Stimulation Working Capital

Resources:

Harvard Business Publishing: Working Capital Simulation: Managing Growth Assignment

Ch. 1 - 21 ofFundamentals of Corporate Finance

WileyPLUS Assignments

All additional resources from each week

Review the following scenario:

Acting as the CEO of a small company, you will apply the principles of capital budgeting to invest in growth and cash flow improvement opportunities in three phases over 10 simulated years. Each opportunity has a unique financial profile and you must analyze the effects on working capital. Examples of opportunities include taking on new customers, capitalizing on supplier discounts, and reducing inventory.

You must understand how the income statement, balance sheet, and statement of cash flows are interconnected and be able to analyze forecasted financial information to consider possible effects of each opportunity on the firm's financial position. The company operates on thin margins with a constrained cash position and limited available credit. You must optimize use of internal and external credit as you balance the desire for growth with the need for maintaining liquidity.

Sign-in to the simulation and review each of the following:

· Welcome Statement

· How to Play

· Terminology Primer

· More Details (this includes information to help you understand how to play the simulation)

Write a paper of no more than 1,400 words that analyzes your decisions during each phase (1-3) and how they influenced each of the following final outcomes (metrics) of SNC:

· Sales

· EBIT

· Net Income

· Free Cash Flow

· Total Firm Value

Address the following in your paper:

A summary of your decisions and why you made them

· How they affected SNC's working capital

· What general effects are associated with limited access to financing

Include scholarly references (in addition to your course textbook and simulation materials) to support your positions.

Grading Outline (8 points total):

Introduction - .25 points

Summary of your decisions throughout the simulation - .50 points

Effect on SALES (numerical details required) - 1 point

Effect on EBIT (numerical details required) - 1 point

Effect on NET INCOME (numerical details required)- 1 point

Effect on FREE CASH FLOW (numerical details required) - 1 point

Effect on TOTAL FIRM VALUE (numerical details required) - 1 point

Effect on WORKING CAPITAL (numerical details required) - 1 point

Discussion on the general effects associated with limited access to financing - .50 points

Conclusion - .25 points

APA (includes title page, references, spelling, grammar, readability, etc) - .50 points

 

Required References (make sure to double-space and format into a hanging indent):

 

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed). Hoboken, NJ: Wiley.

 

Harvard Business School. (2012). Working capital simulation: Managing growth [Multimedia]. Retrieved from University of Phoenix, FIN571 - Corporate Finance website.

Welcome to the Working Capital Simulation

Sunflower Nutraceuticals (SNC) is a privately held nutraceuticals distributor based in Miami, Florida, and founded in 2006. SNC started as an internet-based, direct-to-consumer distributor and retailer of dietary supplements, including vitamins, minerals, and herbs for women, with product offerings for all age groups. Through its website and catalog, SNC offers customers a large selection of stock keeping units (SKUs) from more than 50 third-party brands. Since its founding, the company ambitiously expanded into new retail outlets and launched several private-label brands, including a line of women's electrolyte sports drinks, metabolism-boosting powders, and a vitamin line for teenage girls.

SNC is breaking even, with relatively flat annual sales growth on total revenues of $10 million. The business is working-capital-intensive, and margins are generally thin. Several times during the past few years, the company struggled to finance the payroll, given the firm's constrained cash position, and more than once the company's line of credit was overdrawn. SNC keeps a minimum amount of cash on hand to meet operational needs and this level of required cash is $300,000. The company also accesses a line of credit, with a fairly restrictive set of governing covenants, issued by a national bank. The credit limit on the facility of $3,200,000 is priced as a spread over the 1-year LIBOR. It is currently set at a rate of 8%. SNC uses a cost of capital of 12% to evaluate investment opportunities.

Health food companies have sold vitamins for decades, but the nutraceuticals industry is relatively new. Although regulatory bodies apply stricter definitions, the term nutraceuticals generally means "a fortified food or dietary supplement that provides health benefits". Examples include omega-3 fatty acids, probiotics, and soy and energy drinks. By 2010, the global nutraceuticals market was worth approximately $128.6 billion; it is forecasted to grow at a compound annual growth rate (CAGR) of 4.9% and reach $180.1 billion by 2017. The key driving factors for industry growth are the increase in the elderly population, the rate of growth in chronic diseases, the relative affluence of the working population, and increasing societal awareness of preventive medicine.