Why has the Private Equity firm decided to sell this business?

1. What problems did you find with management's estimated numbers and assumptions used in the forecast for the years beyond 2016.

1. If you entered negotiations to buy this business, what would be the most you would pay for the net assets.You need to explain why you would pay this amount.

1. If Wells Fargo was willing to fund the entire acquisition, how much would you have to borrow to buy the business, and then, operate it.(HINT:Use the results of your ratio analysis to determine the operating requirements.)

1. A. Use the information you noted in your response to questions #2 and #4 above and prepare a revised 2017 income statement correcting the seller's errors and reflecting your more realistic assumptions for business performance.

1. Based on your answer to #5A, would the business generate enough cash to repay the loan to Wells Fargo by the end of the seven year loan agreement?

Calculate the financial ratios to help you answer the following case questionsGROWTHP/E ratio = Price of share/ Earning per share=Total fair value of the business/ Stand alone adjustedEBITDA= P/B ratio= Fair value of the business/Book value of the business=PROFITABILITYGross Profit rate = Return on Asset = Stand alone adjusted EBITDA/ Average total assetASSET EFFICIENCYDays inventory outstanding=365*average inventory/cost of goods sold=365*(Days sales outstanding=365*average net receivable/total net sales365*(

Excel questions are imporatant

Accounting 3150 Case Assignment #4 Fall 2017 Name__________________________ Name__________________________ You are the CFO of Strikes and Spares Incorporated. Strikes and Spares owns and manages 15 bowling alleys in the upper Midwest. The CEO tells you about an exciting acquisition opportunity located in northern Wisconsin. Key points from the meeting are as follows: Company manufactures wood shelves and signs for retail stores Customers include Dick's Sporting Goods, Best Buy, Cabela's, Macy's and JC Penney's Current management team averages 24 years experience at that company. CEO plans to keep current management team Current owner is a prominent New York City private equity firm Private Equity firm executives are very sharp business professionals CEO wants a cash deal but wants you to determine the purchase price Funding will come from a new seven year loan agreement with Wells Fargo Bank. The interest rate is 6%. Other key facts you learn from the CEO that you need for your analysis are as follows: The business for sale has very limited accounting and MIS resources. You estimate an annual cost increase of $1,750,000 in accounting and MIS functions is necessary for upgrades to systems and personnel. The allocations from the PE firm represent an annual management fee charged to that business. This fee would not continue. Assignment: Review the financial information provided in the Excel document. Perform a financial statement ratio analysis of the 2009-2016 actual numbers and the 2017-2019 projected results. Answer the following questions: 1. Why has the Private Equity firm decided to sell this business? 2. What problems did you find with management's estimated numbers and assumptions used in the forecast for the years beyond 2016. 3. If you entered negotiations to buy this business, what would be the most you would pay for the net assets. You need to explain why you would pay this amount. 4. If Wells Fargo was willing to fund the entire acquisition, how much would you have to borrow to buy the business, and then, operate it. (HINT: Use the results of your ratio analysis to determine the operating requirements.) 5. A. Use the information you noted in your response to questions #2 and #4 above and prepare a revised 2017 income statement correcting the seller's errors and reflecting your more realistic assumptions for business performance. B. Based on your answer to #5A, would the business generate enough cash to repay the loan to Wells Fargo by the end of the seven year loan agreement? All of your responses to the aforementioned questions should be typed on the Excel document provided. Make sure you format the document so it is suitable for printing. A three point deduction will be made from your grade for improperly formatted documents. Supporting calculations should be included in your Excel workbook. Responses without support will not receive credit. Your advice should be supported by the facts mentioned in the narrative above and the information obtained through your analysis of the financial data provided. Think CRITICALLY during your analysis of the numbers. ALL AMOUNTS IN MILLIONS 2009 $ 107.1 2010 $ 107.5 2011 $ 111.6 2012 $ 112.0 2013 $ 106.3 78.9 79.4 81.8 81.9 78 GROSS PROFIT GROSS MARGIN % 