Quaker Cracker

FIN 610 Module Five Case Study Review: Quaker Cracker

To respond to the following questions, you will need to review the Quaker Cracker case study on pp.
242–244 of your textbook, Working Capital Management: Applications and Case Studies; the questions
were adapted from the same section of the textbook. Respond in complete sentences as appropriate.
1.Part A: Using the data in exhibits C5.1 and C5.2, discuss how Quaker Cracker’s results compare to its
industry. You will need to prepare a pro forma income statement (using the table below) before
proceeding.

Income Statement (in millions)
Sales $230
Cost of goods sold $180
Gross profit $50
Depreciation expense $5
Advertising and selling expenses $15
Profits before taxes $30
Income Taxes $10.5
Net income $19.5
Current (times) 1.8 times
Quick (times) 0.6 times
Debt (%) 26.84%
Average collection period (days) 27 days
Total asset turnover (times) 1.5 times
Return on Equity (%) 28.5%

Part B: After entering the calculations in the table above, discuss specific metrics that can be
used to analyze working capital performance. Type your two- to three-sentence response
below.

Current and quick ratios are two specific measures that can be used to assess working capital
efficiency. These ratios can measure the liquidity margin and efficiency of a company’s working
capital by assessing how efficiently assets cover liabilities. Return on equity is another measure
that may be used to determine how well a company is operating by comparing it to the
performance of other investments.
Finally, the average collection time indicates how much time is required to turn a sale into
revenue.

2. Part A: Show changes to the 2012 pro forma balance sheet assuming the company borrows
   the necessary funds for the capital improvements at an interest rate of 7 percent. Ignore
   depreciation on the new equipment. Enter your calculations in the table provided below.
   Assets Calculations
   ($)

Liabilities and Owners’
Equity

Calculations
($)

Cash and Marketable
Securities

46,000 Notes payable –
Accounts Receivable 16,000 Accounts payable 19,500
Inventory 23,000 Accrued expenses 8,100
Current Assets 85,000 Current liabilities 27,600
Gross Fixed Assets 52,000 Long-term debt 30,000
Accumulated
Depreciation

-12,000 Common Stock ($10

par)

40,000
Net fixed assets 40,000 Retained earnings 29,500
Total assets 125,000 Total liabilities and
owners’ equity

127,100

Part B: Does this cause any significant change in the financials? Type your two- to three-
sentence response below.
The firm’s capital and total liabilities have increased as a result of adding the loan to the long-
term debt and interest expenses that have accrued, while the Total Assets in the balance sheet
total has decreased. Furthermore, the debt-to-income ratio has increased by 46.08 percent.

3. Play the role of a financial analyst and explain your recommended course of action. Type
   your three- to five-sentence response below.

For the past six decades, the company has developed and thrived by selling stock rather than
relying on debt funding. As a result, if the company does not take the $30 million loan, it will
have to liquidate a portion of its remaining stock. The owners would lose half of the company
ownership and control due to this. For the firm to continue to grow and compete effectively,
there is an urgency to increase funding and operations. Therefore, I consider that taking out a
loan is the best alternative.

4. The Cynsky family controls the company through its ownership of one half of the
   outstanding stock, with outsiders owning the balance. Should this influence McCabe’s
   presentation of her recommendations? What arguments can you make in support of and
   against McCabe’s position? Type your four- to five-sentence response below.

Yes. I believe McCabe’s recommendations will be impacted. The Cynsky family controls the firm,
and their decisions are more likely to influence the board. Therefore, they would need the best
deal to satisfy them as owners. The best argument, in my opinion, is to bring the family to the
table and persuade them that they can keep 50% and grow the firm faster. However, they can
also decide that, rather than working with external shareholders, they sell their shares.

5. Why was the information provided in the second paragraph about competitive companies
   in the fancy food industry? Type your two- to four-sentence response below.

I believe they are displayed to demonstrate how valuable the company is. It’s also there to
demonstrate that other businesses are growing rapidly. If the company does not improve and
compete effectively, it will not grow as quickly as projected and will lose a significant amount of
market share.