Working Capital Simulation: Managing Growth

Transcription

1 SIMULATION SUPPLEM EN T Working Capital Simulation: Managing Growth Problem Set Questions Problem 1 Estimate the net working capital and cash conversion cycle in 2012 for McDonald s Corporation based on the data provided in the following chart: Income Statement for the Period Ending 12 Months: December 31, Months: December 31, 2012 Revenue 27, ,567.0 Cost of Goods Sold (16,319.4) (16,750.7) Gross Profit 10, ,816.3 Selling: General and Administrative Expenses (2,393.7) (2,455.2) Operating Income 8, ,361.1 Net Interest Expenses (453.8) (488.6) Other Net Operating Income (Expenses) EBT, Including Unusual Items 8, ,079.0 Income Tax Expense 2, ,614.2 Net Income to Company 5, ,464.8 Balance Sheet as of December 31, 2011 December 31, 2012 ASSETS Total Cash and ST Investments 2, ,340.3 Accounts Receivable 1, ,375.3

2 Inventory Prepaid Expenses Other (Including Current Deferred Tax Assets) Total Current Assets 4, ,922.1 Net Property, Plant, and Equipment 22, ,677.2 Long-Term Investments 1, ,418.6 Goodwill 2, ,804.0 Deferred Tax Assets, Long-Term Other Long-Term Assets 1, Total Assets 32, ,386.5 LIABILITIES Accounts Payable ,141.9 Accrued Expenses 1, ,952.2 Current Portion of Long-Term Debt Other Current Liabilities (Including Income Taxes Payable) Total Current Liabilities 3, ,403.1 Long-Term Debt 12, ,632.5 Other Noncurrent Liabilities (In Deferred Taxes) 2, ,057.3 Total Liabilities 18, ,092.9 Total Equity 14, ,293.6 Total Liabilities and Equity 32, ,386.5 Source: Capital IQ 2

3 Problem 2 Captivate Remodeling is a small, owner-managed construction company. The owner, Bob, typically works on a single residential remodeling project at a time. The business is very simple because Bob does not carry any inventory. The project is completed in four months, on average; thus, Bob can take on three projects each year. The total cost that he bills to his clients averages $400,000, so he books revenues of $1,200,000 per year. After accepting a project, Bob collects the payments from his client in two installments. He collects the first installment of $200,000 at the end of the second month, and the balance of $200,000 at the end of the project (i.e., at the end of four months). Bob s expenses are largely payments to his subcontractors (e.g., plumbers, electricians, and so on). Bob pays all his subcontractors every week once they start on the job (for simplicity, assume that he pays his subcontractors four times a month). His margin on a project is 10%, so his payment for expenses every week is, on average, $22,500. Bob is constantly being asked to take on more projects due to his excellent reputation. He also has an excellent network of subcontractors and could easily take on more projects. He is thinking about taking on six projects each year and, instead of working on a single project at a time, working on two overlapping projects simultaneously. 1. How much capital will Bob need to double his business? 2. If Bob has only half the capital needed and cannot obtain any additional loans, what possible avenues exist for him to achieve this growth? 3

4 Problem 3 Natasha Brown runs a specialist food store in Portland, Oregon. The store specializes in hard-to-find food and condiments such as Milifiore Honey from Tuscany, Blue Stilton Cheese from England, and so on. The store keeps an inventory that, valued at cost, is approximately $1.2 million. The store generates average sales of $2 million per year, with an operating margin of 8% (after tax). News about her excellent foods has spread, and Natasha is considering opening an online retail option for the limited selection of the most popular products. Many of these products are sourced from around the world and involve long lead times. Natasha would need to order a number of these items in advance to make sure she has adequate supplies. She estimates that the online channel can generate an additional $400,000 in sales. She would have to spend about $150,000 upfront to build a robust online store website. (She estimates that the cost of capital for a small business like hers is about 15%.) Natasha also expects the operating margins from the business to be the same as her existing business. Assuming that additional sales from the online channel will be sustained for the foreseeable future (in perpetuity), is this project worth undertaking? 4

5 Problem 4 Gluten-Free Baked Goods has created a niche for itself by creating and marketing a line of gluten-free cakes and desserts. The company has annual sales of $5 million. It has grown slowly but steadily; the owners have avoided all debt and have relied on internal funds to sustain growth. The firm has no debt and has generated an after-tax operating income of $400,000. The firm purchased its supplies of sugar, gluten-free flour, specialty yeasts, and other raw ingredients from a number of suppliers. Even though the owners were offered 2/10 Net/30 terms by their suppliers, they paid cash on delivery. One of the owners stated the rationale for this as follows: We hate to owe anybody anything. Once we have the supplies and if we like the quality, we like to pay when we get the delivery. After all, our customers pay us right when they buy our product! The cost of goods sold were 80% of the sales. The owners were recently approached by another specialty food manufacturer who wanted to buy the business for $4 million. The interested firm explained that it had simply taken the perpetuity value of the most recent after-tax operating income using a cost of capital of 12% to arrive at the value. (The analysis included a long-term growth potential of 2% per year.) The estimated value was $400,000/( ). The owners generally agreed with all the assumptions but were still a bit unsure about the value. They felt that the offer failed to reflect the conservative policies that they have been following. Do you agree with the owners? What would be your estimate of the extra value that should be offered for Gluten-Free Baked Goods? 5