Case Studies 1
CASE STUDIES
Borrowing Capacity
Banks routinely monitor a company’s health and financial position. Borrowing capacity is a measure of whether a company has sufficient net tangible assets to serve as a secondary source of payment in case the business fails. Determine whether the company in this case has any remaining borrowing capacity, and if so, how much. Page 3.
Asset Based Lenders
Every asset based lender has a particular criteria it uses to screen potential clients. Three companies are each applying for credit from a national asset based lender: Micro Electron, Proxima Comics and Industrial Laundry services. Apply the lenders criteria to determine whether any of the three companies will be funded and to what extent. Page 4.
New Furniture Company
Develop a pitch to friends, family and other individuals to convince them to invest in your start-up furniture company. Student teams should develop presentations and present them to the class who will act as a panel of individual investors. The potential investors will ask the kinds of follow-up questions they would if their own money were at stake. Page 9.
New Soup Company
Develop a more sophisticated, fact based pitch to Angel Investors. The presentation should be made by teams of students. The class will act like a panel of potential Angel Investors who will ask questions designed to sharpen the presenters’ analytical and presentation skills. Page 10.
Electric Motor Works
Develop a presentation to persuade Venture Capitalists to invest in a start up car company. Venture Capitalists are much more sophisticated than family and friends or most angel investors. They focus on sales, growth, profits and the yield on their investment. The class will act as a panel of Venture Capitalists and ask challenging follow-up questions designed to sharpen the presenters’ skills. Page 17.
Mom’s Soup Company
Develop the forms and filings required by the SEC to comply with regulations for a Regulation D, private offering. Page 22.
Blenheim Furniture
Develop the forms and filings necessary for a small public offering. Assume that the company is not going to be listed on a national exchange so that the filings must satisfy both state and federal securities law. Page 26.
BORROWING CAPACITY
Use the following information to compute: (i) Tangible Net Worth, (ii) Borrowing Capacity, and (iii) Remaining Capacity.
Terms: Line of Credit $800; Factor 70%, A/R > 60 days ineligible.How much more can this company borrow on its line of credit?
Current Assets:Current Liabilities:
Cash $20 Accounts Payable $400
A/R $600 Line of Credit $570
Prepaid Expense $20 Current Leases $20
Inventory $560 Bank Term Loan – current $30
Total Current Assets $1,200 Total Current Liabilities $1,020
Plant, Property $1,000 Bank Term Loan $330
(net of depreciation)______Equity $850
Total Assets: $2,200 Total Liabilities & Equity $2,200
A/R Aging: $225 < 30 days; $175 31-60 days; $125 61-90 days; $75>90 days.
------Tangible Net Worth and Borrowing Capacity Format------
Assets:
Less: Excluded Items:
______
Subtotal Excluded Items:______
Less: Non-bank Liabilities:
______
Subtotal Non-bank Liabilities______
Tangible Net Worth:
x Factor ______
Borrowing Capacity
Less Outstanding Bank Debt:
Term Loan
Line of Credit ______
______
Remaining Capacity:
ASSET BASED LENDERS
Asset based lending is an alternative for companies that cannot obtain conventional bank financing. Loan underwriting is based on the quality of assets rather than the ability to produce net income.
Assume the following are lending criteria for an asset based lender called American International Capital. Following the criteria are descriptions of three companies. Which of these companies gets funding, and about how much based on these criteria?
American International Capital
General Lending Criteria
American International Capital asset based loans range from $10 to $150 million.
Characteristics of companies that qualify for American International financing include:
Actively involved management, with a track record of good performance in the company’s industry
Adequate assets
Historical profitability that is “spotted” to consistent
Moderate to high financial leverage
Realistic projections, consistent with historical data
Required Loan to Asset Value(s)
Accounts receivable, up to 85% based on the quality of accounts receivable (this usually implies accounts receivable are less than 90 days old, often less than 60 days old.)
Inventory, up to 75% of eligible (lower of cost or market) inventory
Machinery and Equipment - up to 80% of appraised, orderly liquidation value (this usually means, the business is closed, and assets are sold via regular markets. However, orderly liquidation value might be a small fraction of fair market value. It is probably closer to “fire sale,” or exit value, which may be a few percent of book value.)
