Policy Brief 3
AEB 4138 – Advanced Agribusiness Management Fall 2019
Case Study Assignment 1: Loan Evaluation for Wacky Wines
For this individual assignment, you will take on the role of Brad (or Brandy) Banker who works as a credit analyst for Big Bucks Lending. Your job is to evaluate Wacky Wines loan request. As a relatively new credit analyst, you will not get to make the final determination on the loan. Instead you will present your results and recommendation to the credit committee of Big Bucks Lending in a write-up. This is an individual assignment and collaboration is not allowed; you must calculate the ratios, conduct the analysis, and write the write-up on your own. Suspected plagiarism cases will be reported to the Dean of Students Office. The members of the Committee are extremely well versed in finance. Hence, do not dedicate a great deal of space to explaining simple finance concepts (i.e., there is no need to put the formulas for each ratio in your write-up). The members are looking for advanced analysis with evidence of critical thinking. The members always appreciate well-written documents that make appropriate use of correct grammar and spelling. They are also very busy evaluating numerous loan proposals therefore documents written in a concise manner are better received. Use the information below and the two sets of pro forma financial statements (expected and worst cases) to complete the analysis of the loan request. Your write-up should clearly state your recommendation regarding the loan with a supporting analysis. You must justify your decision using both qualitative and quantitative analyses. While concisely written documents are appreciated, there is no possible way that you can address all items in the rubric in one page. Thus, if your write-up is only one page of analysis (written words) or less, your assignment will not be read or graded. You will earn a zero.
More specifically, please evaluate the loan request using the 5 C’s of Credit. You must explicitly address each of the C’s in your write-up. Please use the ratios (liquidity, solvency, profitability, repayment capacity, efficiency, etc.) that we discussed in class to support your analysis. A competent analysis will include a discussion of the company’s past performance in terms of the financial ratios as well as also assess projected cash flows and ratios under the various scenarios (expected and worst cases). In other words, you are expected to calculate relevant ratios for the historic data (years 2015, 2016, 2017, and 2018) as well as for projected years (2019, 2020, and 2021) for both the expected and worst-case scenarios. You should discuss changes in the ratios (but avoid elevator analysis – it went up and then it went down), what is driving these changes, which ratios are strengthens and weaknesses, and why the ratios differ cross the two scenarios. Please also compare the ratios to the industry average. To do this, you will need to identify Wacky Wines’ competitors, calculate the ratios for these competitors, and take the average across the competitors. Once you decide on a set of competitors, please either calculate their financial ratios using their financial statements or look up the ratios on a website like yahoo finance. To find the industry average, average each ratio across the set of competitors. Please only calculate the industry average for one year (the most recent year for which you can find
AEB 4138 – Advanced Agribusiness Management Fall 2019
the data) and assume that it is constant across the years. Please discuss the firms used and cite where you obtained the information to construct the industry average in your write-up. Note that this is meant to make you think and might be difficult as there are not a lot of publicly traded firms like Wacky Wines. Please see the rubric below for more details. Note: You are asked to calculate a certain number of each type of ratio, however, do not use two ratios that convey the same information (e.g., asset turnover and capital intensity; or debt-equity ratio and equity multiplier) as these will be counted as just one ratio.
In addition, you are expected to conduct Du Pont analysis of ROE for all years (historic and projected) and both cases (expected and worst). Recall, that Du Pont analysis is useful for identifying the drivers of ROE and hence you must show all three parts of the analysis separately (profit margin, asset turnover, and the equity multiplier).
Banks often request that potential borrowers submit additional information to support their loan application. Please also discuss additional factors/information that you would like Dr. Kropp and Mr. Wolf (the potential borrowers) to supply to assist the Committee in making a final determination about the firm’s credit worthiness.
The course website will only allow you to submit one document in Microsoft word format. Thus, you will need to embed your excel tables and graphs in your word document before uploading your write-up to the course website. Please make sure that the tables are formatted such that they are easy to read, fit on the page, and can be read easily when they are printed. Please guide the reader by referring to the tables/graphs in the text. I must receive both a hardcopy and electronic version submitted through the course website by 1:55pm on the due date. Otherwise, the write-up is considered late and will not be graded. Extra Credit Opportunity: I will award an additional 5 points (essentially half a letter grade) to any write-up that properly references at least two relevant articles from Harvard Business Review, Economist, Bloomberg, NY Times, Wall Street Journal, or equivalently reputable popular press sources. The Harvard Business Review (HBR) is a magazine typically written by academics (i.e., professors and other researchers) for practitioners (i.e., managers). The HBR, therefore, is written in a manner that is very accessible and relatively enjoyable to read. Many senior-level managers read the HBR to learn about the most cutting-edge management, marketing, human resource, and finance research. The HBR is easily accessed via the UF Libraries website. Note, to receive extra credit you must show evidence that you have read and understood the articles and use the articles to support your analysis. If you simply quote directly from the article, you will not receive extra credit. Stock price quotes do not count toward the extra credit.
