Instructions: For this case you should prepare a spreadsheet that calculates financial ratios for Hobby Horse. The data you will need is already added to the Case Study One spreadsheet to save you time. Where possible, show trends in the ratios over time; they will provide more information than just looking at a single year. Once you have completed the case study, answer the questions about the case study, the questions are found in the Case Study One Questions section of the course. After answering the questions, submit your spreadsheet to Independent study. For information on submitting the excel sheet to Independent Study, please see the syllabus. Please put your name on the excel sheet before submitting it. Case Study One Instructions Case Study One Spreadsheet Hobby Horse Case Study: Burchetts Green had enjoyed the bank training course, but it felt good to be starting his first real job in the corporate lending group. Earlier that morning, the boss had handed him a set of financial statements for the Hobby Horse Company, Inc. (HH). Hobby Horse, she said, has a $45 million loan from us due at the end of September, and it is likely to ask us to roll it over. The company seems to have run into some rough weather recently and I have asked Fruze Platt to go down there this afternoon and see what is happening. It might do you good to go along with her. Before you go, take a look at these financial statements and see what you think the problems are. Heres a chance for you to use some of that stuff they taught you in the training course. Mr. Green was familiar with the HH story. 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 coincided with a poor Christmas season and had pushed the company into loss. Management had halted all new construction and put fifteen of its existing stores up for sale. Mr. Green decided to start with the six-year summary of HHs balance sheet and income statement . Then he turned to examine the latest position in more detail . FINANCIAL HIGHLIGHTS FOR HOBBY HORSE 2008 2007 2006 2005 2004 2003 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 3 60 46 43 39 34 Net profit -49 189 145 142 125 76 EPS -0.15 0.55 0.44 0.42 0.37 0.25 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 LT debt 236 159 297 311 319 315 Shareholders equity 676 725 599 502 407 324 Stores 240 221 211 184 170 157 Employees 13,057 11,835 9,810 9,790 9,075 7,825 INCOME STATEMENT, 2008 (in millions of dollars) Net sales 3,351 Cost of goods sold 1,990 S, G & A expenses 1,211 Depreciation expense 159 EBIT -9 Net interest expense 37 Taxable income -46 Income taxes 3 Net Income -49 Addition to RE -49 Dividends 0 BALANCE SHEET Assets 2008 2007 Current assets Cash & securities 14 72 Receivables 176 194 Inventories 479 203 Total current assets 669 469 Fixed Assets PP&E (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 Current liabilities Debt due for repay 484 222 Accounts payable 94 58 Other current liabilities 102 85 Total current liabilities 680 365 Long-term debt 236 159 Stockholders equity Par + paid-in cap 155 155 Retained earnings 521 570 Total stock equity 676 725 Total liabilities + stock equity 1,592 1,249 Note: If you havent had much experience with cases, analyzing them takes some getting used to. Everything you are supposed to do is not spelled out for you; it takes some thought on your part. Such is the case in real business situations. You may know what the problem is, but it isnt always obvious how to approach the problem or how to solve it. You learn as you work your way through the uncertainty. Sometimes in cases there is not just one correct answer you should be searching for. How well you back up your recommendations is usually more important than the recommendations themselves. A good case analysis offers concrete, quantitative support for the recommendations given. Case Study Questions Please type the answers to these questions in the Case Study One Questions section of the course. As a banker, what would be your greatest concern regarding the decision to roll over the loan to Hobby Horse? (To roll over a loan means to extend the amount of time until the loan must be repaid.) What do you see as the source of Hobby Horses current difficulties? Does Hobby Horse have too much debt? Do you see any signs of mismanagement or lack of efficiency at Hobby Horse? What actions would you recommend Hobby Horse take to ease their current difficulties? As a banker, would you be willing to roll over the loan to Hobby Horse? Why or why not?