Classic Fixtures & Hardware Company is a nationally-known manufacturer and distributor of kitchen and bathroom fixtures and trim, as well as lock sets and hardware for doors and windows. The company is privately held and has limited access to capital markets, so it depends on a loan facility with Southwest National Bank to finance its seasonal working capital needs. Level production and seasonal sales result in higher inventory levels and loan balances in the first half of the year and declining inventory and loan balances in the second half of the year. In 2008, Classic's loan balances have grown beyond forecasted amounts, and its CFO believes that Classic will likely be unable to pay off the loan balance before the end of the year. The CFO and a senior loan officer from Southwest have scheduled a meeting in order to determine both the reasons for this problem and what Classic might do to turn itself around.
New MBA graduate Larry Steffen has accepted an attractive job offer from Athena Global Technology but must now choose one of two alternative compensation plans. The first compensation plan option includes a base salary plus a $25,000 cash bonus, and the second includes the same base salary plus employee stock options. In order to evaluate and decide on one of these plans, Larry must estimate the value of the offered stock options and consider several complicating factors, including whether he will remain at Athena for the five-year vesting period necessary to receive the options. This case introduces students to option valuation and facilitates a discussion about the effectiveness and potential benefits and problems associated with the use of stock options in compensation packages.
Sterling Household Products manufactures and markets a broad line of consumer goods from laundry soap and cosmetics to cleaning, disinfecting, and sanitizing products. The company has many highly regarded brand names and consistently reports impressive sales and profits to the investment community. Despite a record of success, a deeper analysis of financial measures reveals that growth rates for unit volumes, sales, and profits are low. Looking to expand into new markets with strong growth potential, the company considers acquiring the germicidal, sanitation, and antiseptic product unit from Montagne Medical Instruments, a company in the health care industry. This acquisition seems like a natural extension of Sterling's experience and expertise in the market for household cleaning supplies. Both parties reach a tentative agreement on price and Sterling considers whether the proposed investment adds value given the risks involved. Students must perform a comprehensive investment analysis and examine both the qualitative and quantitative issues associated with evaluating a strategic acquisition before making a final recommendation.
Hill Country Snack Foods, located in Austin, Texas, manufactures, markets, and distributes snack foods and frozen treats. The CEO is passionate about maximizing shareholder value and believes in keeping tight control over costs and operating the business as efficiently as possible. The company invests in additional capacity and new products only when attractive, low-risk opportunities are identified and can be funded internally. The firm's culture of risk aversion extends to financing decisions with a clear preference for equity finance over debt finance. The CEO believes a strong balance sheet with large cash balances provides the company with maximum safety and flexibility. Sales growth has been steady but unspectacular. As the CEO approaches retirement, investors and analysts speculate that the company will change to a more aggressive capital structure. Students must analyze the firm's current capital structure, explore three alternatives using debt finance, and determine the optimal debt-to-capital ratio.
Pacific Grove Spice Company is a profitable, rapidly growing manufacturer, marketer, and distributor of quality spices and seasonings. The company's business model requires significant investment in accounts receivable, inventory, and fixed assets to support sales. Although the company is profitable and all of its net income is reinvested in the firm, the firm must utilize significant amounts of debt to fund the necessary growth in assets to support sales. The bank is concerned about the total amount of interest-bearing debt on Pacific's balance sheet and has asked the company to provide a plan to reduce it. Debra Peterson, president and CEO, believes the current four-year financial projections are reasonable and attainable. She is also considering three opportunities: sponsoring a cable cooking show, raising new capital by selling shares of common stock, and acquiring a privately owned spice company. Students must analyze the company's financial projections to determine if the reduction in debt meets the bank's requirements. They must also analyze the opportunities and consider their individual and combined impacts on the company's financial position. The case illustrates the interaction between investment and financing decisions. This multifaceted case can be taught in a single class session or extended over several sessions and can be used as a final exam for an introductory MBA-level Finance course.
Harmonic is a small, privately held manufacturer of hearing aids. Harriet Burns and Marc Davis, two employees at Harmonic, have an opportunity to purchase the company from the founder. As well-informed insiders who understand the industry, Burns and Davis believe the benefits of ownership far outweigh the risks. While the decision to purchase Harmonic is easy for them, arranging financing proves more difficult. The company is preparing to launch a new hearing aid product and Burns and Davis want the financing package to include the additional capital required to complete both the development and the launch. Two financing alternatives are presented: one is virtually all debt-financed, the other all equity. The financing structure Burns and Davis select will have a significant impact on the products and future prospects of the company. Students must analyze the two financing alternatives, determine the advantages and disadvantages, and recommend the best option.
The CFO of Flash Memory, Inc. prepares the company's investing and financing plans for the next three years. Flash Memory is a small firm that specializes in the design and manufacture of solid state drives (SSDs) and memory modules for the computer and electronics industries. The company invests aggressively in research and development of new products to stay ahead of the competition. Increased working capital requirements force the CFO to consider alternatives for additional financing. In addition, he must also consider an investment opportunity in a new product line that has the potential to be extremely profitable. Students must prepare financial forecasts, calculate the weighted average cost of capital (WACC), estimate cash flows, and evaluate financing alternatives. This case is especially recommended as a final exam case for a standard MBA-level course in corporate finance.