Case # 2 SureCut Shears, Inc. Applied Corporate Finance
1. In his predictions, Mr. Fisher assumed that growth of sales in the year (July 95 till June 96) would be -0.4% – which in the case of a company that has shown sustainable growing profits since 1958 should reflect some negative economic expectations that would be confirmed by the retail industry downturn – with monthly values for 1996 similar to homologues registered in 1995; production would be constant, so as the cost of goods (60% of sales); and sales seasonal peak is placed between July and December. However, it happens that from August 1995 in beyond, the cost of final goods were supposed to decrease as result of productive efficiencies inherent to the plant modernization program, allowing to save about $ 900,000 per year before taxes in manufacturing costs, assuming these as materials and labour. In fact, this cost should likely be 58% of the sales, instead of the affirmed 60%, with the year total value of those inputs equal to $18.000, the saving value resultant from the gains of efficiency since the end of August 1995 until June 1996 equal to $ 750,000, and a total amount of sales of $ 30,000,000 (($ 18,000,000 - $ 750,000) / $30,000,000 = 57.5%). For this reason we do not think this was a reasonable assumption to take.
2. Comparing the Pro Forma Income Statement with the effectively verified Income Statement for the period of July 95 till June 96, the first of the cause and effect relations that we can establish to explain the incapacity of SureCut Shears to repay its bank loan on March 31 is the Retail downturn, and consequent decrease on sales, which end up to register values 12.24% under the forecasted. Directly related to that is also the verification of a higher lag sales collection period than the predicted (from the 45 estimated days to 50.68), explained, for instance, by the high market power of large retailers, who constitute a...
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