,680 935,240 987,900

STOCKHOLDERS’ EQUITY:

Common Stock ($1.00 Par) 200,000 200,000 200,000 0 0.0% 0 0.0%
Paid In Capital 400,000 400,000 400,000 0 0.0% 0 0.0%
Retained Earnings 336,370 256,645 146,245 79,725

110,400

Total Stockholders’ Equity 936,370 856,645 746,245 79,725

110,400

TOTAL LIABILITIES and EQUITY 1,818,050 1,791,885 1,734,145 26,165 1.5% 57,740 3.3%

			Custom Snowboards Inc	Winter
Comparative Income Statements	Custom Snowboards, Inc.	Sports
Ratio Analysis:
			Horizontal Analysis
	Years 14 and 13		Years 13 and 12	Current Ratio	6.21	6.85	4.20
		REVENUE:				Change				% Inc (Dec)
				Net Sales	128,800							1.91%	209,300							3.21%	Acid-Test Ratio	4.68	3.40
4,536,000	89,600	145,600
		Gross Profit	39,200	63,700	Inventory Turnover	33.3	33.9	30.4
		OPERATING EXPENSES	Average Collection Period		11.0	32.5
	Selling Expenses
	Transportation Out		234,300	4,400	7,150	Debt Ratio	4	8.5%	5	2.2%	38.0%
9,750
	243,000	4,800	7,800	Gross Profit Margin					3	0.4%	3			2.1%
794,200	769,500	15,200	24,700
Operating Profit Margin			2.6%					3.3%	5.2%
	Administrative Salaries		250,000	220,000	210,000	13.64%	4.76%	Net Profit Margin		1.2%		1.6%	5.1%
215,000		195,000		190,000	1		0.26	2.63%
	260,000		255,000	1.96%	17,000	7.14%		Earnings per Share	0.13	0.08
					0.00%
	Website Creation and Maintenance	Return on Total Assets	4.4%	6.2%	4.8%
7.59%	37,500	3	1.1	Return on Common Equity	1		2.9%	8.	10%
	1,030,000	67,000	6.50%	7.24%
Price / Earnings Ratio	35.77	79.71	29.00
82,200	4.51%	5.45%
(43,000)	-1	9.2	(30,500)	-11.98%	Times Interest Earned	2.41	2.80	5.10
	Interest Income (Expense):
(2,900)	-90.63%	28.00%
-6.25%	-5.88%
	-74,700	2,100	-2.73%	5,700	-6.91%
	EARNINGS BEFORE INCOME TAXES	(40,900)			-27.79%	(24,800)			-14.42%
(10,225)	(6,200)
129,000	(30,675)	(18,600)
		Custom Snowboards Inc.
Comparative Balance Sheets
December 31, Years 14 and 13
62,893	27.6%	106,923	8	8.4%
(150,000)	-83.3%	2															0.0%
3,864			1.9%	6,279					3.2%
720	1,170
2,688		—	4,368
		5.8%	9.5%
(73,835)		-8.3%	1		57,740	2						1.5%
Furniture, Fixtures, and Equipment	66.7%
	1,400,000		16.7%
-400,000	-300,000	-200,000			(100,000)	33.3%	50.0%
1	1.1%	–	10.0%
	26,165
	1,440		2,340
	Current Portion of Long-	Term Debt
	1.8%
	(50,000)	-6.7%	-6.3%
	(5,000)	-9.1%
	(55,000)	-6.8%	-6.4%
(53,560)	-5.7%	(52,660)	-5.3%
31.1%	7		5.5%
9.3%	14.8%

Vertical Analysis

Custom Snowboards Inc.

December 31, Years 12, 13, and 14

Year 14 Year 13 Year 12
REVENUE:
Net Sales 6,858,600

6,729,800 100.0% 6,520,500 100.0%

Cost of Goods Sold 4,771,200

4,681,600 69.6% 4,536,000 69.6%

Gross Profit 2,087,400 30.4% 2,048,200 30.4% 1,984,500 30.4%
OPERATING EXPENSES

Selling Expenses

Transportation Out 234,300

229,900 3.4% 222,750 3.4%

Sales Commissions 319,500

313,500 4.7% 303,750 4.7%

Advertising 255,600

250,800 3.7% 243,000 3.7%

Total Selling Expense 809,400

794,200 11.8% 769,500 11.8%

General and Admin Expenses

Administrative Salaries 250,000

220,000 3.3% 210,000 3.2%

Executive Compensation 215,000

195,000 2.9% 190,000 2.9%

Research and Development 90,000

90,000 1.3% 90,000

Website Creation and Maintenance 12,000

12,000 0.2% 12,000 0.2%

Depreciation Expense 100,000 1.5% 100,000 1.5% 100,000 1.5%

260,000

255,000 3.8% 238,000 3.7%

Other General and Admin Expenses 170,000

158,000

120,500 1.8%

Total General and Admin Expenses 1,097,000

1,030,000

960,500

Total Operating Expenses 1,906,400

1,824,200

1,730,000

OPERATING INCOME 181,000 2.6% 224,000 3.3% 254,500

Interest Income (Expense):

