Strong Tie Ltd Case

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Joseph Alvarez
2/11/13
Cases
Monday 7-10pm

Strong Tie Ltd. Case

From the first scenario, I can conclude that Strong Tie Ltd is in terrible financial shape because of three straight years of negative CATO between 2010-2012. I used the growth rate calculated between the years 2006 to 2007 and the total was 7.72%. It increased by 1% for every year thereafter. But with an increasing working capital and variable costs, the increase in sales growth is not enough for Strong Tie to produce enough free cash flow to withstand its increasing costs.

CATO| | -3319.73| -3884.50| -4551.92|
Gross debt| 1145.00| 4064.73| 7549.23| 11701.15|
t| 0.30| | | |
v| 0.82| | | |
w| 0.35| | | |
c| 1.17| | | |
F| 3130.00| | | |
GROWTH| 7.72%| 8.72%| 9.72%| 10.72%|
INFLATOR| 2.00%| 2.00%| 2.00%| 2.00%|

In the second scenario, I adjusted the growth rate down to 5% and for it to remain constant throughout the remaining three years. As we can see, the negative CATO went down significantly but Strong Tie is still not producing any free cash flow and it is putting the company in danger of liquidating if it cannot find a way of reducing its costs. Banks will stop lending this company and any company for that matter if it is illiquid.

CATO| | -2182.63| -2282.44| -2386.63|
Gross debt| 1145.00| 2927.63| 4810.07| 6796.69|
t| 0.30| | | |
v| 0.82| 0.82| | |
w| 0.35| 0.35| | |
c| 1.17| 1.17| | |
F| 3130.00| | | |
GROWTH| 5.00%| 5.00%| 5.00%| 5.00%|
INFLATOR| 2.00%| 2.00%| 2.00%| 2.00%|

For the third scenario, I maintained the same constant growth rate of 5% that I used in the second scenario. However, this time I included prepaid expenses from 2007 when calculating “v”. The variable cost increased by 1 cent, which led the negative CATO to increase also. Again Strong Tie is not producing any free cash flow therefore making it insolvent and impossible to survive...
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