Chill Lemonade Inc.

Chill Lemonade Inc. is a beverage manufacturer in Vancouver, British Columbia who is in the process of a major expansion and is looking into bank financing for the acquisition of manufacturing equipment to be used in its lemonade-making facilities. The new acquisition is estimated to increase gross profit by 15%.

Chill's cash cycle is tight; although its sales and production have expanded considerably, over the past 10 years, liquidity is less than the industry average of 1.5. All its other key ratios are good, which is what is allowing Chill to consider financing an expansion.

The founder and major shareholder of Chill, Sebastian, is concerned about maintaining a healthy current ratio and debt to equity ratio as he believes this will be important in the future, and the minority shareholders have shown some concern over these ratios in the past.

Chill has hired you to assist in exploring various alternatives available to the company, described below. They have asked for a detailed analysis with any impact these choices will have on the financial statements, along with any qualitative impacts you deem appropriate in the circumstances.

DETAILS:

1. The company intends to purchase a bottling beverage machine on January 1, 2021 that can bottle 100 cases of lemonade per minute. The fair value of this machine is $500,000. The machine is expected to have a useful life of 10 years after which it could be sold for $50,000.

The bank will agree to a loan for the machine providing the debt to equity ratio does not increase above 1.6 and the current ratio is maintained at a minimum of 1.2. If a loan is granted interest is to be paid annually at a fixed rate of 6%. Payments will be fixed at $8,300 per month plus $2,500 interest per month.

1. During the year, a visitor to the facility slipped and fell on some spilled lemonade and broke their leg. They have subsequently sued Chill for $800,000. Chill's lawyers believe there is a 20% chance it will be dismissed, a 60% chance that Chill will have to pay $200,000, and a 20% chance it will have to pay

$400,000. The lawsuit will be settled by the end of the current period (2021).

1. Chill is considering promoting a contest with a coupon that is attached to each lemonade product. Any customer who collects five coupons may send them to Chill and redeem them for a CHILL t-shirt. The contest would be open until the end of the current period 2021). It is estimated that all the coupons will be redeemed as this has been a successful promotion in the past. Total value of the coupons are

$150,000. Chill would like advice on whether or not to proceed with the contest.

The Company's Financial Statements are provided on the next page to assist with your analysis. For the purpose of this case, assume that the Balance Sheet and Income Statement for 2021 are the same as 2020 except for the inclusion of any new details as deemed required from the information presented above.

*Use the Excel provided in order to create the Pro-forma 2021 financial statements pertaining to your recommendations. (You may need to add additional line items to your financial statements if they do not already exist!) In order to help you to make your decision, you may wish to create multiple scenarios of your proforma statements (based on choices in #2 and #3) in order to determine which option provides the optimal outcome for Chill.

*Remember to re-calculate the ratios in order to make your recommendation!

*Probability Calculation: To calculate the probability of an outcome using the following formula:

= (% x value of first outcome) + (% x value of second outcome) + (% x value of third outcome)

Chill Lemonade Inc - SCENARIO ANALYSIS Statement of Financial Position 2021 2020 2019 2018 COMMENTS: Assets Current Assets Cash 11,158 53,210 11,066 Accounts Receivable 600,000 480,000 410,000 Inventory 630,000 420,000 364,000 Prepaid Expenses 102,000 56,000 162,000 Total Current Assets 0 1,343,158 1,009,210 947,066 Capital Assets (net) 1,298,000 1,220,000 1,080,000 Investment in XYZ Corp 0 0 150,000 150,000 Total Assets 0 2,641,158 2,379,210 2,177,066 Liabilities Current Liabilities Line of Credit 190,000 184,000 94,000 Accounts Payable 760,000 616,000 540,000 Total Current Liabilities 950,000 800,000 634,000 Long Term Debt 400,000 400,000 400,000 Total Liabilities 0 1,350,000 1,200,000 1,034,000 Shareholder's Equity Capital Stock 1,000,000 1,000,000 1,000,000 Retained Earnings 291,158 179,210 143,066 Total Shareholders Equity 0 1,291,158 1,179,210 1,143,066 Total Liabilities and Shareholder's Equity 0 2,641,158 2,379,210 2,177,066 Chill Lemonade Inc Statement of Income 2021 2020 2019 2018 Sales 3,704,000 3,963,280 3,923,646 Cost of Sales 2,057,944 2,149,620 2,100,158 Gross Profit 1,892,964 1,646,056 1,813,660 1,823,488 add 15% gross profit Selling, general & admin expenses 1,304,108 1,304,108 1,341,516 1,312,422 Amortization 220,000 204,000 196,000 Research & Development 90,000 176,000 250,000 Repairs 6,000 6,000 2,000 Salaries 20,000 50,000 50,000 Total Expenses 1,304,108 1,640,108 1,777,516 1,810,422 Net Income before unusual items 588,856 5,948 36,144 13,066 One-time gain on sale of investment 126,000 O Net Income 588,856 131,948 36,144 13,066 2021 2020 2019 2018 INDUSTRY BANK COV Current Ratio 1.5 1.2 Quick Ratio D/E Ratio 1.6