Estimate fair value for Roslyn Manufacturing employing each of the three approaches:

1) Liquidation Approach

2) Comparables Approach

3) Discounted Cash Flow Analysis

ROSLY N Billion-dollar apparel companies such as Calvin Klein and Liz Claiborme are unusual in the garment industry, which consists primarily of dozens of mudh smaller apparel makers. One such firm is Roslyn Manufacturing, a producer of women's apparel, located in Bedford, New York. The firm was started 14 years ago by Justin Rose and Brett Lynn, who between them had nearly 25 years of experience with a major garment manufacturer. And the partnership initially blended very well. Rose, reserved and introspective, is extremely creative with a real flair for merchandising and trend spotting. Mainly as a result of his genius, the Roslyn label is synonymous with quality and "in" fashions. Lynn, outgoing and forceful, has contributed important merchandising and marketing ideas, but has mainly assumed the duties of the firm's chief operating officer. THOUGHTS ON SELLING OUT Rose, however, is seriously considering the sale of his 50 percent interest. Though he still enjoys the creative side of the business, he is tired of the caslh crunches that the firm has faced over the years. Periodically the retailers Roslyn deals with have encountered financial difficulties and have strung out their payments, For example, at one point nearly 40 percent of Roslyn's receivables were more than 90 days overdue. And in situations like this, factoring compa- nies (firms that buy the receivables of apparel companies) would cut back on the credit they Rosyln faced a most unpleasant choice: Either ship to these retailers (whidh often meant a mad scramble for cash) or risk losing sales. Fearful of the second possibility, at Lynn's insistence Rosyln would continue to supply all but the most unreasonable orders. And Lynn is quick to point out that, despite this decision, the company's average collection period of 62 days is not terribly different from the industry median of 50 days. advance on orders to the more unstable retailers. A firm like Another reason that Rose wants to sell his interest is that he is losing confi dence in Lynn's managerial expertise. When the firm was small Rose felt that Lynn did a fine job, but he now wonders whether Lynn is capable of efficiently running a firm as large as Roslyn. He questions, for example, the firm's inven- tory procedures and Lynn's decision three ycars ago to retire all long-term debt. The latter move was predicated by Lynn's fear that Roslyn's business risk was increasing. He cited the difficulties of seemingly rock-solid retailers like Bloomingdale's and Campeau to support his claim. Lynn also pointed out that the company's stock represents an extremely large proportion of the personal wealth of both him and Rose. It's true," he told Rose, "that we could borrow at 9.5 percent, which is only two percentage points above the long-term govern ment bond rate. But given our personal investment situation, I hesitate to add any financial risk to the high business risk we're exposed to." THE CONSULTANT'S RECOMMENDATIONS Although Rose owns half of the company, Lynn's personality is such that he has effectively seized control of the firm, and no major decision that he opposed has ever been approved. An important recent example of this was Lynn's reaction eight months ago to the report of a consulting firm. The consultants necom mended that Rosyln implement more sophisticated accounting procedures and make greater use of the computer. They also suggested that Rosyln "very seri- ously" consider building a state-of-the-art distribution center that would allow the firm to handle big orders from retailers such as K Mart and Wal-Mart. Lynn read the report thoroughly and said he would explore further computerization and alternative accounting procedures. However, he rejected the distribution center because he considered the estimated $5-million to $8-million cost "exces- sive." He felt that "sizeable" capital budgeting projects should be avoided until he was confident that the firm was on a solid financial base. In fact, Roslyn's capital budget over the last three years has equalled the money necessary to maintain the firm's plant and equipment, an average of $124(000) a year. Lynn admits, though-and Rose agrees-that without large orders from the major retailers, sales growth should only be in line with inflation, about 4 percent per year. Rose wondered whether Lynn was really concerned that implementation of these proposals would necessitate bringing in outside capital, given his debt policy. If so, Lynn would own less than half of Rosyln, a scenario that might eventually lead to his ouster. In fairness, however, the relationship between the two partners has been rel atively smooth over the years. And Rose admits that he may be unduly critical of Lynn's managerial decisions. "After all," he concedes, "the man seems to have rcasons for what he does, and we have been in the black every ycar since we started, including the last one, which was especially difficult for a firm in our business." Nonetheless, at present late 1995), Rose has decided to seriously pursue the sale of his interest, and believes