AEB 4138 – Advanced Agribusiness Management Fall 2019
Sources should be cited within the text of your write-up using the author(s)’s last name(s) or source and the year of publication. For example, Kropp (2018) stated all statistics and other items that are not common knowledge must be cited properly. References cited within the text (and only those cited in the text) need to be listed in alphabetical order by lead author’s last name in a reference list. Please refer to this guide when preparing your reference list: http://www.oxfordjournals.org/our_journals/ajae/for_authors/guide.pdf . Loan Request Information: Wacky Wines opened in 2009 as a boutique wine retailer specializing in hard to find premium wines from around the world. Wacky Wines is unlike other wine retailers in that it employs several level 3 sommeliers who are available to assist costumers whenever the store is open. In addition, Wacky Wines offers an innovative interactive wine of the month club. When members enroll, they complete a survey that indicates their wine preferences. Each month each member receives a custom selection of wines based on his/her preferences. The member then rates the selections and future wines received through the club are selected based on the member’s prior ratings. Because of this customization, Wacky Wines is able to charge a premium on its wine club memberships relative to other on-line clubs. In addition, Wacky Wines requires members to pick up their club selections at the store. On average, club members purchase six additional bottles of wine when they pick up their customized club selections. As a result of these innovative marketing activities as well as traditional marketing techniques such as regular wine tastings events and discounts on cases, Wacky Wines has achieved accolades from Somm and Wine Spectator magazines. Hence, Wacky Wines has brand recognition and is ready to expand into two new locations while maintaining its flagship store located in Manhattan. Wacky Wines is requesting a $500,000 real estate loan to purchase retail space (along with furniture and fixtures, signage, etc.) to open new stores in Washington, DC and Boca Raton, FL. If the expansion is successful, Wacky Wines would like to open an additional store in LA. However, Wacky Wines views expansions into the California market as being more risky due to the presence of serval competitors and close proximity to Napa and Sonoma. Washington, DC and Boca Raton, FL were chosen as optimal expansion locations based on the per capita incomes of residents, per capital wine expenditures, and other market research. Wacky Wines is owned and operated as a LLC by Dr. Kropp and her business partner, Mr. Wolf. Dr. Kropp and Mr. Wolf met in college where Kropp studied finance and Wolf studied food and beverage management with a minor in viticulture. After receiving her doctorate, Kropp taught finance at a prestigious university for several years before opening Kropp’s Hops Brewery. Unfortunately, Kropp’s Hops Brewery suffered from liquidity issues, product quality issues (Kropp had no idea how to make beer), and low profits due to stiff competition, and went out of business three years after opening. Realizing the shortcomings of her prior business failure, Kropp contacted Wolf who had developed a stellar reputation as an industry leader in the wine
AEB 4138 – Advanced Agribusiness Management Fall 2019
world since entering the industry in 2001. Wolf’s contacts and reputation are responsible for Wacky Wines ability to procure and maintain such an eclectic inventory of hard to find wines. Key assumptions used to construct the pro forma statement projections:
1) In both the expected and worst case scenarios, Wacky Wines receives the $500,000 loan and uses the loan proceeds to purchase retail space, furniture and fixtures, signage, etc.
2) In the expected scenario, Wacky Wines’ sales from the flagship store are expected to increase by 15% in 2019 over the 2018’s value. Also in 2019, Wacky Wines is expected to generate $500,000 in revenue from the new stores. Sales growth is expected to be 15% at all stores in both 2020 and 2021 over the prior year’s sales.
3) In the worst-case scenario, Wacky Wines’ sales from the flagship store are expected to increase by only 10% in 2019, while revenue generated from the new stores is expected to be $250,000. Annual sales growth is expected to be 10% at all stores in both 2020 and 2021.
4) The gross profit margin is assumed to be 5 percentage points lower in the worst-case scenario than the expected case.
5) The interest rate on all loans is assumed to be 3 percentage points higher in the worst case scenario than the expected case scenario.
