Post on 09-May-2015
description
Nino Burnadze Ekaterine Khaburzania
Nino Bazhunaishvili
07.12.2013
The Topeka Adhesives
The issues that Topeka faces:•Financing methods for the upcoming 3-4 years: what method to use in order to cover upcoming forecasted growth
•Improving the companies accounts receivable;
•Make forecasts and see if the short-term growth of the company is sustainable
Gross Margin Sales 31%Cost of Goods Sold
Increase by 20% SG&A (% sales) 20% 1995 Depr + 1/6 new Depreciation 17% Remains constant Interest Expense 0%40% of pretax profits Tax Rate 40%
Dividend Payout Rate 0%
3% of sales Cash & Securities 3%Asume 40.4 days for AR Accounts Receivable 40,40 Inventory Turns at 7.7x Inventory 7,70 0.6% of sales Other Current Assets 0,60%3% of sales Gross Fixed Assets 175 Prev AccDep + Depr Accumulated Depr.
New Debt Debt Due - 23.33 days Accounts Payable 23,33 2.2% of sales Accruals 2,2%Subtract debt due from previous Long Term Debt (20)No change in CS Common Stock - Retained Earnings
Assumptions
Pro Forma Income Statement
1993 1994 1995 1996 1997 1998
Sales 1 347,0 1 448,0 1 546,5 1 933,1 2609,7 3131,6Cost of Goods Sold 956,4 1 010,7 1 076,4 1 333,8 1 800,7 2 160,8
Gross Profit 390,6 437,3 470,1 599,3 809,0 971,0 Selling, General & Admin. 323,3 350,4 368,1 441,7 530,1 636,1 Depreciation 29,6 31,9 34,0 63,2 63,2 63,2
EBIT 37,7 55,0 68,0 94,4 215,8 271,8 Interest Expense (Income) 14,0 12,0 10,0 8,0 6,0 4,0
Earnings before Taxes 23,7 43,0 58,0 86,4 209,8 267,8 Taxes 9,5 17,2 23,2 34,5 83,9 107,1
Net Income 14,2 25,8 34,8 51,8 125,9 160,7
Topeka Sales Estimations
1347 1448 1546.51933.1
2609.7
3131.6
0
500
1000
1500
2000
2500
3000
3500
1993 1994 1995 1996 1997 1998
Year
Sa
les
(0
00
$)
Sales
Average Collection Periods
Percentage
% Days % DaysWeighted
0,4 ACP30 0,8 30 0,2 40 32,0
0,6 ACP45 0,9 45 0,1 55 46,0
40,4
40% ACP30 = .80 (30) + .20 (40) = 32 days
60% ACP45 = .90 (45) + .10 (55) = 46 days
The "overall ACP" equals .40(32) + .60(46) = 40.4 days .
Level of A/R = 216.9Level of A/P= 86.4
Cash Vs Retained Earnings
Retained Earnings do not represent surplus of cash or cash left over after the dividends payments. Retained Earnings demonstrate what company did with its profits; they are the amount of profit the company has reinvested in business since its inception.
Bad Inventory Management
The worst case would be for the inventory level to decrease by the value of the funds so that the balance of passive and active will remain. In this case the funds will tend to 0. In the best case, the inventory levels will be the same as those predicted earlier, meaning that the needed funds will stay the same.
1996
Cash 58
Account Receivable 216,9
Inventory 173,2
Other Current Asset 11,6
Current Assets 460
Gross Fixed Assets 441
Accumulated Depreciation -188,7
Net Fixed Assets 252,3
Total Assets 712
Liabilities& Equity
Account Payable 87
Debt due 20
Accruals 42,5
Current Liabilities 149,5
Long term debt 60
Common Stock 235,6
Retained Earning 216,7
Total Liabilities and equity 661,8
TA-TL= 50.2
Funds Needed Vs Percentage Sales Method
Comparing two results the 97 value generate by the percentage of sales method is higher that the initial value for funds of 50.22. The difference comes from the fact that the percentage of sales method brings in the sales figures for the current year as being in relation with the previous year’s sales figure. Also the percentage of sales method is a method of estimating cash requirements by expressing revenues and expenses as percentages of sales, and using these percentages to construct a pro forma income statement.
1996 1997 1998
EBIT 94 216 272 less Taxes on EBIT (38) (86) (109)add Depreciation 63 63 63
Working Capital: Receivables 217 293 351 Inventory 173 234 281 less Accounts Payable (86) (117) (140)less Accurals (43) (57) (69)
Adjusted Working Capital 261 353 423 less Change in AWC 261 91 71 less Capital Spending (175)
Free Cash Flow (316) 101 156
Dividends less: Dividends - - - less: Interest (1-tax rate) - - - add: New Equity - - - add: Net Debt (20) (20) (20)
Total Cash Generated (336)
81
136
If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.
Cash Flow
Recommendations:
•Debt financing•Although company officials think that the net 30 term is better, which is actually true from an economic point of view, the net 45 is better if it justifies not losing the sale
•To take discounts from suppliers, which is the additional saving of money for the company