Topeka Case Study While it May Be essay

Download this essay in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from essay:

Topeka Case Study

While it may be true that the retained earnings of the company provide a large amount of cash for future endeavors, there are several issues with using this cash to fund the necessary expansion efforts. First, this cash might simply be inadequate when it comes to funding the entire expansion, second, such a use would significantly impair the company's ability to operate if a supplier disruption or major payment issue arose, and third, this cash represents the only return on investment for the company's owners and stakeholders. All of these reasons make the securing of at least some external funding preferable.

1996 Pro-Form Income Statement

Revenue

Sales

$1,933,100.00

Expenses

Cost of sales (assumes 31% gross margin)

($1,333,839.00)

Debt payment

($20,000.00)

Facilities

($175,000.00)

income Before Taxes

$404,261.00

Tax Liability

Tax rate=40%

($161,704.40)

Income from Operations

$242,556.60

3)a.

It is assumed 40% of sales will be collected on a net 30 basis, with 80% on-time payment, and that 60% of sales will be made on a net 45 basis with 90% on-time payment. The average collection period for on time payments can thus be calculated as (.4x.8x30)+ (.6x.9x45)=33.9. Assuming that late payments are made within thirty days of the payment due date, late payment schedules can be calculated as (.4x.2x60)+(.6x.1x75)=9.3, bring the total average expected accounts receivable period to 43.2.

b.

With an expected average receivables period of 43.2 days on $1,933,100 receivables at the end of a 360-day year, total receivables at the end of the year could be estimated as $214,789.

4)

The purchase estimate for 1996 is based on the cost of goods ($1,333,839) plus beginning inventory ($149,500) less ending inventory (which has been a fairly consistent 13.9% of cost of goods, and can be estimated at $185,404), for a total of $1,297,935.

5)a.

Assuming 1/3 of all payments are made on a 2/10 net 30 basis and the remaining 2/3 will be made on a net 30 basis, the average payment period will be (.33x10)+(.66x30)=23.1.

b.

In a 360-day year with $1,333,839 in purchases and an average payment period of 23.1 days, the average level of payables would be $57,742.

6)

1996 Pro Forma Balance Sheet

Assets

Current Assets

Cash

$510,000.00

Receivables

$214,789.00

Inventory

$185,404.00

Total Current Assets

$910,193.00

Gross fixed assets

$2,836,000.00

Depreciation

($1,588,160.00)

Total Assets

$2,158,033.00

Liabilities and equity

Accounts Payable

$57,742.00

Debt due

$20,000.00

Curent liabilities

$1,073,000.00

Long-term debt

$60,000.00

Common stock

$110,000.00

Retained earnings

$837,291.00

Total Liability & Equity

$2,158,033.00

b.

It is possible that no additional funds (form external sources) will be necessary in 1996, as projected sales are not hugely different from 1995's actual sales. It is in 1997 and 1998 that funds will be required to expand operations. Funding that equals the cost of goods sold, other operational costs, and debt payments (in the neighborhood of $1,600,000) should be sufficient

c.

While reducing the cost of goods sold/inventory ratio would provide for a freer cash flow and thus ease concerns regarding operating capital, it would not present a significant cost savings and is thus not a point of essential consideration in the projection of these pro forma documents.

7.

In 1995, approximately 95% of sales revenue was needed to cover all operating expenses and debt payments. 95% of 1996's expected sales revenue ($1,933,100) is $1,836,445.

8.

The answers in 6(b) and & ought to be (and are) fairly similar; some discrepancy exists as it was not possible to adequately project administrative costs with the information given, and this expense is thus left out of the pro forma cash flow statement for 1996.

9.

Saving money tends to make sound financial sense in the long run for any company, and as long as operational expenses can be met with early payments the discount received is certainly worthwhile. If the company has to borrow at a rate of higher than 2% on a regular basis in order to make payments within 10 days to its suppliers, however, then this does not make financial sense during the growth period. For 1996, continuing to make 10 day payments and receive the discount is definitely sensible.

10)

Extending 15 days of extra credit makes sense at the current time, though after expanding (when a sale of this size will make up a smaller percentage of total revenue), establishing a stricter credit scheme would be advantageous.

Repeat of Bank Analysis

Current Ratio: 1.9 (contractual obligation=2.0)

Quick Ratio: .77 (contractual obligation=1.0)

Debt Ratio: 68.2% (contractual obligation=5.5)

The banks analysis of SDI's current position is quite accurate, and the huge debt ratio is especially disturbing.

If the company can secure the financing for its expansion project and meet projected sales increases and cost savings, sales revenue will increase to $330,386 in 1996 at a cost of goods of $274,200, and in 1997 to $371,684 at a cost of $297,347. The rise in short-term interest rates will not significantly affect earnings figures as long as administrative and selling expenses are reigned in over this period; there is not much room for these to grow proportionately with sales if the company wishes to achieve a better financial position, however.

Historical Analysis and Current Position

Though it is true that the company currently carries far more debt and other liabilities than it ought to for its own health and for the bank loan, owner's equity in the firm has risen considerably in the past few years despite economic troubles, meaning that the company is still profitable if precarious. The price cutting and credit extensions the company has been offering are largely responsible for the position SDI currently finds itself in, and as an elimination of these policies is included in the expansion plan it seems that a turnaround is quite possible.