6) It is assumed that 50% of all sales are made on credit. 7) Wages and benefits are assumed to be 10% of sales in the expected case scenario, while
wages and benefits are assumed to be 15% of sales in the worst-case scenario.
AEB 4138 – Advanced Agribusiness Management Fall 2019
Topics
--------------------------Achievement Level--------------------------
Weight Unsatisfactory
(Level 1) Barely adequate
(Level 2) Satisfactory
(Level 3) Good
(Level 4) Excellent (Level 5)
Explicitly stated opinion
No loan recommendation given
Vague loan recommendation given at the end of the write-up
Clear loan recommendation at the end of the write-up
Clear loan recommendation given in the first paragraph of the write- up
Clear loan recommendation given in the first sentence of the write-up
5%
Calculate DuPont Identity
No historic DuPont Identity completed for ROE
DuPont Identity Ratios (ROE= PM*AT*EM) presented for historic years (2015, 2016, 2017 and 2018)
Level 2 plus DuPont Identity Ratios (ROE= PM*AT*EM) presented for all projected years and all scenarios
Level 3 plus the information is presented graphically and the factors driving the changes in each ratio are discussed for one scenario
Level 3 plus the information is presented graphically and the factors driving the changes in each ratio are discussed for both the expected and worst-case scenarios
10%
Analysis of Profitability
No ratios relevant to profitability are calculated
At least three profitability ratios are calculated and presented for historic years (2015, 2016, 2017 and 2018)
Level 2 plus pro forma ratios for projected years are presented in a graph and benchmarked against industry averages
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for one scenario
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for both the expected and worst-case scenarios
10%
Analysis of Liquidity
No ratios relevant to liquidity are calculated
At least three liquidity ratios are calculated and presented for historic years (2015, 2016, 2017 and 2018)
Level 2 plus pro forma ratios for projected years are presented in a graph and benchmarked against industry averages
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for one scenario
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for both the expected and worst-case scenarios
10%
Analysis of Solvency/
Repayment Capacity
No ratios relevant to solvency/ repayment capacity are calculated
At least one solvency and two repayment capacity ratios are calculated and presented for historic years (2015, 2016, 2017 and 2018)
Level 2 plus pro forma ratios for projected years are presented in a graph and benchmarked against industry averages
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for one scenario
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for both the expected and worst-case scenarios
10%
Analysis of Efficiency
No ratios relevant to efficiency are calculated
At least three efficiency ratios are calculated and presented for historic years (2015, 2016, 2017 and 2018)
Level 2 plus pro forma ratios for projected years are presented in a graph and benchmarked against industry averages
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for one scenario
Level 3 plus the operational decisions that are driving the changes in the ratios are discussed for both the expected and worst-case scenarios
10%
Analysis of Conditions
No facts relevant to industry/firm conditions are discussed
At least one fact from the assignment relevant to frim/industry conditions is discussed
Level 2 plus one properly cited fact from online sources regarding the industry
Level 2 plus two properly cited facts from online sources regarding the industry
Level 2 plus at least three properly cited facts from online sources regarding the industry
5%
Analysis of Character
No facts relevant to character are discussed
At least two facts relevant to character are discussed
At least three facts relevant to character are discussed
At least four facts relevant to character are discussed
At least five facts relevant to character are discussed
5%
AEB 4138 – Advanced Agribusiness Management Fall 2019
Ratios are Linked to 5 Cs
of Credit
No discussion of the 5 Cs
Vague discussion linking the ratios to the 5 Cs
Each calculated ratio is clearly linked to one of the 5 Cs
Level 3 plus a clear discussion of the Cs that are strengths and those that are concerns
Level 4 and discussion of how the 5 Cs were used to make the loan recommendation
10%
Additional Information
Needed
No additional information is requested
Information already provided is requested
One additional piece of information not already contained in the assignment is requested
Two additional pieces of information not already contained in the assignment are requested
Three additional pieces of information not already contained in the assignment are requested
5%
Grammar Several spell check errors
No spell check errors, but spelling errors exist
Level 2 and no spelling errors Level 3 and no grammatical errors Level 4 and pronoun use is correct
10%
Readability Write-up is one giant run on sentence
Write-up uses paragraphs, but paragraphs often contain several thoughts
Write-up uses well-structured paragraphs and proper sentence structure
Level 3 and write-up uses headings to guide the reader, graphs and tables to illustrate key points, and is appropriate for credit experts
Level 4 and graphs and tables are well labeled and discussed in the text
10%