Dragon Soup Harvard Business Case Essay

1309 Words May 8th, 2014 6 Pages
1. Using the excel spreadsheet provided, and the recommended consequential disclosures as a basis you your analysis, what recommendations would you give Phillips on each of the items listed below? In each case, justify your recommendations and estimate how much the decision will change the “true” value of the company and its value in the eyes of an investor in a private company.

a. The lease or buy decision, including whether to structure as an operating lease. The new canning equipment should be leased over the 14 year term with no bargain purchase option so as to structure it as an operating lease. The major factor to consider is what will boost Net Income the most given that the goal is raise the share price. After a
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Because this is the case, the Net Income effect of this decision has be the biggest factor to consider and an operating lease structure would therefore appeal to investors the most.

b. The regular price of soup, whether or not to run the end of year promotion and target yearend inventory.

Dragon Soup should increase the regular price of soup. The sales team is confident they will be able to sell soup at any price due to the cult-like following of The Clangers. Dragon Soup then just needs to find the optimal price per can for their purposes of maximizing income. Based on the spreadsheet, a price of $1.99 per can maximizes Gross Profit at $547,298 (Net Income of $207,354). On the other hand, Net Income is maximized at a regular price of $2.15 per can, producing Net Income of $226,740 (Gross Profit falls to $516,783).

Given the goal of the company to boost the stock price, Phillips must refer to the Stock Valuation Formula. For a growth company such as Dragon Soup, P = E1/(R-G) where E1 is the earnings over the next 12 months (found in Exhibit 1A). Therefore, Dragon Soup will increase their stock price by increasing the amount of their Net Income.

Regardless, Dragon Soup should run the end of year promotion, because all of these values are increased by selecting the option to run the promotion.

Decreasing the End of Year Inventory as a