Case Study-AW516 Online Services
This is the second of three cases that you will need to write up a recommendation and turn it in to be graded. This case is intended to assess your understanding of the concepts from weeks 5 – 7 of the class, and as you will see the assignment asks for analysis very similar to what we did with the Adept Chemical Inc. case. As with the first assessment case (i.e.,Total’s CCS Project), you may either work on this case in teams of two or you may complete the case individually.
Please read and analyze the “TerraCycle Inc.” case. Assume that Betsy Cotton, the company’s chief financial officer, has asked you to complete the two part analysis that follows. You are to develop a report providing the requested financial analysis and assessments.
The paper should consist of up to three pages of single spaced text (note that I suspect that you can actually do this in two pages given that a lot of the detail will be in the accompanying spreadsheet). Please submit your assessments & recommendations in a word document and please submit all the financial analysis in a single excel file (I suggest you use multiple worksheets in the single excel file as I did with the Adept Analyzed file). Please submit the files by clicking on the above title and uploading the files into this assignment space. Please start the name of both your files with your last name (e.g. Lawrence_TerraCycle_Analysis.doc) as this will help me more quickly access and manage files. If two of you are working together on this please name the files name with both your last names.
Your assignment will be graded based on how well you are able to develop the requested financial analyses and how well you are able to interpret what all these numbers tell you (i.e., can you understand the story that the numbers are telling). Your files should be submitted by midnight on Monday, October 13.
Part I: Overall Financial Assessment of TerraCycle Inc.
Analyze TerraCycle’s 2004 and 2005 financial statements and provide your overall assessment of the financial strengths and weaknesses of TerraCycle. Your analysis should include (i) simply reading the financial statements and drawing conclusions from them; (ii) a “horizontal analysis” comparing the 2 years of financial statements and how they have changed over time; (iii) a “vertical analysis” that considers the “common-sized” income statements where all entries are evaluated as a percentage of sales; and
(iv) a ratio analysis, including interpretation of the ratios in an absolute sense and in comparison to industry average and competitor ratios (found in exhibit 5 of the case). You do not need to calculate and analyze EPS, Free Cash Flow, and ROTC. I have attached the TerraCycle financial statements below in excel format so you don’t have to re-enter all of this data. Note that I have put the earlier year (2004) in the left hand most column and the later year (2005) to the right of that which is opposite from how the statements are presented in the case. All numerical analysis should be done and submitted in an excel or excel accessible spreadsheet program.
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Part II Financial Forecast for 2006
Develop a projected income statement for TerraCycle Inc. for the year 2006 for the following two scenarios
• Scenario 1: The company decides not to introduce the Orchid and African Violet products but continues to focus on and grow its core all purpose plant food product (assuming growth estimates found on page 6 of the case).
• Scenario 2: In addition to growing the company’s all purpose plant food product as in scenario 1 above, the company decides to also introduce the Orchid and African Violet products. The case indicates that Betsy thinks that sales of the two products combined could range from 30,000 – 110,000 units. In developing these statements please assume that the company is able to achieve the 110,000 units level of sales.
Based on these projections, do two things. First, provide Betsy with your assessment of the financial health of TerraCycle based on the 2006 projections you developed for scenario 1. This recommendation should naturally link to your assessment of the company’s financial strengths and weaknesses identified in Part I and should follow it in the body of your report. And second, based on your projections for scenario 2 above and assuming that the 110,000 units estimate of sales is a reasonably accurate estimate of potential sales, provide and support a recommendation to Betsy on whether the company should move forward with the launch of these products. This should be the final portion of your report.
The body of your written report should therefore include the following elements
• Overall financial assessment of TerraCycle based on the 2004 and 2005 financial statements and your horizontal, vertical and ratio analysis of these statements
• An assessement of the financial health of TerraCycle based on the projected 2006 income statement assuming you don’t introduce the new products
• A well supported recommendation on whether the company should launch the two new products
Notes & Clarifications:
1. The narrative in the case indicates that Betsy is interested in a promotional plan for TerraCycle’s products and an evaluation of the benefits and drawbacks of debt vs. equity financing. You do not need to discuss either of these in your report as they are beyond the scope of what we have covered in the class to date.
2. When you work with scenario 2 in part 2 above, you will probably need to create a separate worksheet to calculate the COGS of the violet and orchid products separately before combining the costs and adding to the base case of scenario 1.
3. The credit terms of ‘net 60 days no discounts’ means that customers (in this case the retailers like Wal-mart and Home Depot) have 60 days to pay once they receive the product from TerraCycle and that they don’t receive any discount for paying early.
4. The income statement and balance sheets use the word amortization but not depreciation. The two here mean the same thing. U.S. developed financial statements frequently associate the term depreciation with tangible assets (like a building or machine) and amortization with intangible assets (like patents). In Canada and the UK they tend to use the term amortization for both types of assets. The case was written by authors at the University of Western Ontario in Canada and so uses the amortization term as in the Adept case.
5. There are no long term liabilities shown on the balance sheet because the company does not have any long term liabilities at this time.
6. A few of the ratios included in case exhibit 5 are called be names slightly different than what is in your book. The “acid test” ratio is the same thing as the “quick” ratio; the “age of accounts receivable” is equivalent to “days sales outstanding”; and the “age of accounts payable” is equivalent to “days payables outstanding”. Also, exhibit 5 includes the “fixed asset turnover” which you can ignore.
7. In developing the projected income statement for 2006 you will need to make some assumptions regarding operating expenses. There is some content in the case narrative to help you do this, although its not clear cut and there isn’t one ‘correct’ set of assumptions. Please provide some explanation about what you assumed regarding the 2006 operating expenses, either in your paper or in the spreadsheet. What I will be looking for in your reports is whether you have approached this is some logical and systematic way given the information in the case and how we approached this for the Adept case.
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