Real Estate - up to 65% of appraised fair market value (if property is already subject to a mortgage, then only the net equity is available for collateral.)
Terms and Repayment
Repayment consistent with liquidation of assets
Loan terms up to seven years
Rate: Floating rate over prime or LIBOR with fixed rate pricing available.
Case I: Micro Electron Corporation
Micro Electron Corporation designs computer switches based on electron spin. Founded in 2005 by two Ph.D. scientists, they have raised $5 million in investment capital. They want to borrow $10 million to bring their first product to market. Their target market is telecommunications companies. Their balance sheet is given below:
Assets
Cash & cash equivalents$4,000,000
Furniture 30,000
Equipment - laboratory 300,000
Patents 200,000
Real Estate 100,000
$4,630,000
Liabilities
Accounts Payable $10,000
Accrued Payroll 8,000
$18,000
Equity
Capital at Par $2,000
Preferred Stock 5,000,000
Retained Earnings (390,000)
$4,630,000
Does Micro Electron get an American International Capital loan? If so, how much?
Case II: Proxima Comics
Proxima Comics specializes in Spanish language comic books. They have four different comic books each of which is published monthly. Profits have been $3 million, a loss of $2 million, and $4 million on sales of $18 million, $21 million, and $24 million respectively. They want to borrow $12 million to purchase rights to publish Marvel Comics in Spanish and finance additional working capital. Their balance sheet in thousands follows:
Assets
Cash 50
Accounts Receivable (all under 60 day) 8,000
Inventory 450
Furniture & Fixtures 500
Printing Machinery 6,000
Real Estate10,000
25,000
Liabilities
Accounts Payable 300
Term Loan12,000
Mortgage 5,700
18,000
Equity
Capital at Par and Paid In Capital 1,000
Retained Earnings 6,000
7,000
Does Proxima get an American International Capital loan? If so, how much?
Case III: Industrial Laundry Services
Industrial is the leading provider of commercial laundry services in the Baltimore area with 22% of hospitals, 27% of restaurants and 28% of nursing homes in their market. Profits for the last three years have been $10, $12, and $15 million on sales of $110, $120 and $130 million respectively.
Industrial is a third generation, privately held family business. The owners are: Debbie Glick, 32, a doctor in Seattle, Charles Glick, 35, a lawyer with the New York firm of Glick and Sales, who is also Industrial’s President, and Sandy Glick, a New York furniture designer. They want to borrow $15 million for working capital. Their balance sheet is in millions.
Assets
Cash 3
Accounts Receivable (all under 60 days)30
Inventory 2
Machinery & Equipment 5
Real estate10
50
Liabilities
Accounts Payable 7
Term Loans13
Mortgage15
35
Equity
Capital at Par and Paid In Capital 2
Retained Earnings13
15
Does Industrial get an American International Capital loan? If so, how much?
NEW FURNITURE COMPANY
You and your friends have decided to start a furniture business. Among the reasons for selecting furniture as a business are:
1. It is low-tech. High tech businesses require constant investment in new technology, and at any given moment, even the best technology can be eclipsed by the “latest and greatest.”
2. Only a few of your friends have engineering or science degrees.
3. You want a product that everyone can understand, employees, customers and most important investors.
4. You perceive there are relatively low barriers to entry in terms of start-up capital and government regulation (as compared to, for example starting a pharmaceutical firm, an airline, or nuclear waste dump.)
Of course the disadvantages of starting a furniture company are:
1. Relatively low barriers to entry.
2. A crowded market.
Your challenge is to define a market space, and corresponding product that is unique, or unique enough that you are not competing head to head with the largest furniture manufacturers.
One thing you all agree upon is that most furniture is boring, not well made, and just doesn’t have that… something that makes it stand out.
You must figure out how to distribute your product, the cost to manufacture it, and its retail price.
You also have to figure out how much money it will take to get the company started and where you will get it.
