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Maple Leaf Hardware

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					Maple Leaf
Hardware
Next class:
Read Chapter 15, Money, Banking and Securities
Markets (pp 488-505)
Shoppers Drug Mart share price on
www.globeinvestor.com (symbol: SDM-T)
Mike’s Bikes:
Decision #6 input due Tuesday March 27 at 9:00am
Decision #7 input due Thursday March 29 at 9:00am
Part IV due Monday April 9th
Maple Leaf Hardware: The
Issue and Role
   Issue:
       Increase in line of credit from
        $100,000 to $160,000 to cover
        seasonal working capital requirements
   Role:
       Stuart Foreman, assistant bank
        manager, recently transfer and
        promoted
Maple Leaf Hardware:
Company
   Retail hardware business stated in Sept.
    1996
   Owned by two friends: Patrick and Harrison
   Some disagreements about how business
    should be run
   Patrick has experience in father’s hardware
    business and experience in a large retail
    department chain
   Located business in growing area of the city
   Sales increased steadily in first two years
    and in 1998 realized first profit
Maple Leaf Hardware:
Industry
   Big Box retailing a 1990’s phenomena (e.g.
    Home Depot)
   Home Depot had two locations in London
   Cooperative groups buy on a central basis
   21 other stores in London in the retail
    hardware business
   Major determinants of hardware store’s
    success is location: a large area from which
    to draw customers
   During economic recession, retail hardware
    was financially stable
Maple Leaf Hardware:
Financial
   Sales for 1999 projected as $1.7 million
   Sales for 2000 projected to increase 10% to
    20%
   Cash position strongest in December
   Working capital in Feb & March was $80,000
    to $120,000 more
   $20,000 dividend starting 1999
   Rent increasing $2,400 per month
   Plans to install a new inventory system
   Company slow to send financial data to the
    bank
Maple Leaf Hardware:
Issues
 Whathave been the major
 sources of funding and the
 major uses?
Maple Leaf Hardware:
Sources of Funding
   1. Debt:
     Long term loan $186,000 ($240,000)
     Line of credit $20,000 ($100,000)

   2. Equity:
     Share capital – R. Patrick $120,000
     Share capital - L. Harrison $80,000
Maple Leaf Hardware:
Issues
Has  Maple Leaf
 Hardware been
 financially successful?
       Profitability
          Sales increased 16.4% 1998 (6.2%, 1997)
          Net income has been increasing and they achieved
           a profit of $46,000 in 1998
          New business statistically operate at a loss the first
           several years
                            Maple Leaf Hardware               Industry
Profitably             1996        1997        1997      1996          1997
   Sales                 100%          100%      100%       100%          100%
   Cost of sales        67.5%         66.7%     66.0%      73.7%         25.3%
   Gross profit         32.5%         33.3%     34.0%      26.3%         74.7%
   Net income            -5.5%         -1.6%      3.2%     10.7%         12.5%

   ROI                                          20.5%      10.7%       12.5%
Maple Leaf Hardware:
Issues
 Prepare  a projected income
  statement for 1999 and 2000
 What are the critical
  assumptions?
 How sensitive are the
  financing needs to changes in
  assumptions?
         Maple Leaf Hardware:
         Projected Income Statement
                                   Maple Leaf Hardware
                           1998       %        1999       2000
Sales                      1,418.0 100.00%      1,700.0
Cost of sales                936.0   66.01%
Gross profit                 482.0   33.99%     1,700.0      0.0
Operating expenses
Wages                       192.0    13.54%
Rent                        120.0     8.46%
Property tax                 24.0     1.69%
Utilities                    16.0     1.13%
Depreciation                 18.0     1.27%
Advertising                  24.0     1.69%
Other                        18.0     1.27%
Interest                     22.0     1.55%
Total operating expenses    434.0    30.61%        0.0       0.0
Net Income before taxes      48.0     3.39%    1,700.0       0.0
Income tax (25%)              2.0     0.14%      425.0       0.0
Net income after tax         46.0     3.24%    1,275.0       0.0
    Maple Leaf Hardware:
    Projected Income Statement
                                   Maple Leaf Hardware
                           1998       %        1999       2000
Sales                      1,418.0 100.00%      1,700.0    1955.0
Cost of sales                936.0   66.01%     1,122.1    1290.5
Gross profit                 482.0   33.99%       577.9     664.5
Operating expenses
Wages                       192.0    13.54%      230.2     230.2
Rent                        120.0     8.46%      145.6     148.8
Property tax                 24.0     1.69%       28.8      33.1
Utilities                    16.0     1.13%       19.2      22.1
Depreciation                 18.0     1.27%       18.0      18.0
Advertising                  24.0     1.69%       28.8      33.1
Other                        18.0     1.27%       21.6      24.8
Interest                     22.0     1.55%       26.4      30.3
Total operating expenses    434.0    30.61%      518.5     540.4
Net Income before taxes      48.0     3.39%       59.4     124.1
Income tax (25%)              2.0     0.14%       14.8      31.0
Net income after tax         46.0     3.24%       44.5      93.1
Maple Leaf Hardware:
Decision
   Should Foreman increase the line of
    credit from $100,000 to $160,000 to
    cover seasonal working capital
    requirements?
     Cash management
     Inventory
     Debt leverage
     Solvency/Liquidity
     Options
          Maple Leaf Hardware:
          Decision - Cash
             Cash balance at Dec. 31/98 decreased to
              $10,000 (best month?)
             Need $80,000 t0 $120,000 more working
              capital in Feb and March
             Spending money on inventory

                            Maple Leaf Hardware               Industry
Liquidity               1996       1997        1997      1996          1997
   Current ratio       2.76:1      2.29:1     2.22:1     1.6:1         1.6:1
   Quick ratio         0.43:1      0.27:1     0.20:1     0.6:1         0.6:1
   Working capital   $ 222,000 $ 204,000 $252,000      $ 555,000 $ 555,000
Maple Leaf Hardware:
Decision - Inventory
    Inventory levels are increasing, 30% (1997-1998)
     but sales increasing 16.4% (1997-1998)
    Quick ratio (0.20:1) is very low relative to current
     ratio (2.22:1) and relative to the industry average
     (0.60:1)
    Planning to introduce a new inventory control
     system to reduce the age of the inventory

                           Maple Leaf Hardware           Industry
Efficiency             1996       1997       1997    1996        1997
    Investor in days   132.5      142.8      162.2   104.9        99.1
     Maple Leaf Hardware:
     Decision – Debt Service
        Long term debt is secured by personal
         assets of the owners
        Long term debt is decreasing by $16,000
         per month through loan repayment
        Total assets are increasing (15.5% (1997-
         1998)
                            Maple Leaf Hardware               Industry
Stability              1996        1997         1997   1996              1997
   Net worth/assets    34%         31%          34%    42%               41%
   Interest coverage               0.23x        3.2x
             Maple Leaf Hardware:
             Decision – Solvency
                            Maple Leaf Hardware               Industry
Liquidity               1996       1997        1997      1996          1997
   Current ratio       2.76:1      2.29:1     2.22:1     1.6:1         1.6:1
   Quick ratio         0.43:1      0.27:1     0.20:1     0.6:1         0.6:1
   Working capital   $ 222,000 $ 204,000 $252,000      $ 555,000 $ 555,000
Maple Leaf Hardware:
Decision – Options
 Increase the operating line of credit
 Increase the operating line of credit
  with conditions
 Do not increase the operating line of
  credit

				
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posted:5/3/2011
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