Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

Halverton Corporation Case PART 1 FINANCIAL STATE ANALYSIS You are recruited as an assistant of Rachel Gold, a financial analyst at Halverton Corporation. You are

Halverton Corporation Case PART 1 FINANCIAL STATE ANALYSIS You are recruited as an assistant of Rachel Gold, a financial analyst at Halverton Corporation. You are familiar with the story of this company. Founded in 1990, it had rapidly built up a chain of discount stores selling materials for crafts and hobbies. However, last year a number of new store openings coinciding with a poor Christmas season had pushed the company into loss. Management had halted all new construction and put 15 of its existing stores up for sale. Rachel has provided you the following financial information for the company and has asked you to provide a report evaluating the financial state of the company. Table 1: Financial highlights for Halverton Corporation, year ending March 31. 2014 2013 2012 2011 2010 2009 Net sales 3,351 3,314 2,845 2,796 2,493 2,160 EBIT 9 312 256 243 212 156 Interest 37 63 65 58 48 46 Taxes (24% tax rate) 3 60 46 43 39 34 Net income 49 189 145 142 125 76 Earnings per share .15 .55 .44 .42 .37 .25 Current assets 669 469 491 435 392 423 Net fixed assets 923 780 753 680 610 536 Total assets 1,592 1,249 1,244 1,115 1,002 959 Current liabilities 680 365 348 302 276 320 Long-term debt 236 159 297 311 319 315 Stockholders equity 676 725 599 502 407 324 CSAC 4541 Fall 2019 2 Number of stores 240 221 211 184 170 157 Employees 13,057 11,835 9,810 9,790 9,075 7,825 Table 2 Income statement for the Halverton Corporation, for year ending March 31, 2014 (millions of dollars). Net sales 3,351 Cost of goods sold 1,990 Selling, general, and administrative expenses 1,211 Depreciation expense 159 Earnings before interest and taxes (EBIT) 9 Net interest expense 37 Taxable income 46 Income taxes 3 Net income 49 Allocation of net income: Addition to retained earnings 49 Dividends 0 Note: Column sums subject to rounding error. Table 3 Consolidated statement of financial position for Halverton Corporation (millions of dollars). Assets March 31, 2014 March 31, 2013 Current assets: Cash and cash equivalents 14 72 Trade receivables 176 194 Inventories 479 203 Total current assets 669 469 Non-current assets: Property, plant, and equipment (net of depreciation) 1,077 910 Less accumulated depreciation 154 130 Net fixed assets 923 780 Total assets 1,592 1,249 Liabilities and Shareholders Equity CSAC 4541 Fall 2019 3 March 31, 2014 March 31, 2013 Current liabilities: Debt due for repayment 484 222 Trade payables 94 58 Other current liabilities 102 85 Total current liabilities 680 365 Long-term debt 236 159 Stockholders equity: Common stock and other paid-in capital 155 155 Retained earnings 521 570 Total stockholders equity 676 725 Total liabilities and stockholders equity 1,592 1,249 Required: 1) Calculate the key financial ratios that will explore the financial state of the company. 2) Provide a report analyzing the performance of the company. What appear to be the problem areas in Halverton Corporation? PART 2: LEASING OR BUYING Halverton Corporation has expended its activity in the Maritime industry. Rachel Gold, the financial adviser of the company, had just been asked to analyze a proposal to acquire a new dredger. She reviewed the capital appropriation request. The dredger would cost $3.5 million and was expected to generate cash flows of $470,000 a year for 9 years. After that point, the dredger would almost surely be obsolete and have no significant salvage value. The companys weighted-average cost of capital was 16%. Rachel proposed a standard DCF analysis, but this suggestion was brushed off by Halvertons top management. They seemed to be convinced of the merits of the investment but were unsure of the best ways to finance it. Halverton could raise the money by issuing a secured 8-year note at an interest rate of 12%. However, Halverton had large tax-loss carryforwards from a disastrous foray into foreign exchange options. As a result, the company was unlikely to be in a tax-paying position for many years. Halvertons CEO thought it might be better to lease the dredger rather than to buy it. CSAC 4541 Fall 2019 4 Rachels first step was to invite two leasing companies, Mount Zircon Finance and First Cookham Bank, to submit proposals. Both companies were in a tax-paying position and could claim CCA on the dredger. The dredger is a Class 38 asset with a 30% CCA rate. Rachel received the following letters, the first from Mount Zircon Finance: March 31, 2010 Dear Rachel, We appreciated the opportunity to meet you the other day and to discuss the possibility of providing lease finance for your proposed new JLT4 dredger. As you know, Mount Zircon has extensive experience in this field, and because of our large volumes and low borrowing costs, we are able to offer very attractive terms. We would envisage offering a 9-year lease with 10 annual payments of $550,000, with the initial lease payment due on entering into the lease contract. This is equivalent to a borrowing cost of 11.8 percent per annum (i.e., 10 payments of $550,000 paid at the beginning of each year discounted at 11.8 percent amounts to $3,500,000). We hope that you agree with us that this is an attractive rate. It is well below your companys overall cost of capital. Our leasing proposal will cover the entire $3.5 million cost of the dredger, thereby preserving Halvertons capital for other uses. Leasing will also allow a very attractive return on equity from your companys acquisition of this new equipment. This proposal is subject to a routine credit check and review of Halvertons financial statements. We expect no difficulties on that score, but you will understand the need for due diligence. Thank you for contacting Mount Zircon Finance. We look forward to hearing your response. Sincerely yours, Henry Attinger The next letter was from First Cookham. March 31, 2010 Dear Rachel, CSAC 4541 Fall 2019 5 It was an honour to meet you the other day and to discuss how First Cookham Bank can help your company to finance its new dredger. First Cookham has a small specialized leasing operation. This enables us to tailor our proposals to our clients needs. We recommend that Halverton consider leasing the dredger on a 7-year term. Subject to documentation and routine review of Halvertons financial statements, we could offer a 7-year lease on the basis of eight payments of $619,400 due at the beginning of each year. This is equivalent to a loan at an interest rate of 11.41 percent. We expect that this lease payment will be higher than quoted by the large, mass-market leasing companies, but our financial analysts have determined that by offering a shorter lease, we can quote a lower interest rate. We are confident that this is a highly competitive offer, and we look forward to your response. Yours sincerely, George Bucknall Both proposals looked attractive. However, Rachel realized the need to undertake careful calculations before deciding whether leasing made sense and which firm was offering the better deal. She also wondered whether the terms offered were really as attractive as the two lessors claimed. Perhaps she could persuade them to cut their prices. Required: 1) Should Rachel accept any of the proposals for leasing the equipment? 2) How can she persuade the lessors to cut the prices? 3) Would you suggest buying instead of leasing? Consider assumptions if necessary, for your analyze.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions

Question

It can be physically harmful.

Answered: 1 week ago