Interest Income 300 0.0% 3,200 0.0% 2,500 0.0%
Interest Expense -75,000

-80,000

-85,000

Interest, net -74,700 -1.1% -76,800 -1.1% -82,500 -1.3%
EARNINGS BEFORE INCOME TAXES 106,300 1.5% 147,200 2.2% 172,000 2.6%
Provision for Income Taxes 26,575 0.4% 36,800

43,000

NET EARNINGS 79,725 1.2% 110,400 1.6% 129,000

Custom Snowboards Inc

December 31, Years 12, 13, and 14

Year 13 Year 12

ASSETS
Current Assets:

Cash and Cash Equivalents 290,816 16.0% 227,923

121,000

Short-Term Investments 30,000

180,000 10.0% 150,000

Accounts Receivable, net 205,758

201,894 11.3% 195,615 11.3%

Raw Materials Inventory 38,340 2.1% 37,620 2.1% 36,450 2.1%
Finished Goods Inventory 143,136

140,448 7.8% 136,080 7.8%

Other Current Assets 110,000

104,000 5.8% 95,000 5.5%

Total Current Assets 818,050

891,885

734,145

Property and Equipment, at cost:

Land 100,000 5.5% 100,000

100,000 5.8%

Manufacturing Plants and Offices 800,000

800,000

800,000

Furniture, Fixtures and Equipment 500,000

300,000 16.7% 300,000

1,400,000

1,200,000

1,200,000

Less Accumulated Depreciation (400,000)

(300,000)

(200,000)

Net Property and Equipment 1,000,000

900,000

1,000,000

TOTAL ASSETS 1,818,050 100.0% 1,791,885 100.0% 1,734,145 100.0%

LIABILITIES
Current Liabilities:

Accounts and Notes Payable 76,680

75,240 4.2% 72,900 4.2%

Current Portion of Long-Term Debt 55,000

55,000 3.1% 55,000 3.2%

Total Current Liabilities 131,680

130,240 7.3% 127,900

Long-Term Liabilities:

Mortgage Payable 700,000

750,000

800,000 46.1%

Other Long-Term Liabilities 50,000

55,000 3.1% 60,000

Total Long-Term Liabilities 750,000

805,000

860,000

Total Liabilities 881,680

935,240

987,900

STOCKHOLDERS’ EQUITY:

Common Stock ($1.00 Par) 200,000

200,000

200,000 11.5%

Paid In Capital 400,000 22.0% 400,000

400,000

Retained Earnings 336,370

256,645

146,245 8.4%

Total Stockholders’ Equity 936,370

856,645

746,245

TOTAL LIABILITIES and EQUITY 1,818,050 100.0% 1,791,885 100.0% 1,734,145 100.0%

Comparative Income Statements – Vertical Analysis
										100.0%
		69.6%
		3.4%
		4.7%
			3.7%
		11.8%
3.6%
		3.1%
	1.3%	1.4%
		0.2%
Utilities & Services		3.8%
2.5%	2.3%
	16.0%	15.3%	14.7%
2		7.8%	27.1%	26.5%
3.9%
		-1.1%	-1.2%		-1.3%
0.5%	0.7%
2.0%
Balance Sheets – Vertical Analysis
Year 14
12.7%	7.0%
1.7%	8.6%
		11.3%
7.9%
6.1%
45.0%	49.8%	42.3%
5.6%
44.0%	44.6%		46.1%
27.5%	1	7.3%
77.0%	67.0%	69.2%
–	22.0%	-16.7%	–	11.5%
55.0%	50.2%	57.7%
		4.2%
3.0%
7.2%	7.4%
38.5%	41.9%
2.8%	3.5%
41.3%	44.9%	49.6%
48.5%	52.2%	57.0%
11.0%	11.2%
22.3%	23.1%
18.5%	14.3%
51.5%	47.8%	43.0%

Trend Analysis

Custom Snowboards Inc.

