First, we have generated the financial statement forecasts for the year 2006 by assuming that Alliance will make the expected $ 3 million dividend payment to National. Then analysis of all the three options available to Harris has been performed and recommendation has been made. These are explained below:
The financial statements forecasts for the year 2006 have been prepared in excel spreadsheet and these are shown in exhibit 1 in the appendices. The first financial forecast has been prepared by assuming that Alliance would make the $ 3 million dividend payment to National. Hence, the balance sheet has been adjusted for the bank loan and this implies a possible renegotiation with the bank.
A number of assumptions have been made in preparing the financial forecasts which are also stated in the excel spreadsheet. Important assumptions are as follows:
- Expected sales will increase by 2.2 million yards as given in the case.
- The price has been increased by 5.5% average rate of worst and best scenario.
- The cost per yard has been increased by 10% to give more room to the company in case of unexpected cost increases.
- The tax rate has been calculated by taking average of the tax rates for all the previous years.
- Cash, accounts receivables, payables, accrued expenses and inventory for 2006 would be equal to the ratio of these assets over 2005 revenues.
- The capital expenditure would remain same in the dividend payment scenario but the long-term debt would be decreased by 4 million.
After preparing the above forecast, we have also prepared another forecast for the company in which no dividend payment has been paid to National and a capital investment has been made in 2006. These forecasts are shown in exhibit 2 in the appendices. The analysis of each of these options have been performed as follows:
Alliance is a ready mix concrete company and it has to deliver its products to the customers on time. However, the main issue faced by the company now is its negligence to upgrade the old plant equipment, which would cost the company around $ 2.6 million and a two weeks shutdown. Therefore, investing in the capital expenditure to improve the operating efficiencies is highly important for Alliance.
- The company should spend $ 2 million on the expenditure before the start of the year so that the risk of breakdown is minimized.
- Since, $ 2 million would be spent before the start of the year, and then the external financing needed would be $ 14 million as shown by the forecasts in exhibit 2.
- The company can fulfill the $ 16 million obligation by borrowing $ 16 million from the bank.
Capital improvements would save the company from long-term shutdown and the unexpected costs. Moreover, the customers of the company are highly sensitive to the delivery times; therefore, improving the operating capacity would save the company’s reputation and their loyalty towards the customers. Therefore, it is recommended for the company to invest in the capital expenditure…………………..
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