28.2 26.3% 28.1 26.1% 29.8 26.7% 30.1 26.9% 28.3 26.6% OPERATING EXPENSES OP EXPENSE % 25.4 23.7% 23.2 21.6% 24.8 22.2% 24.4 21.8% 24.1 22.7% 2.8 2.6% 4.9 4.6% 5 4.5% 5.7 5.1% 4.2 4.0% 1.8 1.1 1.6 1.7 1.4 1 3.8 3.4 4.0 2.8 0.35 1.3 1.2 1.4 1.0 SALES COST OF GOODS SOLD OPERATING INCOME OPERATING MARGIN COST ALLOCATIONS FROM PE FIRM PREATAX INCOME INCOME TAX NET INCOME $ 0.65 $ 2.5 $ 2.2 $ 2.6 $ 1.8 EST EST EST 2014 $ 111.3 2015 $ 113.0 2016 $ 114.5 2017 $ 119.0 2018 $ 125.0 2019 $ 131.0 82 82.6 84.1 82.9 87 91 29.3 26.3% 30.4 26.9% 30.4 26.6% 36.1 30.3% 38 30.4% 40 30.5% 23.3 20.9% 22.8 20.2% 22.7 19.8% 23.1 19.4% 23.4 18.7% 23.7 18.1% 6 5.4% 7.6 6.7% 7.7 6.7% 13 10.9% 14.6 11.7% 16.3 12.4% 1.6 1.6 1.6 1.6 1.6 1.6 4.4 6.0 6.1 11.4 13.0 14.7 1.5 2.1 2.1 4.0 4.6 5.1 $ 2.9 $ 3.9 $ 4.0 $ 7.4 $ 8.5 $ 9.6 ALL AMOUNTS IN MILLIONS 2009 2010 2011 2012 2013 2014 R&D 3.7 3.5 3.9 4.3 4.7 4.2 General Admin 9.1 7.3 8.3 7.9 8.1 8 12.6 12.3 12.5 12.2 11.2 11 Sales and Marketing NOTES: R&D represents engineering and development of the Company's various product offerings General Admin relates to general management, accounting, finance, legal, human resources, inform Sales and marketing relates to typical marketing expenses including events, catalogs, website main CAPITAL EXPENDITURES NOTE: 0.3 0.3 1.2 0.8 0.5 0.8 The Company's facilities were built in 1954 and require a modest level of mantenance. The main building has a new HVAC system which was installed in 2011 and a new roof There is an abundance of available space in the plant to absorb growth. Therefore, man Recurring capital expenditures should not exceed $400,000 annually. 2015 2016 EST EST EST 2017 2018 2019 3.9 3.5 3.5 3.5 3.5 7.7 7.6 7.5 7.5 7.5 11.2 11.2 10.5 10.5 10.5 arious product offerings e, legal, human resources, information systems, and employee benefits and bonuses for all employees g events, catalogs, website maintenance, as well as sales and order processing personnel costs. 0.4 0.4 0.4 0.4 0.4 a modest level of mantenance. Capital spending is tied to maintenance and facility updates. nstalled in 2011 and a new roof installed in that same year. absorb growth. Therefore, management does not need to make major capital investments to meet or exceed its financial projections. 000 annually. exceed its financial projections. ALL AMOUNTS IN THOUSANDS ASSETS 2014 2015 2016 CASH ACCOUNTS RECEIVABLE INVENTORY 545 13296 17258 824 16388 17239 794 17188 22949 TOTAL CURRENT ASSETS 31099 34451 40931 NET PROPERTY PLANT AND EQUIPMENT 10800 9226 8564 3535 3104 3083 45434 46781 52578 6223 9266 6223 9054 6918 13896 15489 15277 20814 4126 4805 4718 TOTAL LIABILITIES 19615 20082 25532 NET EQUITY 25819 26699 27046 TOTAL OTHER ASSETS TOTAL ASSETS LIABILITIES ACCOUNTS PAYABLE ACCRUED LIABILITIES TOTAL CURRENT LIABILITIES DEFERRED TAXES AND OTHER LT LIABILITIES Name Name ACCT 3150 Case Assignment #4 Calculate the financial ratios to help you answer the following case questions GROWTH PROFITABILITY ASSET EFFICIENCY Name Name ACCT 3150 Case Assignment #4 1. Carefully review the content of the finanical statements and notes. What evidence can you find that points to potential reasons the Private Equity firm decided to sell this business? STUDENT RESPONSE: Name Name ACCT 3150 Case Assignment #4 Carefully review the content of the income statement forecasts for future years. Apply a critical eye to the forecasted numbers. 2. What problems did you find with management's estimated numbers and assumptions used in the forecast for the years beyond 2016. STUDENT RESPONSE: Name Name ACCT 3150 Case Assignment #4 3. If you entered negotiations to buy this business, what would be the most you would pay for the net assets. You need to explain why you would pay this amount. STUDENT RESPONSE: Name Name ACCT 3150 Case Assignment #4 4. If Wells Fargo was willing to fund the entire acquisition, how much would you have to borrow to buy the business, and then, operate it. (HINT: Use the results of your ratio analysis to determine the operating requirements.) STUDENT RESPONSE: Initial amount of borrowings based on purchase price Additional borrowings required to operate the business Total borrowings required Interest rate Annual interest cost Explain how you determined the amount of additional borrowings: 6% Name Name ACCT 3150 Case Assignment #4 5A. Use the information you noted in your response to questions #2 and #4 above and prepare a revised 2017 income statement correcting the seller's errors and reflecting your more realistic assumptions for business performance. STUDENT RESPONSE: REVISED 2017 INCOME STATEMENT 5B. Based on your answer to #5A, would the business generate enough cash to repay the loan to Wells Fargo by the end of the seven year loan agreement? STUDENT RESPONSE