Red Hen Case Study

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Red Hen Baking Company

Red Hen Baking Company
Case Study

Company profile
Randy George established Red Hen Baking Company in 1999. Red Hen Baking Company specializes in artisan bread and their mission is “to produce premium quality breads and pastries with traditional methods and carefully selected high quality ingredients. To do this while striving to minimize our impact on the environment, to support the growers and producers of our ingredients, and to provide the finest baked goods and service to our customers” (Our Mission). Red Hen Baking Company is able to achieve their mission by marketing their baked goods within 100 miles of the bakery and by delivering every day to stores and restaurants in the delivery area.
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Our analysis attempts to answer the question, “What are the things a company must consider when analyzing a new investment or project?” According to the text, a firm’s first objective when deciding to take on new debt should be that its return on net assets (RONA) should be greater than its weighted average cost of capital (WACC). Since we are working with an income statement only and do not have an amount for net assets, we will instead use return on invested capital (ROIC), which measures how well a company is using its money to generate returns. Comparing a company 's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively. From our spreadsheet calculations we see that using our estimated operating profit provides us with a 19.9% return on invested capital with only a 7.2% weighted average cost for that same capital. If these numbers are even close to correct, George should definitely make the move.

The actual numbers will differ from what has been estimated here, of course. Not all of the expenses will increase by 30% in response to 30% growth. Many of the expenses listed are fixed and do not change in relation to changes in production levels. Expenses that do change in this way would most likely be in the cost of goods sold section of the income statement. Depreciation will markedly increase with expansion. This has been accounted for on the
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