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Case 3.1 Dr. Jay Stephenson
Case 3.2 Gardiner Wholesalers Incorporated (A)
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11 comments:
Re: Dr. Stephenson's Case
Do you think the problem is: Should Ritter approve Dr. Stephenson's request for a $300K loan from the Dominion Bank?
Stephenson's plans to expand his business (for which he is relying on the loan's approval so he can expand his physical assets and space) seem entirely dependent on whether he can hire an appropriate associate. Without an associate, he will be relying on his current revenue stream (basically, himself and 5 currently employed hygienists) to repay the loan. He'll be working 24/365!
Despite that Stephenson has a long-time relationship with the bank, I don't think it's realistic he receive the loan without securing an associate. Now, should Ritter assist with Stephenson's search to ensure Stephenson remain a customer of the Dominion?
I agree Calvin. Even though the company is showing growth, cost of sales are coming down and his return on investment is increasing, the fact of the matter is Stephenson is already working as much as he can and would not be able to sustain growth (never mind increase it) in the years to come without more associates or partner(s).
Should Ritter provide him with his loan request? I think so. Even though the banks previous commercial accounts managers didn’t request any collateral, I believe this would be in the banks best interest and that Ritter would have to secure the loan using Stephenson’s assets.
Another option, Stephenson could look for another partner that would buy into the company thus providing him with the extra cash flow to help with renovation costs. Since Stephenson’s clinic is the busiest in the city, if not the entire province, I don’t think this would be a difficult position to fill. Plus it’s a great starting point for Stephenson’s exit strategy for when he retires in 10 years.
I don’t think Stephenson would have a hard time finding another reliable associate (even though the last four have left him due to the long busy days!). He just needs to manage his time more efficiently and possibly hire an extra associate or two to help take the load off him and reduce the stress in the clinic. This would increase the velocity of patients and help improve the scheduling of future patients and in return would help retain customers for future growth.
I am new to the blog scene, so if this is far too long I apologize!
I wish we could some how post the answers of the “practice” sheets we did last class… not sure if I have them all correct. I will soon find out I guess.
See you Tuesday for the big quiz!
Hey Marty!
Here are my results! Just let me know if are the same as yours!
2005:
2a: 72 days
2b: 153 days
3a: 1.75:1
3b: 0.71:1
4a: 7.94X
4b: 153.27%
5a: 38.57%
5b: 36.75%
5c: 79.54%
5d: 20.83%
See you next tuesday!
Is anyone else feeling like there's a gap between what they've learned about creating financial statements and ratio analysis and actually drawing conclusions in cases? I find myself spending a lot of time looking at the ratio analysis stuff and not being sure what to conclude.
Hi Dayris: Not sure what Marty has for results, but the only figure that didn't match was 4b - I believe the denominator on Ken's sheet indicates it should be the "Total Assets", not the "Shareholder Equity". I got 61% here (206,460/341,160). Let's see what Marty and the rest of the crew got.
- Cal
Hi Jan:
I'm getting the hang of this a bit. Crunching the numbers for the Stephenson case reveals to me that if he receives the loan and goes ahead with his expansion, he will only pocket at most about 64% of what he earned in 2000 based on his projected total revenue for 2001. So it's a bit of a risk for him to expand at this point before he has secured an appropriate associate. However, Marty has convinced me that the the gamble might be worth it to attract a decent associate.
Likewise, with the Gardiner case, if we crunch the same numbers that Kathy found from Dun & Bradstreet (Current Ratio, Age of Receivables, Net Worth of Total Assets), we can see how SD Taylor and Elegance stack up against the industry averages:
Industry Averages
Current Ratio - 1.6:1
* (Short term liquidity - higher ratio = better)
Age of Receivables - 4.7 days
* (Fewer days = better, means stuff is paid for pretty much after it's bought, which is incredible to me!)
Net Worth to Assets - 41%
* (It looks like firms that have high fluctuations in earnings - like these folks because of the seasonal nature of their business - should have a higher ratio than, let's say, Thrifty Foods who have very little fluctuation in day-to-day earnings)
S.D. Taylor
CR - 2.57:1
AR - 3.33 days
NW - 78.3%
Elegance
CR - 1.47:1
AR - 6.26 Days
NW - 60.7%
Given these numbers, I would say that SD Taylor have a far better credit rating than Elegance does and Kathy can probably extend them more credit than Elegance.
-Cal
Hi Dayris,
Thanks for posting your results! I feel much more comfortable going into the quiz tomorrow knowing that you and Cal have the same results as I do (for the exception of 4b).
Just to make things confusing, I ended up with 1.53:1
Total liabilities/total shareholders equity
$206,460/$134,700 = 1.53:1 (this is a ratio I believe and not a percentage)
Let us know what you ended up with Jan.
Thanks!
This is what I got:
2005 2004 2003
72.1 70.3 71.7
153.3 111.7 120.6
1.75:1 2.06:1 2.02:1
0.71:1 0.98:1 0.90:1
1.53:1 0.70:1 0.79:1
2004-2005 2003-2004
38.6 21.1
36.7 335.4
79.5 12.2
20.8 18.0
By the way, I don't think the debt to equity ratio (4b) is on our formula sheet, is it?
In any case, I think it's total current & long term liabilities / total shareholders equity.
Thanks for sharing your thought flow about the assessments, Chromajoy, that was helpful.
One more thought: I agree with Ken's comment about Dr. Stephenson's dilemma. What he needs is two associates and more reasonable expectations about their work/life balance in order to establish a better long term prospect for his business.
Hi Dayris and Marty:
Marty's right, I was lying in bed thinking about this one last night (boy, that's sad, eh?) and I did have it wrong. It's not a percentage as Marty points out but a ratio (debt:equity), so Dayris you were on the right track. I also got 1.53:1 when I recalculated this just now.
Thanks for pointing this one out. See you at the quiz!
-Cal
Hi there!!!
You are right!!! Ithe result of 4b= 1.53 I don't have to % that number!!!
See you tonight and good luck!
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