Sweet Dreams Incorporated Case Study

Be Our Guest’s balance sheet shows good signs of liquidity. Current Ratios for the past four years have remained above 1 proving that the company can handle its current liabilities. The current ratios are not extremely high (19941.27, 1995- 2.17, 1996- 1.15 and 1997- 1.16), but they can cover the current liabilities. It is important to note that the company is operating on a thin line because the current assets are barely covering the current liabilities. This is particularly unpleasant because we are dealing with a company operating in a seasonal business. It is a concern that the current ratio slightly eroded after 1995, and this is primarily due to Be Our Guest converting the bank line into long term debt in

The company’s increase in inventory (illustrated on the statement of cash flows) rose after 1970 and culminated by a drastic increase in 1973. This increase in inventory (especially in 1973) appears to be heavily financed by short-term and long-term borrowing rather than the typical accounts payable. This is a bit unusual and in 1973 (when they acquired the greatest amount of debt equity, their accounts payable decreased. Their sales were not sufficient to offset the large outflows of inventory related costs. Furthermore, Grant’s decentralization was also a cause of their financial woes because rather than corporately controlling credit extension and credit terms, they allowed each store manager to set their own policies (and manipulate them as they desired). This disastrous policy imploded in 1975 when the company had to make a $155.7 million provision for bad debt expense. So not only did the company have substantial debt and bad debt to equity ratios, they were forced to write off about 8.8% of their total sales from 1975.

Clarkson Lumber Company’s biggest problem by far is the fact that Mr. Clarkson had agreed to buy out Mr. Holtz for $200,000 with semi-annual installments of $50,000. It wasn’t necessarily a bad idea for Mr. Clarkson to buy out Mr. Holtz altogether, but the $100,000/year of payments is an unrealistic amount for Clarkson Lumber at this point in time. Between 1993 and 1995, there hasn’t been a year where they have realized more than $77,000 in net income, so the payment of $100,000/year is clearly unrealistic and a sure problem for the company. Another problem, which isn’t nearly as important as the former, is that net income is growing

There are two chief participants in this case study, Paul Mackay and Jackie Patrick. Mackay, a sole proprietor of Lawsons (a general merchandising retail site in Riverdale, Ontario), has approached the Commercial Bank of Ontario in order to acquire an additional $194, 000 bank loan and a $26,000 line of Credit. Patrick, a first time loans officer, has been appointed to Mackay’s request. As such

Creditors normally focus on the liquidity or solvency of the borrower in terms of current ratio and quick ratio, which indicate whether the company has enough working capital to cover the short-term debts. Myer will enter into a syndicated facility agreement to refinance the existing borrowings of the Myer Group. Besides, creditors are interested in the business risks the company might undertake, which indicate the possibility that the company might be unable to pay back the long-term liability in the future. From this point, the expectation on high return on investment and high profitability in the long run make the creditor’s interest aligned with shareholders’ value.

MCI senior officers were concerned with the increasing amount of bad debt due to the number of delinquent Accounts Receivables (AR). A reasonable course of action may have been to improve on the collection of AR. However, the officers were more concerned with their stock portfolios. The officers sought to improve the reputation MCI. The company was attracting a takeover bid that would increase the value of the company’s stock, consequently enriching their own self interests.

Mr. Paul Mackay, a sole proprietor, has approached the Commercial Bank of Ontario in order to obtain an additional $194,000 bank loan and a $26,000 line of credit. Paul owns and operates a general merchandising retailer in Riverdale, Ontario named Lawsons’. The bank loan is needed for Mr. Mackay to reduce his trade debt that has a sheer 13.5 per cent interest penalty. The line of credit is needed for sales seasonal downfalls so that Mr. Mackay could properly manage those tough months. Jackie Patrick, a first time loans officer, has been appointed to Mr. Mackay’s request. Although anxious to finish her first loan, Ms. Patrick knows that this particular case is a difficult one.

Torres’ common-size financial statements also show the changing composition of Costco’s financing structure over time. The fact that interest expense consistently fell over the five year span from -0.35% of net sales in 1997 to -0.09% in 2001 demonstrates Costco’s ability to reduce its overall amount of debt during these years. Exhibit nine’s balance sheet portion supports this reduction, documenting an increase in total current liabilities from 35.86% of total assets in 1997 to 40.76% in 2001 and an increase in accounts payable from 25.46% of assets in 1997 to 27.03% in 2001. This signifies that the company’s debts or obligations due within one year increased, further corresponding with the fact that short-term borrowing increased from 0.46% of assets in 1997 to 1.93% in 2001. With an increase in short-term borrowing it is logical to expect to see a decrease in long-term borrowing. The income statement proves that this is indeed the case, documenting a decrease in long-term debt from 16.74% of sales in 1997 to 8.52% in 2001. This relates back to the decrease in Costco’s interest expense on the income statement, representing the company’s decision to switch to short-term and away from long-term methods. Furthermore, the decrease in long-term debt helped account for a decrease in total liabilities from

Tighten up collection of receivables so that receivables account for less than 19% of Sales (1985). Pursue more aggressive strategy of collections;

Du Pont's financial policy had always been based on maximization of financial flexibility. Taking to consideration the riskiness of Du Pont's businesses, its competitive position and profitability had declined in the last 20 years. Moreover, the firm is still forced to seek external financing each year for the next five years (1983-1987) due to the continued high level of capital expenditures which are considered non-deferrable to redress the causes of poor performance. In view of the importance and magnitude of the projected financing needs, the firm is concerned about how the cost and availability of debt

The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets.

The company currently faces serious financial challenges. It was struggling with declining sales and increasing costs. Since 2004, revenues had fallen by more than 40% while costs especially for employees health insurance, maintenance, and utilities climbed. Credits and loans had been borrowed to

Interco's overall financial health is relatively healthy. It is highly-liquid as the current ratios are consistently over 3.5, showing that it has plenty of cash to cover any of its current liabilities. Its accounts receivable days indicate that in 1987 it took longer to collect on outstanding accounts while this figure would drop in 1988. The same trend follows with its inventory days, increasing in 1987 and decreasing in 1988, which would signal that its turnover was slower in 1987 and faster in 1988. The accounts payable days increased in 1987 while slightly decreasing in 1988. This is a healthy trend as Interco was able to take

The company becomes less flexible in its managerial decisions by taking up the new loan. It would be bounded by the negative covenants imposed by the new bank. These negative covenants place clear restrictions to Butler’s future managerial decisions, including investments in fixed assets and limited withdrawals of funds. Because of Butler’s conservative operating so far, he should be able to deal with these restrictions. Furthermore, Butler Lumber’s increased sales are shielded from the general economic downturn to some degree due to the relatively large proportion of its repair business. This will facilitate the maintenance of the net working capital even in a general economic downturn stage.

In order to test his hypothesis, the author followed the Dechow and Dichev (2002), which examines the standard deviations of residuals from a regression of accounts receivable accruals on corresponding cash flow realizations. The model uses information related to accounts receivable, sales cash collected during the periods, and errors in accounts receivable accruals (sresid). The author