Year 14 Year 13 Year 12

Net Sales 6,858,600 6,729,800 6,520,500

.2%

100.0%

103.2%

Custom Snowboards Inc.

Year 14

Net Sales

6,858,600

100.0%

Year to Year Increase

103.0%

Historical Trend Analysis
December 31, Years 12–14
Trend Percentages (Year 12 as base)	105.2%			103
	Year to Year Increase	101.9%
Forecasted Trend Analysis
December 31, Years 14–17
							Year 17								Year 16							Year 15
7,115,112	6,995,772	7,064,358
Trend Percentages (Year 14 as base)	103.7%	102.0%		103.0%
101.7%	99.0%

European_Sales_Forecasts

Custom Snowboards Inc.

Year 17 Year 16 Year 15

REVENUE:

Net Sales

Cost of Goods Sold

Gross Profit

OPERATING EXPENSES

Advertising 80,000 80,000 100,000 100,000 100,000
Sales Commissions

Manager/Staff

55,000

40,000 40,000 40,000 40,000

EARNINGS

Selling Price
Regular

161

Regular
Trade

Year 13 Year 12 0.6

Sales

0 0 0

Sales

s

Overhead Total Costs

Year 16 8520 30 56 36

Year 17

30 56 36

Year 18

30 56 36

Year 19

30 56 36

30 56 36

The management of Custom Snowboards has prepared the following projected income statements for an anticipated expansion to Europe. Different potential financing options are presented in the spreadsheets that follow.
European Sales Forecast
Comparative Pro Forma Income Statements
December 31, Years 15–19
						Year 19							Year 18
	2,390,085		2,172,804		1,975,277		1,646,064		1,371,720
	1,811,120		1,646,473		1,496,794		1,247,328		1,039,440
578,965	526,332	478,483	398,736	332,280
Selling and Admin Expenses
28,948	26,317	23,924	19,937	16,614
Transportation Out ($5/unit)	74,226	67,478	61,344	51,120	42,600
	Factory	66,853	63,669	60,638	57,750
Total Selling and Admin		250,027		237,464		245,906		228,807		214,214
Depreciation Expense*										40,000
		288,937			248,867			192,578			129,929				78,066
* Depreciation is based on straight line, 10 year life, $800,000 cost, $400,000 salvage
330
First year
	8520
Sales and COGS		Direct Material		Direct Labor
1039440
10224	1247328
12269	1496794
13496	1646473
Year 20	14845	1811120

Capital Structure

Year 15 78,066

Year 16 129,929

Year 17 192,578

Year 18 248,867
Year 19 288,937

Long Term

Debt and

Debt Common Common Term Debt

1,000,000 300,000 800,000

700,000 200,000 1,000,000

Total 1,000,000 1,000,000 1,000,000 1,000,000

0 0 0 0

0

0

0

0

-43,875 -13,163 -35,100 0

200,000

300,000 700,000

9

EBIT from European Forecast
Insert the EBIT from the European Sales Forecast into the box. Each year can be analyzed individually.
CHOOSING AN OPTIMAL CAPITAL STRUCTURE
30% Long-Term	80% Long-Term
Alternative Capital Sources		Debt and	No Long-
Long Term Debt
Preferred
Common *
Earnings before Interest and Tax (EBIT)
Interest on Long Term Debt	67,500	20,250	54,000
Income before tax (EBT)	-67,500	-20,250	-54,000
Income Tax (35% marginal rate)	-23,625	-7,088	-18,900
Net Income		-43,875		-13,163		-35,100
Total Income Available for Common Stock
Common Stock Shares Outstanding	550,000
Earnings per Common Stock share	–	0.21	-0.024	-0.117	0.000
* Capital received from the additonal shares: $2.00 per share consisting of $1 par value plus $1 of additional paid in capital.

Capital_Budgeting

Year 15 Year 16 Year 17 Year 18 Year 19

1,371,720 1,646,064 1,975,277 2,172,804 2,390,085

:

Cost of Goods Sold 1,039,440 1,247,328 1,496,794 1,646,473 1,811,120

40,000 40,000 40,000 40,000 40,000

214,214 228,807 245,906 237,464 250,027

78,066 129,929 192,578 248,867 288,937

at a minimum expected 10% Cost of Capital

10% Present

Value

Year 15 98,550

Year 16 137,447

Year 17 184,433

Year 18 226,650

Year 19 256,703

,413

200,000 0.621

400,000 0.621

Investment 1,000,000

28,437

:

Cash Flows
Investment

Year 15 98,550
Year 16 137,447
Year 17 184,433
Year 18 226,650
Year 19

Internal Rate of Return

Custom Snowboards, Inc. Capital Budget
New Manufacturing Facility in Europe
Projected Five-Year Income Statements for European operations
Expected Annual Sales Increase from Europe
Expected Costs of New	Product
Depreciation on European Fixed Assets
Selling and administrative expenses
Income before taxes
Income tax at 25% marginal rate	19,517	32,482	48,144	62,217	72,234
Net income	58,550	97,447	144,433	186,650	216,703
Net cash flow (Net Income with Depreciation)			98,550			137,447			184,433			226,650		256,703
Net		Present		Value
				Cash Flows	PV Factors
		0.909	89,581
		0.826	113,531
		0.751	138,509
		0.683	154,802
				0.621		159
Working Capital Return	124,200
Salvage Return	248,400
Total				Present Value	1,0	28,437
Net Present Value
	Internal Rate of Return
-1,000,000
856,703
10.8%

Lease vs Purchase

Interest and

Calculations

Payment:

Loan

Payments Principal Interest Principal Principal

15

800,000

16 189917 658,083

17 189917 507,651

18 189917 348,193

19 189917 179,167

179,167 0

Loan

Total Tax

End of Year Payments Costs Depreciation Interest

Cash Flows

15 189917

48,000

16 189917 25,000 35,000 39,485

17 189917 25,000 35,000 30,459

18 189917 25,000 35,000 20,892

19 189917 25,000 35,000 10,750

Leasing

After Tax Present Value Present Value After Tax Present Value Present Value
End of Year Cash Flows

Cash Flows

of Outflows

Year 14

50,000

15

140,438 0.909

16 146,250

142,567 0.826

17 146,250

0

144,823 0.751

18 146,250

147,215 0.683

19 146,250

149,750 0.621

50,000 0.747

Custom Snowboards Inc. Lease vs. Buy Decision
Analysis of Extended Payment Options for Procurement of Plant & Equipment
	Leasing			Principal
		Loan	189,917.12
		Payments
Beg., Year	End Year
		End of Year
									189917		48,000	141,917		658,083
	39,485	150,432		507,651
	30,459	159,458		348,193
	20,892	169,026			179,167
	10,750
After-tax Cash Flow if Purchased
Operational			After Tax
Deductions	Shields
				25,000					35,000	297,917	74,479		140,438
289,402	72,351		142,567
280,376	70,094		144,823
270,809	67,702		147,215
260,667	65,167		149,750
Lease vs. Purchase Comparison of Cash Flows
Purchasing
Factors (6%)		of Outflows	Factors (10%)
Down Payment
				146,250	0.943	137,914	127,658
0.890	130,163	117,760
	0.84	122,850	108,762
0.792	115,830	100,548
	0.747	109,249	92,995
Cash buyout	37,350
653,355	597,723

After Tax Cash Flows based on $195,000 lease payments and a 25% tax rate.

Merge – Acquire

Custom Snowboards

78,066

200,000 300,000

0.26

1.1 9.2

Earnings per Share
Custom Snowboards 0.98

European Snowboarding 0.26

Present

Value

Year 15

0.909

Year 16

0.826

Year 17

0.751

Year 18

0.683

2.40

Year 19

0.621

Total

CONSIDER A MERGER
Financial Data for Custom Snowboards Inc. and	European Snowboarding
European SnowFun
Earnings Available for Common Stock	196,876	Projections based on Year 15 budget and European Year 15 forecast.
# of shares of common stock outstanding
Earnings per share		0.98
Market price per share	$1.08	$	2.40
Price/Earnings ratio
Expected EPS
Before Merger	After Merger
1.18	Expected EPS based on efficiencies
from combined operations.
CONSIDER AN ACQUISITION
Net Present Value of European SnowFun Project Cash Flows
10% Present
Cash Inflows	Value factor
113,453	103,129
155,331	128,303
205,894	154,626
250,257	170,926	Offer/share:
282,670	175,538
1,007,605	732,522	Offer Price:	720,000

Net income before taxes from Year 15 budget * an anticipated 35% marginal tax rate.

Activity Based Costing

Custom Snowboards, Inc.

vs.

