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Balance Sheet and Net Income

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Balance Sheet and Net Income
DRAGON SOUP QUESTIONS – Professor Naughton Before our final class, please read the Dragon Soup case and analyze the associated Excel Sheet. Kerr had been given the task of valuing Dragon’s equity for a possible acquisition. He was told by his boss to assume a valuation of ten times sustainable earnings, plus the value of cash and marketable investments on the balance sheet. The Excel Sheet completes this calculation for you, based on inputs that are provided in the top portion of the “Assumptions and Statements” tab. In completing this task, you’ll need to address some accounting issues highlighted in the case. Kerr’s job is to try to unwind accounting choices that might provide transitory increases in Net Income, which would have the effect of overstating Net Income, and hence the value of Dragon Soup. The goal is to establish the true value of Dragon. This exercise is not intended to seek out especially high or especially low values. Within the case, there is no need to read the section on “Product Pricing, Production, and Promotion”. In addition, only skim the description of the tomato farm acquisition. We will discuss these issues in class. The spreadsheet asks you to make eight separate decisions, listed below. Please note that the “Notes to Accounts” tab is automatically updated based on your inputs in the “Assumptions and Statements” tab. For example, if you decide to accept Dunwoody’s guarantee, the footnotes are updated to include this guarantee in the description of Accounts Receivable. The eight items you choose are as follows (please note that items #2, #3 and #8 don’t require adjustment; just follow what is stated in bold). 1 Should Dragon Soup lease or purchase the new machine? (Cells D5-9 in Excel). The information on lease structure and financing structure is provided in the case. How do your choices affect Net Income? Why? What should be the regular price of soup (Cell C12 in Excel). Please set this price at $2. Should you run a promotion at the
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