NEW SOUP COMPANY
While watching the Seinfeld episode on the Soup Nazi, you began thinking about what really good soup was like. Your writer’s group recently met at a member’s house and she made the most wonderful, thick, comforting chicken soup you’ve ever had.
You’ve also tried several varieties of split pea soup sold in supermarkets and have been disappointed by all of them. For one thing, they all seemed watery, and not thick and rich like the home made split pea soup your mom made.
You did some investigation and found that total soup sales, in terms of cases of soup, has declined one percent per year for the last 30 years. However, after a little investigation, you found that coffee sales declined about one percent per year for thirty years until some upstarts from Seattle, Starbucks, made coffee trendy. At that point demand for better coffee skyrocketed and the price of a cup of gourmet coffee tripled, and the price of regular, brewed coffee doubled. You believe that if you can make your gourmet soup trendy, it will command a premium price in the marketplace.
Your product objective is to make a line of soups that are not just a little better than today’s canned soup, but are so much better that once people it, they just won’t be able to go back to anything else.
You have excellent recipes for chicken soup (from your writer friend), and split pea soup (from your mom) and are searching for receipts for mushroom, tomato, pepper pot, and one other soup. You would like to make your soup so satisfying, so trendy, so hip, that people will think of your soup as a way to end every day. Hence, you want seven varieties of soup.
The issues you have to address are:
- The channels of distribution are you going to use – direct sales by yourself, or your own sales force, or brokers, or some other alternative.
- How to convince supermarkets, or other retailers to carry your soup.
- What you are going to do for production. You can make and can (in ball jars) samples in your own kitchen. However, you can only produce 100jars of soup per day.
- You have surveyed retail prices and done research as to supermarket’s gross margin on various soups, and have summarized those in a table attached.
- You have estimated your cost per can of soup in the attached table. What have you included in that cost? Investors will want to know because your cost per can is an integral part of your cost structure.
- Attached is a break-even analysis that shows how your economic model will change as sales volume increases. They will probably ask questions about whether you have allocated enough for each type of fixed and variable expense. Do the best you can to explain/rationalize the numbers.
- You have allocated a certain amount for marketing/advertising costs. Investors will want to know how you intend to spend those dollars. If they are smart, they may ask whether you are spending too much or too little. They may also ask how you intend to measure the effectiveness of your advertising.
- You hired Rutgers Rohrer Center for Management and Entrepreneurship to conduct focus group studies for you. A one-page summary of the studies is attached.
- You must decide how much you need for plant, equipment, and working capital to get started. You should also forecast how much cash you will need to develop other recipes and for product introduction.
Marketing Plan Issues
There are two overlays to your marketing plan, one regional and one demographic. Rather than scattering marketing and advertising resources across the country, you intend to focus on one region until you get a penetration of three percent of all supermarket soup sales for the region. At that point you will consider opening a new region. Priority will be given to high income regions first, such as the North East, Middle Atlantic states and California.
The second overlay is demographic. Marketing efforts will focus on towns with high per capita income. This data is available from the census bureau. Within these town, you will focus on high end retailers, bypassing supermarkets that emphasize low price.
Product introductions will be through in-store promotions, coupons, and perhaps even samples distributed to homes in very high income areas. The strategy is to get “buzz” going among trend setters.
National soup sales have declined about 1% per year for thirty years. You plan to reverse this. Since the US population is growing at about 2% per year, the number of new, potential, soup consumers grows by 2% per year, or about 5.6 million (280 million population x 2%.) If we capture 10 percent of them (560,000). Combine this with focus group data to estimate sales. Another market is high end restaurants which purchase about $1.8 billion of soup per year.