Factory

9,500 20 Regular 125

37,377

Setups

9,344

186,200

159 Regular 93

37,377

Personalized

9,344

315,800

Engineering 140

Regular 37

37,377

Service Personalized 103

9,344

142,000
Product

Regular

37,377

Personalized

9,344

312,767

& Shipping

Packaging

7 Regular 37,377

315,800 0.84

Personalized 9,344

315,800 0.21

332,588
37,377

9,344

Regular Personalized

Traditional ABC Traditional ABC
Direct Material

1,177,376

490,560

Direct Labor

2,197,768

686,784

3,375,143

1,177,344

Traditional

1,403,030

2,442 183,758

14,862 300,938

37,867 104,133

139,010 173,757

266,072 66,516

ABC

1,403,030

Regular

119

105

Personalized
Unit Cost – Traditional

Unit Cost – Activity Based

						37,377
						9,344
		1,403,030
Minneapolis Manufacturing – Overhead Analysis –			Traditional			ABC
Five overhead items with identified costs
Item	Activity Cost Pool	Cost Driver	Cost Driver Quantity	Pool Rate	Product Line	Cost Driver Quantity for Product Line	Activity Cost for Product Line	Product Line Production Volume	Activity Cost per Unit of Product
	186,200		Setups		2,442	0.07
						Personalized	9,375		183,758	19.67
Quality				315,800	QC Inspections	1,986		14,862	0.40
Control	1,892		300,938	32.21
	Engineering		142,000	1,013		37,867	1.01
	104,133	11.14
	312,767	Forklift Service	841	372	374		139,010	3.72
Movements	467		173,757	18.60
	Packaging		332,588	46,721		266,072
	66,516
Miscellaneous Data
$ 1,289,355	Overhead allocated to Activity Cost Pools
Regular Snowboard Production
Personalized Paint Production.
$ 1,403,030	Total Applied Overhead
Summary:
	1,177,376		490,560
	2,197,768		686,784
Total direct cost of materials and labor		3,375,143		1,177,344
Manufacturing Overhead (ABC)	1,068,982	334,048
Factory Setups
Quality Control
Engineering Services
Product Movements
Packaging and Shipping
Overhead cost unallocated to activity cost pools	86,610	27,065	113675
Total ABC Overhead Cost	546,863	856,167
Total Product cost	4,444,125	3,922,006	1,511,392	2,033,511
Unit Cost Comparisons:
	Unit Cost – Traditional
	Unit Cost – Activity Based
162
218

Sheet1

CFO Presentation Background

This is a presentation to a banker who the company wants a loan from and is a targeted financial statement analysis.

This is NOT a sales job. You are presenting the facts only regardless of how good or bad they might be.

This is a focused financial analysis and everything you talk about should be restricted to information that you think will be of use to the banker

The banker is NOT interested in lots of detail, but only in the areas that will affect the company’s ability to pay.

CFO Presentation
Question A1
A1. Key Points – This is analogous to the Horizontal, Vertical and Trend Analysis in Task 1, but restricted to accounts that the banker is interested in.
The banker is concerned about Profitability, Liquidity and Solvency.
Don’t use ratios since you’ll be talking about them in A3.
State the line item, provide a status, describe why the line item is important to the banker.

CFO Presentation
Question A2
A2. Risks – Put yourself into the shoes of the banker and define risks that a banker might be concerned about in looking at Custom Snowboards’ financial statements and how the company can mitigate them.
Key Thought: What is going to give the banker nightmares? What worries the banker? These are NOT internal control risks, but risks associated with poor performance of the company.
You’ll need three or so risks. You can base them on line items that you discus in A1. e.g. Declining Sales could be a risk.
You might think of writing down the risks and how CS will work to mitigate on two sides of a piece of paper to make sure you’ve got both the risks and the mitigations included with you answer.

CFO Presentation
Question A3
A3. Ratio Analysis – Discuss the key ratios that a banker will be most interested to detect the company’s ability to pay the interest payments and the loan principal. Useful tab: Horizontal Analysis – ratio section.
Ratios should address Profitability, Solvency and Liquidity
What is the ratio?
What is the current status of the ratio (like Task 1)
Why is it important to the banker and the company’s ability to pay?

CEO Presentation
Bring the Board Up to Speed
B1, B1a, and B2 are questions that follow an informational discussion with the Board of Directors.
This is another targeted financial analysis to give the Board an idea of how the company has performed in the past three years.
Do not contemplate the European expansion.

