FINANCIAL ANALYSIS

Case study analysis

Summary

Hansson private company evaluating an investment in expansion explains provides an in-depth analysis of Trucker Hansson dilemma in accepting the offer of potential client as for that company needs to expand its manufacturing department and it would require an investment of $50 million. Based on the provided data of Hansson Company in the first section researcher has calculated the free cash flow of the company, and based on that it was observed that company would be profitable by excepting the investment proposal. After calculating the incremental free cash flow, the researcher has analyzed the assumption made by the executive vice president of company manufacturing department “Robert Gates”.

Gates based on its knowledge and experience has drafted a reasonable assumption of the investment plan. In the next section, the researcher has evaluated the steps through which Dowling has drafted the WACC schedule, and after the researcher has provided the recommendation regarding the acceptance of this investment proposal.

Calculation of incremental cash flow3

Analysis of Assumptions made by Robert Gates5

Explanation of the way WACC schedule has been calculated7

Recommendation of Tucker Hansson8

Analysis on the selection of financing sources10

References12

Case study Analysis

Question 1) Calculation of incremental free cash flow

According to the assumption made by executive vice president of manufacturing Robert Gates, the incremental free cash flows calculation comprises of following steps. Firstly, we would calculate the working capital and change in working capital using the assumption.

Calculation of working capital

Working capital = receivables + average inventory - ending account payable

Note = for the calculation of change in working capital we have assumed that working capital in 2009 is $ 12817, thus (12817-11891 = -926)

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Days sales outstanding

47.6

47.6

47.6

47.6

47.6

47.6

47.6

47.6

47.6

47.6

Days sales inventory

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

Days payable inventory

34.2

34.2

34.2

34.2

34.2

34.2

34.2

34.2

34.2

34.2

Receivables

11233.6

12413.1

13635.3

14901.5

16212.8

17570.6

17922

18280.5

18646.1

19019

Average inventory

7270.4

7898.9

8642.4

9374.5

10168.9

10951.1

11155.4

11365

11580.1

11800.8

Ending Account payable

6613

7184.6

7860.9

8526.8

9249.4

9960.8

10146.7

10337.3

10533

10733.7

Working Capital

11891

13127.4

14416.8

15749.2

17132.3

18560.9

18930.7

19308.2

19693.2

20086.1

Changes in working capital

-926

1236.4

1289.4

1332.4

1383.1

1428.6

369.8

377.5

385

392.9

Calculation of incremental free cash flow

NOPAV = revenue - cost of sales - operating exp - taxes

FCF = NOPAT - changes in working capital - capital expenditures + Depreciation

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Revenue

84960

93881

10314

11270

12268

132887

135545

138256

141021

143841

Less: cost of goods sold

69610

75628

82747

89756

97362

104851

106807

108814

110873

112986

Gross profit

15350

18253

20377

22944

25256

28036

28738

29442

30148

30855

Less: S&A

6627

7323

8044

8791

9564

10365

10573

10784

11000

11220

Less depreciation

4000

4000

4000

4000

4000

4000

4000

4000

4000

4000

EBIT

4723

6930

8333

10153

11692

13671

14165

14658

15148

15635

less: taxes

1889.2

2772

3333.2

4061.2

4676.8

5468.4

5666

5863.2

6059.2

6254

NOPAT

2833.8

4158

4999.8

6091.8

7015.2

8202.6

8499

8794.8

9088.8

9381

Free cash flow

NOPAT

0

2833.8

4158

4999.8

6091.8

7015.2

8202.6

8499

8794.8

9088.8

9381

Less: capital expenditure

45000

0

0

0

0

0

0

0

0

0

Less: changes in wc

-926

1236.4

1289.4

1332.4

1383.1

1428.6

369.8

377.5

385

392.9

plus: depreciation

0

4000

4000

4000

4000

4000

4000

4000

4000

4000

4000

Free cash flow

-45000

7760

6922

7711

8760

9632

10774

12129

12417

12704

12988

Analysis of incremental cash flow

According to the case study Hansson, private limited has not involved itself in such significant investment in a decade, and this investment would require company to take a significant amount of risk (Arnold & Crack, 2004, pp. 78-82). Thus, incremental cash flow calculated using the assumption made by Robert Gates executive is positive but not realistic because of the reasons that stated below.

This investment proposal of $50 million was being considered to accommodate the demand of one of company potential retailer that wanted to raise the value of company share. However, customer was only committed to three-year deal with the company, whereas, gates assumptions was of 10-year period. Thus, in this circumstances it could be assumed that need of new machines would decline, and this would result in comprehensive decline in free cash flow, and it is speculated that after 5 year free cash flow would be negative (Bierman & Smidt, 2012).

Question 2) Assumptions made by Gates

This proposal of expansion in the manufacturing department to carter the proposal of ...