Solution Pages: 7
Files that you will download:
Word (.docx) & Excel (.xlsx)
Questions Covered in Solution
- What is going right with this business? What concerns you?
- Calculate the Free Cash Flow for the firm? Assume capital expenditures equal the amount spent on fixed assets and purchases are part of working capital. What is trend? What is the implication for the firm?
- What is the trend working capital used from 2012 to 2015?
- What is the Cash Conversion Cycle (CCC) for the firm? What is the trend in the components and the overall CCC? Where is the cash going?
- Analyze the financial ratios. How does the firm compare to the benchmark?
- What is the compounded average revenue growth rate? What is the SGR? What is the asset growth rate?
- Will strong business performance in 2016 improve the cash position? Develop a proforma forecast for 2016. How much money do they need? Can they afford the land?
- Do you agree with Maggie Brown’s accounts-payable policy? Explain.
- What is the problem? What are the alternatives for solving the business’s cash problem?
Sample of Solution
I. Case Summary
Bob Brown has been excited about its flourishing business, realizing 15% growth in revenue in 2005 with operating margins growing at an even greater rate. Bob, the father of four boys, did his degree in Agricultural Economics from Virginia Tech. He married Maggie Horniman in 1993, and bought wholesale nursery business from Maggie’s Father in 2002, to increase family income for growing needs. Browns got the Horniman business for $ 999,000, after pooling their savings, house sale proceeds, minority business development grant, and personal loan. Since the start, Bob has been able to realize growth in operations. The nursery business has 40 acres of productive fields and employed 12 full-time and 15 seasonal employees with 52 operational greenhouses. Company’s specialized products include, woody shrubs, azaleas, camellias, hydrangeas and rhododendrons. Moreover, Bob has been able to increase the number of species’ variety in the nursery by more than 40%. With the increased variety, the warm personality of Bob, and Maggie’s tight rein on cost ensured an increase in profit margin from 3.1% in 2003 to an expected 5.8% in 2005.
II. Case Analysis
Comprehensive analysis of the situation requires extensive financial analysis of not only the historical values but also the pro-forma projections. Since, company is looking to expand, cost for raising capital becomes quite pivotal. Moreover, fundamental analysis which can be multi-dimensional and can involve projections of consumer purchasing power, wage rate and operational sustainability would be required. It is also quite imperative to note that, Bob and Maggie has already bought Horniman Horticulture nursery business out of selling the house and taking a substantial loan. Since, their position is already levered, taking additional loans may put them in liquidity trap or insolvency. Moreover, despite the fact that business has been growing, maintenance of increasing operations can create liquidity hurdles.
Table 5: Financial Ratios
|Net profit margin||4.1%||3.1%||5.7%||5.8%||2.8%|
|Return on Assets||3.2%||2.4%||4.7%||5.1%||2.9%|
|Return on Capital||3.3%||2.5%||4.8%||5.4%||4.0%|
|Net Fixed Asset turnover||2.4||2.4||2.4||3.0||2.7|
With the comprehensive, financial and fundamental analysis, it can be recommended that the company should maintain its current approach towards operations while mitigating the operational expenses. Maggie’s concern about cash reserve is genuine and the company should try to mitigate its receivable-outstanding days by providing early pay discounts, and Maggie shouldn’t pay its suppliers until the payment is due. Moreover, the company should not fuel its growth with debt capital as it would raise serious concerns of solvency. With the increased net profit margin in year 2006E and 2007E, Bob should try to pay off some of the loan, to de-leverage his position.