CEO Presentation
Question B1
B1. Historical Analysis – This analysis is more broad than the Key Points answer in the CFO presentation, because the Board is interested in more aspects of the company and ‘how we got here’ kind of information
Show selected accounts – Year 12 to Year 13 to Year 14
Useful tabs: Horizontal Analysis, Vertical Analysis

CEO Presentation
Question B1a
B1a. Future Performance – The historical analysis is extended to project the future results of the company. The prime focus is on the past three years and how they lead up to the results forecasted in the next three years.
Outline the sales changes in dollars and percentages
The Horizontal and Vertical Analysis might provide a bit more perspective and what trends in the first three years might provide indicators of what could happen in the three future years.
Useful tabs: Trend Analysis

CEO Presentation
Question B2
B2. Improvement – Discussion on what you would do to improve operational results. It is suggested to come up with at least two cost improvement programs, one being Activity Based Costing.
Useful tabs: Activity Based Costing
ABC counts as only one measure and you should bring data in from the spreadsheet that shows how Custom Snowboards can use ABC to reduce costs.
You can discuss another big program like Just In Time inventory, Six Sigma quality control or Lean Manufacturing. You need to make sure that you include discussion on how that program will benefit Custom Snowboards.
Describe the cost control program
Provide a paragraph that outlines how Custom Snowboards can specifically benefit from the program.

CEO Presentation
The Expansion
The rest of the task deals with your presentation to the CEO of your analysis of various aspects of the European Expansion.
B3 questions are business risks
B4, B5, and B6 are based on the same principles discussed in Task 3.
B4 – Capital Budgeting, Lease/Buy
B5 – Merger/Acquisition
B6 – Capital Structure

CEO Presentation
Questions B3 and B3a
B3. Internal and External Risks – Use the European expansion as the basis for risk identification. You are NOT discussing internal control risks, but general business risks.
Internal risks are things that management has some control over (e.g. technology transfer, work environment, information systems)
External risks come from outside the company (currency, regulation, economy, competition)
Suggestion: Three internal risks and three external risks
There are no tabs required for the B3 questions
B3a. Recommendation – Discuss in detail how the above identified risks will be mitigated.
Make sure that for each risk you have defined a mitigation.
Mitigations may not solve the risks, but minimize their effects.

CEO Presentation
Question B4
B4. Potential Returns – This is similar to the Capital Budgeting question in Task 3, but there are no multiple scenarios.
Please state that this project is the Build a New Plant in Europe (or Direct Expansion) alternative… Not merger, not acquisition.
Define NPV and IRR. Why are they important measures?
What is the goal (hurdle rate)?
Discuss the impact of your interpretation of the result on the Build expansion option decision
Lease/Buy tab is applicable as additional financing options to be considered if the Build option is chosen.
Lease/Buy is a secondary decision AFTER you choose to build a new plant in Europe.
Useful tab: Capital Budgeting for overall discussion. Lease / Purchase tab for lease vs. purchase discussion

CEO Presentation
Question B5
B5. Summary – Discuss and choose a specific expansion alternative in this question.
Discuss the Pros and Cons of Merging, Acquisition, and Build a New Plant. Suggest a separate paragraph for each alternative. You need to determine which of the alternatives are financially viable.
Build: discuss result of Capital Budgeting (B4)
Lease/Buy, if applicable
Other pros and cons.
Merger: Business combo with ESF via Stock Swap
Discuss the result of EPS affects and stock dilution effects.
Other pros and cons.
Acquisition: Business combo with ESF via Stock Purchase
What is NPV? (total present value – investment = NPV)
Other Pros and Cons
Your decision.
Useful tabs: Merge/Acquire, Capital Budgeting

CEO Presentation
Question B6
B6. Presentation –Present a specific choice on best capital structure alternative for your recommendation.
State expansion choice
If merger, will it require large cash outlay? If it doesn’t will you finance the merger?
Regardless of your expansion decision, you still must discuss the capital structure as if company has to raise significant capital.
Similar to Task 3 Questions 1 and 1a, complete Capital Structure tab.
Which capital structure has optimum EPS for the entire 5 year period? That is your final financing recommendation.
Make sure you state all four capital structure alternatives along with the five-year EPS results.
Pertinent tab: Capital Structure

Submission Tips
For your discussions, make your point/decision obvious and back it up with detail found in the spreadsheets. Insufficient data and insufficient analysis will result in a rejection.
Remember to always apply analysis. Don’t just put in the numbers, but explain why they are different and if you can put them in a context with other numbers do so. A lack of analysis will result in that element not passing.
Make sure you organize your work according to the rubric questions, so that the grader can easily identify your specific answers.
Don’t overthink your answers, but base them on the information given. If in doubt on details, refer back to the story line or the spreadsheet. If you find yourself guessing, it’s better not to guess and stop your discussion.