caseism

The Farm Winery Case Solution & Answer

The Farm Winery Case Solution

Introduction

This case based on The Farm Winery from West side Paso Robles. This case discusses about the projects made by the company’s owners for the year 2014, in order to determine various strategies for smooth operation of their wine business and to determine various potential liquidity requirement of their business. (Anne Beyer, 2014)

Problem Statement

In the year 2013, Jim Madsen, one of the owners of The Farm Winery along with his team,was willing to make projections about the current and non-current liquidity needs of the business so that they could develop various suitable strategies for the upcoming year 2014 and grow their business for more success. As their business was seasonal, they always fulfilled the company’s liquidity requirements seasonally. So this time, they also wanted to make projections to identify the required capital expenditure for the purchasing purpose, which are always made about four years prior to the business’ operation in their nature of work. Lastly, these projections were necessary to make so that it would help the team on deciding whether to invest capital for the development of the business or not and it was also helpful in finding out  if they would be able to have sufficient balance to pay dividends in the year 2014.

Situational Analysis

“Question 1: Jim Madsen is particularly concerned that the business be self-sustaining in order to return capital to shareholders. Using the information in the balance sheet for 31 December 2013 (Exhibit 2) and the fiscal year 2014 budgets (Exhibit 3 and 4), prepare a projected quarterly balance sheet, income statement and cash flow for The Farm Winery. Based on the projections, can Madsen declare a dividend of $25,000 in June 2014? If not, does The Farm Winery require additional capital contributions in the first half of 2014?”

Based on the projections, it could be said that although in June 2014, i.e. end of second quarter, the company has the positive cash equivalent of $49,654 but still the company cannot declare a dividend of $25,000 because it is visible that at the year end of 2014; the cash equivalent is projected to be negative, i.e. $84,346. Since at the end of year 2014; the company’s cash balance is projected to be negative so it cannot declare dividend in June 2014.

For the first half of 2014; the cash balance is not negative, i.e. positive cash equivalent of $49,654, so in the first half of 2014; The Farm Winery does not require additional capital contributions, but in the year end of 2014, it would definitely need an additional capital to balance the company’s account.

“Question 2: Assess Madsen’s budget for the second half of 2014 excluding the $80,000 investment in additional vineyard development. Based on your analysis, will Madsen be able to declare a dividend of $25,000 in December 2014?”

No, even if the $80,000 investment is excluded from the second half of 2014; the company would still not be able to declare a dividend of $25,000, because even after excluding $80,000 from the cash equivalent at year end i.e. $84,346, there would still be a negative balance of $4,346……………………

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