Module 1 Review: Evaluating a Business

1
Module 1 ReviewEvaluating a Business Its
Financing Needs

• Value Maximization
• Ben Jerrys
• Size-up/financial ratios
• Dell
• Working capital management
• Toy World
• Projections/Financing Need
• Body Shop
• Sophisticated

2
Analytical tools

• New loan request
• Pro-forma income statement and balance sheet
• Establish financing needs and timing
• Business size up
• Identify risks and opportunities (check with
  pro-forma sensitivities)
• Loan structure (managing the risks and
  opportunities)
• Management of problem loans
• Business size up is the problems temporary or
  permanent?
• Liquidation value whats your position as
  creditor?

3
Business size-up

• Keys
• Internal and external factors must be considered
• Outlook for economy?
• What are growth prospects / risks for the
  industry?
• What are the key success factors for a firm in
  this industry?
• How does firm stack up against these key success
  factors? How well does it compare with other
  firms? What trends?
• Output
• Do you think this is a viable business?
• What are the key risks and opportunities?
• Financial implications?

4
Pro-forma analysis Income Statement

• Start with sales or revenue
• Costs and expenses (typically based on historical
  relationships from ratio analysis)
• Need to make an assumption re interest expenses
  (as part of first-pass analysis)
• Determine net income after tax (also increase in
  R/E unless dividends)

5
Pro-forma analysis Balance Sheet

• Start with assets
• Typically use management resource ratios to
  estimate A/R and inventory
• Fixed assets account for depreciation and/or new
  assets
• Balance sheets always balance!
• Total assets total liabilities equity
• Equity reflects increase in retained earnings
• Consider other liabilities
• Typically use management resource ratios to
  estimate A/P
• Typically use loan as plug
• Key Make reasonable assumptions and move on

6
Liquidation value analysis

• Recovery rates as of book value guidelines
  used in previous cases (unless you have better
  information)
• Accounts receivable 75
• Inventory 50
• Fixed assets 50-75 or market value
• Do we have collateral (e.g., bank perspective) or
  are we an unsecured creditor (e.g., supplier)?

7
Loan structure

• Amount and repayment schedule
• Term loan vs. line of credit (operating line)
• Collateral
• Covenants
• positive
• negative
• Interest rate
• Fixed versus floating?
• Prime plus 1-3? ? adjust for risk (see size-up)
• Monitoring

8
Management of loan accounts

• Reduction in financing needs
• Reduce the Gap cycle
• Lower A/R and inventory age
• Increase A/P age
• Key potentially significant costs associated
  with these actions
• Reduce operating expenses
• Improve sales and / or gross margin
• Increase loan collateral
• Increase the borrowers equity base
• Demand changes based on size-up analysis

9
The midterm exam

• Probable steps involved
• Identify decision maker / issues
• Identify criteria
• Identify alternatives
• Analysis assumptions, projections? sensitivity?
• Recommendation (relate to criteria)
• Action Plan Implementation
• Clear and concise exams are rewarded!

10
Some advice

• RTFQ then read the case
• Focus less on reporting facts, more on building
  an argument ? implications!
• Information relevant to the case is in the case
• You may need to make assumptions, but justify on
  basis of case facts and your analysis clearly
  state all assumptions
• Manage your time carefully ? dont get stuck in
  a rut
• SAVE, SAVE, SAVE!!! also use print preview
  formatting
• Successful exam write-up is coherent, cohesive,
  consistent and complete

11
Exam Instructions

• Students are reminded that any spreadsheets must
  be properly formatted. Files will be printed as
  is and will not be reformatted.
• The exam is open book which means you may refer
  to any of your books or notes developed in the
  course this academic year.
• Students are reminded that the Ivey Professional
  Code applies during this examination. This is an
  individual effort and you are not permitted to
  consult with anyone or use any external resources
  (other than any files on your personal computer
  at the start of the exam). Wireless LAN
  cards/devices may not be connected to your
  computer at any time during the exam. No
  communication devises may be used.

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Exam Instructions, continued

• You are reminded that plagiarism (representing
  another persons ideas, writings, etc., as ones
  own) is a serious academic offence the penalty
  can be as severe as expulsion. We expect you to
  write reports, exams, etc., in your own words.
  Whenever you take an idea or a passage from
  another author, you must acknowledge your debt by
  appropriately citing your source(s). Western uses
  software to check for plagiarism.
• By signing the class roster (to be distributed
  during the exam) you are indicating that you
  understand and have abided by these instructions.

13
Grading Guide for Sophisticated

• Decision Process
• Roles/Issues/Criteria/Alternatives 10
• Size Up (Total 30)
• The Environment 8
• Marketing 4
• Operations 4
• Management 4
• Finance 15
• Projected Statements (Total 35)
• Balance Sheet 15
• Income Statement 15
• Discussion 5
• Sensitivity/Collateral Analysis 10
• Decision 5
• Structuring 5
• Impression/Exceptions 5
• Total 100