Who Buys Soup Wholesale?Sales
(billions) / Percent
Supermarkets / 4.2 / 35.0%
Institutions (Schools, Hospitals, etc.) / 2.5 / 20.8%
Restaurants / 1.8 / 15.0%
Discount Stores (Wal-Mart, BJs, etc.) / 1.7 / 14.2%
Convenience Stores (7-11, Wa-wa, etc.) / 1.0 / 8.3%
Gourmet Stores / 0.5 / 4.2%
All Others / 0.3 / 2.5%
Total / 12.0
Case Studies 1
Economics of Retail SoupCost to / Super- / Manufactur’s / Manufactur's
Retail / Super- / Market / Cost of / Gross Profit
Price / Market / Margin / Goods Sold (1) / Per Can
The Competition
Campbell
Chicken Noodle Condensed / $0.63 / $0.58 / 7.2% / $0.28 / $0.30
Chicken Noodle Select / $1.69 / $1.55 / 8.0% / $0.75 / $0.81
Split Pea Condensed / $0.79 / $0.73 / 7.5% / $0.35 / $0.38
Split Pea Select / $1.69 / $1.55 / 8.2% / $0.74 / $0.81
Progresso
Chicken Soup / $1.59 / $1.45 / 9.0% / $0.94 / $0.51
Split Pea Soup / $1.59 / $1.45 / 9.0% / $0.94 / $0.51
Proposed
Hearty Chicken / $2.50 / $1.25 / 50.0% / $0.75 / $0.50
Hearty Split Pea / $2.50 / $1.25 / 50.0% / $0.75 / $0.50
(1) Cost of Goods Sold form company 10-Ks
Focus Group Results
Question: How many cans of soup does your household purchase per year?
CampbellCans
Chicken Noodle Condensed40
Chicken Noodle Select (not condensed)12
Spit Pea Condensed10
Split Pea Select (not condensed) 4
Progresso
Chicken Soup (not condensed)15
Split Pea (not condensed) 5
Question: How much soup would you purchase at each given price point?
Price:$1.25$1.50$2.00$2.50$3.00
Hearty Chicken Soup 24 20 16 9 5
Hearty Split Pea 10 7 6 3 2
Case Studies 1
Pitch Notes
Supermarkets view their shelf space as valuable real estate. How are you going to convince them to stock your product?
Even if your soup is wonderful, how are you going to get people to try it?
How are you going to let consumers know where to look for your soup?
Does your cost per can include packaging? Packaging includes: cans or jars, cardboard boxes, shipping pallets and shrink-wrap.
Your sales costs/sales commissions are about 10%. Is that reasonable? Do you have any data, or norms you can point to?
What is your professional background? Do you have a degree, or any college at all? Do you have any work experience?
What do you know about the food industry?
Have you been in contact with Rutgers University’s Food Industry Research Extension in Bridgeton? How about at the Davis Campus in New Brunswick?
How much are you going to pay yourself as president & CEO? Is that more than you have budgeted?
How much capital do you need?
What are you going to use it for?
ELECTRIC MOTOR WORKS
This case provides background for a pitch to Venture Capitalist for funds to start a company called Electric Motor Works.Electric Motor Works (EMW) was formed to produce and sell electric cars.
Product Description
Historically, there have been two problems with electric cars. First they have limited range. Second, they have been expensive, mostly because they have been individually “hand made.”
The range problem will be overcome by a combination of strategies.
1.Cars will have on-board chargers that can be plugged into any standard outlet. Using on-board chargers it takes approximately 1 hour to recharge each battery.
2.Cars will have solar cell panels. Each solar panel can recharge a battery in 8 hours in the Philadelphia area. Going as far north as Boston, it takes 12 hours to recharge one battery with one solar panel. Going south to Arizona, it takes 6 hours to recharge one battery with one solar panel.
3.An on board, 3500 watt, electric generator can charge a battery in 30 minutes. A 3,500-watt generator can be used, without the battery or solar cells to propel the Sportster at speeds up to 40 miles per hour or the Sedan at speeds up to 30 miles per hour.
4.Each car has space for ten batteries.
The Sportster is really meant as a single passenger vehicle, wherein the driver sits in the center of the car. There is a second seat directly behind the driver’s seat, but it isn’t expected to be used much.
The Sedan has four full sized seats. Neither car has a trunk per se because batteries and electrical equipment use that space. This shouldn’t be a problem for grocery shopping, for example, because groceries can be placed on the seats.
Each fully charged battery is able to propel the Sedan 8 miles or the Sportster 10 miles. Top speed for the Sportster is 75-mph. Top speed for the Sedan is 65 mph.