he has two options: sell to Lynn or to a major apparel maker. POSSIBLE SUITORS Rose knows that there are a number of much larger apparel manufacturers who are shopping around for additional acquisitions. The company's banker gave Rose a list of big apparel makers that might be interested in purchasing Rosyln (see Exhibit 6), but cautioned that these firms were looking for companies with specific characteristics. Most important, the firm would need to have estab- lished brand names. In addition, current management must be the people who developed the firm's corporate culture, they must still be capable of perform ing, and they must be willing to remain. Rosyln undoubtedly has the reputa tion, and Rose is more than willing-even eager to stay on. Still, he fears that these major firms may simply be bargain hunting. It is no secret that the misfortunes of many big retailers have made the operation of a company like Rosyln more difficult. Rose thinks there will be no shortage f apparel firms wanting to acquire Rosyln. And he wonders how a potential buyer would react to Lynn's presence. After all, a new owner would not have absolute control over Roslyn's operation, and Lynn is likely to be a hard person to deal with. When Rose informed Lynn of his desire to sell, Lynn said that he wasnot sur prised and wanted the chance to make an offer. Lynn thought he cold find backers but made it clear that any agreement would require Rose to stay with Rosyln for at least three years, a condition Rose feels he "can live with." Rose thinks that the starting point for the analysis should be the liquidation value of the firm. The inventory, though excessive in his view, contains fashion- able items in good condition and probably can be sold to net 70 percent of book value after taxes. Rose believes this same percentage is appropriate for the firm's receivables. Most of Roslyn's plant and equipment is state-of-the-art, and a reasonable estimate is that the after-tax market value is $400,000. Liquidatior has a cost, of course, since there would be legal and administrative fees. Rose has no good idea what they would run and decides to assume $300,000. He is confident, however, that Rosyln is "worth more alive than dead" and wonders if a comparables approach wouldn't be useful. The problem, of course is to find firms that are really comparable. Companies differ so much in size product line, markcts, ctc, that true comparables are hard to find. And idcally such firms should be publicly traded. Rose concludes that he "most certainly" needs outside help to decide what price to accept and is sure Lynn will do the same EXHIBIT 1 Roslyn's Sales and Operating Margin:1986-1995* Sales ($000s) Yen OM 062 061 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 22,100 21000 19.700 15,600 14,300 11,100 9.100 .082 081 .073 042 Operating margin- (EBIT + Dep.)/Sales. EXHIBIT 2 Roslyn's Income Statements: 1993-1995 ($000s) 1994 1995 1993 $%21,000 4,870 $%22,900 17,180 5,720 4,300 $%22,100 Cost of goods sold Gross margin General & administrative expenses Depneciation EBIT 5,570 1,180 1040 $676 4,110 1,368 1,248 1,330 Earnings before taxes Taxes (35%) Net incomc 1,234 EXHIBIT 3 Roslyn's Balance Sheets: 1993-1995 ($000s) 1993 1994 1995 Cash Receivables Inventory Current assets Net fived Total assets $740 3,210 $341 3,130 3,940 140 7,833 6470 6,921 58,463 Liabilities and equity Debt due Accounts payable $210 1030 10 $%160 950 830 Current liabilities Term loans Equity Total liabilities and equity 2,120 1010 2480 800 1,210 EXHIBIT 4 Roslyn's Cash Flow Situation: 1993-1995 ($000s) 1993 1994 1995 Net income Depneciation Cash flow operations $811 $802 Adjusted working capital needs Capital spending Dividends 892 400 130 141 122 Cash flow $515 ($189) Adjusted Working Capital 1993 $3,210 1,030 1992 1994 1995 $3.130 3,450 3,940 3,440 950 s reeivable Imventory -Accounts payable Adjusted working capital Change adjusted working capital $5,060 400 141 EXHIBIT 5 Selected Ratios for Apparel Manufacturers, Annual Sales of $10-50 Million: 1993-1995 Melia Current 13/2.6 0.6/1.6 41/68 1.7 Average collection period Fixel asset turnover Inventory turover (CGSy Total asset tumover Debt 3.5/8.1 20/3.5 41/.71 18/32 039/.107 Days purchases outstanding Operating margin* The median is the middle value of the industry statistic Forexample, half the indusiry fims had a curment ratio above L7 and half had a current ratio below 1.7 The letor lower number shows the cuto for the botbom 25 pencent. The right or higher number shows the cutoff for the top 25 percent. For example 25 percent of the industry fims had a current ratio below 1.3, and 25 percent had a current ratio abowe 2 Dy implication, 50 pencent of these ratios fell between 13 and 26 Sales/Net Fixed. GSventory. Debt/Assets This shows the average length of time that trade debit is outstanding, Also called the average payment period. Calculated as A/P (CCS/340). Operating margin EBITDep)/Sales. EXHIBIT 6 Financial Information on Large Apparel Manufacturers Seeking Acquisitions Fim DIE Crystal Brands Garan 0.18 0.17 0.14 9.6 7.9 108 Kellwood Osh Kosh Russell 1.1 1.1 S6 13.2 15.1 0.13 In $millions. OM Operating Margin (EEIT + Dep)/Sales. Long-tem ng-tem debt divided by equity, market values