Considerations for Final Exam Parts I & II - Week 4

OPERATIONAL FINANCE: BUILDING A ROBUST BUSINESS

For the final exam, please read the case below. The exam is divided into two parts. The first is a multiple choice section composed of 10 questions based on the Cardbox case. The second is a peer-to-peer review asking you to analyze Cardbox's financial statements, its problem and develop a solution.

CASE: THE CARDBOX COMPANY

In December 2008, Alberto Puig, CEO of The Cardbox Co. was concerned by the severity of the economic crisis that was damaging the sales of the company. "It is imperative that we come up with a different business model if we want to survive this big crisis," thought Alberto, while at his desk.

Cardbox was a family business, selling paper and cardboard. The business was located in Barcelona, in one of its industrial suburban areas. The distribution channels were two: wholesalers' distributors and its own webpage. One of the advantages of Cardbox was the immediate availability of a large number of products offered in its catalogue. These products could be dispatched in 24 hours thanks to the size of the inventory.

The first year in its history that the company saw a reduction in sales was in 2007, when sales had gone down an 8% to 45.8 million euros. In 2008, sales were 42.3 million euros and the prospect was a decrease of 15% in sales in 2009.

Besides the sales reduction there were more problems. The price of materials had gone up, and customers were looking for extended payment periods. The company had also had an increase in bad debts. In 2008, 1% of the sales would never be paid back (Bad Debts). The company accounted this loss in the P&L as a cost.

As a result of the condition of the Spanish economy, the banks were cutting down credit lines for most of the customers. In the case of Cardbox this measure would mean a reduction of short term credit lines in 2009 to 15 million euros, but Alberto did not know if he would be able to do it.

The assumptions for 2009 were the following:

Sales: 85% of 2008 sales.

COGS, purchased goods at acquisition price, were expected to be 82% of sales.

Bad Debts: it was expected that in 2009, a 2% of the sales would never be paid back. These Bad Debts would appear in the P&L of 2009 as a cost.

Overhead: 14% of sales.

Depreciation: 10% of last years' Net Fixed Assets.

Interest Expense is computed as 6% of the sum of Short Term Credit and Long Term Loan at the end of 2008.

Corporate Taxes are 30%. Taxes are paid in June of the following year.

Days of receivables: due to measures taken by the marketing department to increase the sales in 2009, it was expected that the receivables period would be 150 days.

The minimum cash balance required for 2009 was 1 million euros.

Days of Accounts Payable. Since industry payment terms were 90 days, this was the objective for 2009. Compute payables on 2009 purchases of 26.306 million euros.

Days of Inventory. On January 1, 2009, the company was planning to send back merchandise to one of the suppliers at acquisition price. With this sale back and other efficiency measures, the days of inventory should decrease to 170 days.

Fixed Assets. In 2009 Cardbox expects to invest in fixed assets an amount similar to the depreciation of the assets.

In order to reduce the firm's liquidity tension, Alberto had asked the bank for an additional 2 million long term loan. This loan would be guaranteed by a mortgage on one of the family properties. With this new loan, and after having amortized 400,000 euros, Total Long Term Debt at the end of 2009 would amount to 5 million euros.

The company had not paid dividends for the last three years and was not expecting to pay any dividends in 2009.

Additional information:

To develop the forecast for 2009, you will need the following data for 2010:

Expected sales for 2010 are 40 million euros.

Expected COGS for 2010 is 82% of sales.

For calculations, consider the years to have 360 days.

Remember: negative taxes in the P&L and in the Balance Sheet are amounts that the Tax Authorities owe the company.

PLEASE DO NOT CONSIDER DECIMALS (round to the closest integer).

CARDBOX FINANCIAL STATEMENTS

(For questions 1 to 10, please fill in the blank cells.)

INCOME STATEMENT

All numbers in (000) % of Sales

YearYear% of Sales% of SalesForecastDec-07Dec-08Dec-07Dec-08Dec-09Sales45,80042,300100%100%COGS34,10033,50074%79%Gross Margin11,7008,80026%21%Bad Debt2284780%1%Overhead6,6205,95014%14%Depreciation7957402%2%Operating Profit4,0571,6329%4%Interest Expense1,0001,2532%3%EBT3,0573797%1%Taxes9171142%0%Net income2,1402655%1%

BALANCE SHEET

All numbers in (000) Forecast

ForecastDec-07Dec-08SUFDec-09Cash8001,200400Receivables17,58015,820-1.760Inventory15,10017,1002,000Current Assets33,48034,1200Net Fixed Assets7,2106,300-910Total Assets40,69040,420ForecastDec-07Dec-08SUFDec-09Payables9,7507,750-2,000Taxes due917114-803Short Term Credit Lines17,28318,9511,668Current liabilities27,95026,8150Long Term Loan2,8003,400600Equity + Reserves7,8009,9402,140Net income of the year2,140265-1,875Total Liab.+ Equity40,69040,4200Purchases29,77035,500Purchases26,306Receivables in days138135150Payables in days1187990Inventory in days159184170

e.g.Compute the forecast of sales for December 2009 (Sample question - 0 points.)

(a) 36,950

(b) 35,955

(c) 37,500

(d) 3,000

Solution: Sales will drop 15%, thus sales in December 2009 will be 42,300 * 0.85 = 35,955

Questions :

1.

Question1

Compute the Gross Margin for Dec 2009.

1 point

6,472

5,835

6,762

7,352

2.

Question2

Compute the Bad Debts in the P&L for Dec 2009.

1 point

575

719

685

360

3.

Question3

Compute the Operating Profit in the P&L for Dec 2009.

2 points

69

78

75

89

4.

Question4

Compute the interest expense for Dec 2009.

1 point

1,250

1,421

895

1,341

5.

Question5

Compute the Net Income for Dec 2009.

2 points

-345

-756

-550

-876

6.

Question6

Compute the Receivables in Dec 2009.

1 point

14,981

13,732

15,734

14,751

7.

Question7

Compute the Inventory in Dec 2009.

1 point

14,981

13,640

13,923

14,100

8.

Question8

Compute the Payables in Dec 2009.

1 point

7,141

6,576

7,456

6,857

9.

Question9

Compute Equity+Reserves in Dec 2009.

1 point

9,940

11,105

10,205

265

10.

Question10

Compute the amount needed of Short Term Credit Lines in Dec.

4 points

15,674

13,980

14,751

14,480