CAINSBORO MACHINE TOOLS CORPORATE
Case #1 CAINSBORO MACHINE TOOLS CORPORATE
Question 1. What risks does the firm face? What is the limit of Exhibit 8 in terms of the risk analysis?
From the article, there are two major risks the company face.
First, the company’s financial condition is not very good. From 2003 to 2004, the gross profit declined from 314,522 thousands to 257,759 thousands. This leads the company suffer from an operating loss in 2004.
For the first quarters of 2005, the board declared no dividend. This declaration will beat the confidence of the investors.
Second, the company’s sales are heavily relying on the Artificial Workforce and this will be the risk. Although the Artificial Workforce improves the revenue of the company, some factors will destroy the sales of the product.
The first factor is the competitors. There are two strong competitors developing comparable products and would introduce them within the next 12 month. This will reduce Artificial Workforce’s orders and reduce the revenue. The second factor is the software industry is highly cyclical and the strength of the US economy were not encourage. This will also affect the revenue of the company.
The Exhibit 8 shows us the projected sources and uses of the company. But, there are still some limits of Exhibit 8.
First, we should notice that the CFO took the boldest approach to do the table. This approach assumes that the company would grow at a 15% compound rate. This is not accurate enough to predict the revenue of the company because many factors will affect the revenue as mentioned above. If the economic is not good enough, the company may suffer from a negative growth.
Second, the CFO assumes that the company will pay dividend of 40% of earnings every year. This is not accurate enough, too. The company hasn’t decided which industry to reposition, so the dividend payout ratio should be depending on which industry it belongs to. If the company account into the CAD Company, the payout
Question 1. What risks does the firm face? What is the limit of Exhibit 8 in terms of the risk analysis?
From the article, there are two major risks the company face.
First, the company’s financial condition is not very good. From 2003 to 2004, the gross profit declined from 314,522 thousands to 257,759 thousands. This leads the company suffer from an operating loss in 2004.
For the first quarters of 2005, the board declared no dividend. This declaration will beat the confidence of the investors.
Second, the company’s sales are heavily relying on the Artificial Workforce and this will be the risk. Although the Artificial Workforce improves the revenue of the company, some factors will destroy the sales of the product.
The first factor is the competitors. There are two strong competitors developing comparable products and would introduce them within the next 12 month. This will reduce Artificial Workforce’s orders and reduce the revenue. The second factor is the software industry is highly cyclical and the strength of the US economy were not encourage. This will also affect the revenue of the company.
The Exhibit 8 shows us the projected sources and uses of the company. But, there are still some limits of Exhibit 8.
First, we should notice that the CFO took the boldest approach to do the table. This approach assumes that the company would grow at a 15% compound rate. This is not accurate enough to predict the revenue of the company because many factors will affect the revenue as mentioned above. If the economic is not good enough, the company may suffer from a negative growth.
Second, the CFO assumes that the company will pay dividend of 40% of earnings every year. This is not accurate enough, too. The company hasn’t decided which industry to reposition, so the dividend payout ratio should be depending on which industry it belongs to. If the company account into the CAD Company, the payout