Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Estimate fair value for Roslyn Manufacturing employing each of the three approaches discussed: 1 ) Liquidation Approach 2 ) Comparables Approach 3 ) Discounted Cash
Estimate fair value for Roslyn Manufacturing employing each of the three approaches discussed:
Liquidation Approach
Comparables Approach
Discounted Cash Flow Analysis
R O S LY N
Billiondollar apparel companies such as Calvin Klein and Liz Claiborne are
unusual in the garment industry, which consists primarily of dozens of much
smaller apparel makers. One such firm is Roslyn Manufacturing, a producer of
women's apparel, located in Bedford, New York. The firm was started years
ago by Justin Rose and Brett Lynn who between them had nearly 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 percent interest.
Though he still enjoys the creative side of the business, he is tired of the cash
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 percent of Roslyn's receivables
were more than 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 advance on orders to the more unstable retailers. A firm like
Rosyln faced a most unpleasant choice: Either ship to these retailers which
often meant a mad scramble for cash or risk losing sales. Fearful of the second
possibility, at Lynns insistence Rosyln would continue to supply all but the
most unteasonable orders. And Lynn is quick to point out that, despite this
decision, the company's average collection period of days is not terribly
different from the industry median of days.
Another reason that Rose wants to sell his interest is that he is losing confi
dence in Lynns managerial expertise. When the firm was small Rose felt thatLynn 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 Lynns decision three years ago to retire all longterm debt.
The latter move was predicated by Lynns fear that Roslyn's business risk was
increasing. He cited the difficulties of seemingly rocksolid 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 percent, which is only two percentage points above the longterm 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, Lynns personality is such that he has
effectively seized control of the firm, and no major decision that heopposed has
ever been approved. An important recent example of this was Lynns reaction
eight months ago to the report of a consulting firm. The consultants recom
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 stateoftheart distribution center that would allow
the firm to handle big orders from retailers such as K Mart and WalMart. 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 $million to $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 $ 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 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 undul
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started