Nino Burnadze Ekaterine Khaburzania

Nino Bazhunaishvili

07.12.2013

The Topeka Adhesives

The issues that Topeka faces:•Financing methods for the upcoming 3-4 years: what method to use in order to cover upcoming forecasted growth

•Improving the companies accounts receivable;

•Make forecasts and see if the short-term growth of the company is sustainable

Gross Margin   Sales 31%Cost of Goods Sold

Increase by 20%   SG&A (% sales) 20% 1995 Depr + 1/6 new   Depreciation 17% Remains constant   Interest Expense 0%40% of pretax profits   Tax Rate 40%

   Dividend Payout Rate 0%

3% of sales   Cash & Securities 3%Asume 40.4 days for AR   Accounts Receivable 40,40 Inventory Turns at 7.7x   Inventory 7,70 0.6% of sales   Other Current Assets 0,60%3% of sales   Gross Fixed Assets 175 Prev AccDep + Depr   Accumulated Depr.  

New Debt   Debt Due - 23.33 days   Accounts Payable 23,33 2.2% of sales   Accruals 2,2%Subtract debt due from previous   Long Term Debt (20)No change in CS   Common Stock -     Retained Earnings  

Assumptions

Pro Forma Income Statement

1993 1994 1995   1996 1997 1998

Sales 1 347,0 1 448,0 1 546,5 1 933,1 2609,7 3131,6Cost of Goods Sold 956,4 1 010,7 1 076,4 1 333,8 1 800,7 2 160,8

           Gross Profit 390,6 437,3 470,1 599,3 809,0 971,0 Selling, General & Admin. 323,3 350,4 368,1 441,7 530,1 636,1 Depreciation 29,6 31,9 34,0 63,2 63,2 63,2

           EBIT 37,7 55,0 68,0 94,4 215,8 271,8 Interest Expense (Income) 14,0 12,0 10,0 8,0 6,0 4,0

           Earnings before Taxes 23,7 43,0 58,0 86,4 209,8 267,8 Taxes 9,5 17,2 23,2 34,5 83,9 107,1

          Net Income 14,2 25,8 34,8 51,8 125,9 160,7

Topeka Sales Estimations

1347 1448 1546.51933.1

2609.7

3131.6

0

500

1000

1500

2000

2500

3000

3500

1993 1994 1995 1996 1997 1998

Year

Sa

les

(0

00

$)

Sales

Average Collection Periods

Percentage

% Days % DaysWeighted

0,4 ACP30 0,8 30 0,2 40 32,0

0,6 ACP45 0,9 45 0,1 55 46,0

40,4

40% ACP30 = .80 (30) + .20 (40) = 32 days

60% ACP45 = .90 (45) + .10 (55) = 46 days

The "overall ACP" equals .40(32) + .60(46) = 40.4 days .

Level of A/R = 216.9Level of A/P= 86.4

Cash Vs Retained Earnings

Retained Earnings do not represent surplus of cash or cash left over after the dividends payments. Retained Earnings demonstrate what company did with its profits; they are the amount of profit the company has reinvested in business since its inception.

Bad Inventory Management

The worst case would be for the inventory level to decrease by the value of the funds so that the balance of passive and active will remain. In this case the funds will tend to 0. In the best case, the inventory levels will be the same as those predicted earlier, meaning that the needed funds will stay the same.

1996

Cash 58

Account Receivable 216,9

Inventory 173,2

Other Current Asset 11,6

Current Assets 460

Gross Fixed Assets 441

Accumulated Depreciation -188,7

Net Fixed Assets 252,3

Total Assets 712

Liabilities& Equity

Account Payable 87

Debt due 20

Accruals 42,5

Current Liabilities 149,5

Long term debt 60

Common Stock 235,6

Retained Earning 216,7

Total Liabilities and equity 661,8

TA-TL= 50.2

Funds Needed Vs Percentage Sales Method

Comparing two results the 97 value generate by the percentage of sales method is higher that the initial value for funds of 50.22. The difference comes from the fact that the percentage of sales method brings in the sales figures for the current year as being in relation with the previous year’s sales figure. Also the percentage of sales method is a method of estimating cash requirements by expressing revenues and expenses as percentages of sales, and using these percentages to construct a pro forma income statement.

1996 1997 1998

EBIT 94 216 272 less Taxes on EBIT (38) (86) (109)add Depreciation 63 63 63

Working Capital:    Receivables 217 293 351 Inventory 173 234 281 less Accounts Payable (86) (117) (140)less Accurals (43) (57) (69)

Adjusted Working Capital 261 353 423 less Change in AWC 261 91 71 less Capital Spending (175)  

Free Cash Flow (316) 101 156

Dividends    less: Dividends - - - less: Interest (1-tax rate) - - - add: New Equity - - - add: Net Debt (20) (20) (20)

Total Cash Generated (336)

81

136

If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.

Cash Flow

Recommendations:

•Debt financing•Although company officials think that the net 30 term is better, which is actually true from an economic point of view, the net 45 is better if it justifies not losing the sale

•To take discounts from suppliers, which is the additional saving of money for the company