mini case study under 3 pages 1.5 space all info below

Module 2 Rawhide Brewery Mini-case Template: Key

 

Proposal Summaries

Proposal 1

1. Rawhide brews Tabby beer at a few per case (improves Rawhides Net income on Income Statement)

2. Fee is adjusted monthly due to price of hops

3. Fee dependent on volume: as volume increase, fee decreases, but Rawhide profit increases

4. Fee (per case of beer) is adjusted annually due to inflation

5. Guaranteed minimum case of beer processing volume

6. Created a 5-year contract where Tabby would pay 20 cents less per case than presently

Proposal 2

1. Rawhide transfers brewery operations and 10-year debt (improves balance sheet) to Newco

2. Rawhide brewery equipment = $5mil & debt = $3.5 mil

3. Tabby pays $950K for 95% of Newco stock; Rawhide pays $50K for 5% Newco stock

4. Rawhide gets $1.5 mil note receivable with an annually adjusting interest rate depending on Newco profitability: higher profits = higher interest rate, up to 20%.

5. All beer processed at Newco is 15% cheaper than under Proposal 1, reducing COGS for Tabby.

6. Rawhide guarantees the $3.5 mil loan.

7. Rawhide would have more control than Tabby due to shareholder agreement.

8. Rawhide and Tabby pays the same fee per case, increasing COGS for both.

Proposal 3

1. Rawhide transfers brewery and debt to Newco

2. Rawhide gets 60% of Newco for $1.5 mil ($5 [asset] - $3.5 [debt])

3. Tabby buys 40% of Newco for $1.0 mil

4. Tabby and Rawhide both guarantee loan.

Proposal Effect on Rawhide's Debt/Equity Ratio (Reference debt to equity ratio = 1.33)

1. Proposal 1: D/E likely goes down (equity increases relative to liabilities)

a. Cash and marketable securities likely increase (Balance Sheet, B/S)

b. Retained earnings go up, assuming volume increases (B/S), flows to net income to retained earnings increasing equity

c. Net income goes up due to likely higher net revenue due to processing volume, profits, and inflation (Income Statement, I/S), flows to net income to retained earnings increasing equity

2. Proposal 2: D/E is likely reduced as liabilities are reduced and equity (retained earnings) increases, probably more than Proposal 1.

a. Net Income increases, as depreciation, amortization, and interest expenses are reduced and COGS is reduced 15% (I/S) flows to net income to retained earnings

b. Transferring brewery reduces non-current assets (an asset) (B/S) no impact on d/e

c. Transferring loan reduces long-term debts (a liability) (B/S), reduces debt

d. Rawhide holds 5% of Newco; assuming dividends, cash and equity increase (B/S) flows to net income to retained earnings increasing equity

e. Annual interest payment ($1.5 mil note receivable) improves cash position (B/S), flows to net income to retained earnings increasing equity

3. Proposal 3: D/E Ratio likely decreases

a. Net income increases, given a 15% decrease in brewery costs (COGS), depreciation, amortization, and interest expenses are materially reduced. (I/S), flows to net income to retained earnings increasing equity

b. Brewery ($5 mil) and debt ($3.5 mil) are transferred to Newco; so no long-term debt and no current assets on balance sheet. (B/S), reduces ratio

c.   Rawhide gets 60% of Newco stock for $1.5 mil ($5 [asset] -$3.5 [debt]); so, cash and marketable securities increase as does equity (retained earnings) (B/S), flows to net income to retained earnings increasing equity

d. Assuming stock dividends & interest on the note receivable from Proposal 2 pays, flows to net income to retained earnings increasing equity

Decision Model & Recommendation: Expected Value (EV)

Taylor (2013, p. 78) defines expected value as, “computed by multiplying each decision outcome under each state of nature by the probability of its occurrence.” If the decision involves profits, choose the largest EV; if the decision involves costs, choose the lowest expected value. Let’s compute some expected values:

1. First construct a payoff table with the expected occurrences of each state of nature.

Expected Value Payoff Table 1a
	State of Nature
Decision	Good (.6)	Poor (.4)
Proposal 1
Proposal 2
Proposal 3

2. Compute expected values.

Decision	Multiplication & Addition
Proposal 1	$0.00 (.6) + $0.00 (.4) = $0.00
Proposal 2	$0.00 (.6) + $0.00 (.4) = $0.00
Proposal 3	$0.00 (.6) + $0.00 (.4) = $0.00

3. Apply decision criteria. Select the Office complex, since EV = $0.00. A word of caution: the firm in reality may not see an exact $0.00 profit; but if the purchase was repeated a lot, under the same conditions, the average payoff is expected to be $0.00.