Sales have been rising during this period as well, but administrative/selling and miscellaneous expenses have also risen considerably and interest payments have climbed far more so, reducing profitability significantly. Borrowing as a means of solving this problem might be seen as throwing good money after bad for the bank; the increase in loa acquisition has not demonstrably been used by the company to generate greater revenue and cash flow, but has actually arguably been detrimental to the company. From a historical financial analysis, the new loan request is likely to be denied; SDI will need to present a very clear line of reasoning as to why this loan is different and how it will help reshape the company into a more solvent and financially reliable business entity and potential debtor.

Pro Forma Balance Sheet (in thousands)

1996

1997

Assets

Current Assets

Cash

$92,234.00

$111,530.00

Receivables

$30,000.00

$23,000.00

Inventory

$60,000.00

$38,000.00

Total Current Assets

$182,234.00

$172,530.00

Gross fixed assets

$42,953.00

$42,953.00

Depreciation

($13,202.00)

($17,218.00)

Total Assets

$211,985.00

$198,265.00

Liabilities and equity

Accounts Payable

$26,000.00

$23,316.00

Debt due

$36,248.00

$26,248.00

Curent liabilities

$71,599.00

$76,035.00

Long-term debt

$19,388.00

$18,916.00

Common stock

$33,750.00

$33,750.00

Retained earnings

$25,000.00

$20,000.00

Total Liability & Equity

$211,985.00

$198,265.00

Sensitivity Analysis

Unfortunately, the projected amounts are very sensitive to changes in line items such as the administrative expense rate, the cost of good sold, and the sales growth rate. Previous years have shown that there is no a great elasticity in demand, and thus it is unclear that the ability to increase production would actually increase sales revenue at the rate of growth projected -- it is possible that sales can only continue to grow at or slightly higher than the current growth rate, and any disturbance in the industry could lead to a reduction in sales rather than an increase regardless of increased production capacity. This greatly affects the cost of goods sold, as well; the projected numbers take into account not only the efficiency of the new processes available following the planned expansion of SDi's production facilities, but also (presumable) take into account…[continue]

Cite This Essay:

"Topeka Case Study While It May Be" (2011, September 03) Retrieved December 8, 2016, from http://www.paperdue.com/essay/topeka-case-study-while-it-may-be-51988

"Topeka Case Study While It May Be" 03 September 2011. Web.8 December. 2016. <http://www.paperdue.com/essay/topeka-case-study-while-it-may-be-51988>

"Topeka Case Study While It May Be", 03 September 2011, Accessed.8 December. 2016, http://www.paperdue.com/essay/topeka-case-study-while-it-may-be-51988

Other Documents Pertaining To This Topic

  • Court Case Historically Gaines v

    But if Houston insisted that Plessy be enforced that is, if the NAACP sued a state to make its schools for black children equal to those for whites which Plessy did require then he could undermine segregation. (Jomills Henry Braddock. A Long-Term View of School Desegregation: Some Recent Studies of Graduates as Adults. Phi Delta Kappan. 259-61. 1984) He reasoned that states would either have to build new schools for

  • Brown v Board of Education of Topeka

    Brown v. Board of Education of Topeka In Plessy v. Ferguson (1896) the United States Supreme Court upheld racial segregation of passengers in railroad coaches as required by Louisiana law. Three years later the Supreme Court was asked to review its first school case dealing with equal treatment of school children. In Cumming v. Richmond County Board of Education (1899) the court found that the temporary cessation of services for minority

  • Adoption Family Law by Kansas Statutes and Cases

    Adoption (Family Law) by Kansas Statutes and Cases The study of adoption is very important as it influences millions of lives in the United States, who are an element of the adoption process. For instance, the birth parents who put their children for adoption; the children who are adopted; and the parents who adopt children. It is also believed that adoption influences approximately 3% of Americans who initially think of adoption

  • Bowen Systems Theory

    Bowen Systems Theory It is essential to understand the behavior of a person before engaging in assisting them to overcome their challenges in counseling. However, in the course of understanding this individual, there would be barriers, as the person may not have the free will to disclose their actions. Therefore, this necessitates the help of the family to the nurse conducting the assessments to gather useful information that on application will

  • Social Psychology of Hate Groups Content Analysis

    Social Psychology of Hate Groups Content Analysis of the Social Psychology of Hate Groups Over a decade ago, it was already apparent that the Internet had advantages for social organization on the part of marginalized groups -- and that some of these marginalized groups would pose a challenge, as they could be described as "hate groups." A survey of literature on the social psychology of the Internet singles out many factors why

  • Improving Brand Awareness and Customer

    In support of this overarching aim, the following objectives were also be used. Objectives: The proposed study has three objectives as follows: 1.2.1 To deliver a comprehensive and critical review of the relevant literature concerning the relevant issues. 1.2.2. To administer a custom survey to various luxury hotel managers concerning their current branding strategies to identify commonalities and significant differences. 1.2.3. To provide a synthesis of the secondary and primary research that can be used as a

  • Driver s License to Illegal Immigrants

    Proponents advanced that both legal and illegal immigration to California was a concrete and hard reality, which neither legislation nor strict controls could blot out. They envisioned a menial, lowly paid workforce, a source of cheap labor, on which the State would depend. They also held that opponents were racially motivated and too harsh towards non-whites who wanted to flee from poverty and despair. On the other hand, those


Read Full Essay
Copyright 2016 . All Rights Reserved