MBAC 6060 – Spring 2012
Burrito Joint Case Answers
Part 1
1. COGS decreased but it is still higher than BURGERHAVEN. (Maybe more expensive ingredients.)
2. BURRITOJOINT has more cash and less A/R. The cash makes up the majority of
BURRITOJOINT’s Current Assets. Since is a relatively new company and is growing and does not
pay dividends, it has (most likely) acquired its cash through retained earnings and not through
borrowing and therefore does not have offsetting short-term liability.
BURRITOJOINT holds less PPE than BURGERHAVEN, although this comparison is skewed
because of BURRITOJOINTs cash holdings.
3. BURRITOJOINTs liability mix and debt-equity mix did not change substantially between 2008 and
2009.
BURRITOJOINT holds significantly less debt than BURGERHAVEN.
4. BURRITOJOINT’s Days’ Sales in Inventory increased slightly from 2008 to 2009.
BURRITOJOINT holds less inventory than BURGERHAVEN and therefore must have more
frequent deliveries.
Increase BURRITOJOINT’s inventory to BURGERHAVEN’s level: 2.78/1.80 = 1.55
Multiply BURRITOJOINT’s inventory by 0.55 to get inventory increase  0.55 x $5,614 = $3,062
Increased interest expense = $3,062,000 x 0.03 = $91,864
Note that if you type BURRITOJOINT’s new inventory level of $5,614 + $3,062 = $8,676 into cell
C26, Days’ Sales in Inventory in cell C56 changes to 2.78.
5. Quick remove inventory. The denominator is money available if the company sells no more products.
Cash removes A/R. The denominator is money available if the company sells no more products and
collects no receivables.
Since BURRITOJOINT holds more cash and less inventory and A/R than BURGERHAVEN, all the
ratios are higher and the difference between them for BURRITOJOINT is smaller. Therefore
BURRITOJOINT is more likely to meet its short-term obligations.
6. Price-to-Sales removes no expenses form the denominator.
Price-to-EBITDA removes COGS, SG&A and Other Expenses from the denominator.
Price-to-Earnings removes all expenses from the denominator.
Market-to-Book compares the price of the stock to the book liquidation value of equity.
BURRITOJOINT has a lower Price-to-Sales ratio but higher Price-to-EBITDA and Price-to-Earnings
ratios than BURGERHAVEN. The difference is due to the BURGERHAVEN’s lower relative
expenses.
7. BURRITOJOINT’s profitability (ROE) increased from 2008 to 2009. Higher leverage (EM) and
expense efficiency (PM) dominated lower sales efficiency (AT).
BURGERHAVEN was more profitable (higher ROE). BURGERHAVEN is more levered (EM) and
generated les sales from assets (AT) but also incurred less expenses relative to sales (PM).
Recommend BURRITOJOINT work to control expenses to bring PM in line with BURGERHAVEN
– but this recommendation may change with the analysis in the next paragraph.
COGS seems to be driving the result. Lower COGS may not be consistent with BURRITOJOINT’s
mission to provide better quality food than its competitors.
8. Growing at the internal growth rate decreases the D/E ratio since equity, through RE, increases and
debt stays constant.
Growing at the sustainable growth rate by definition keeps the D/E ratio constant since increases in
equity are matched by selling enough debt to keep D/E constant.
Part 2
3. (a) Since A/P grows with Sales, that financing can be returned to the financers. Thus EFN is equal to
the negative of the liabilities automatically created by new sales.
The short-term solvency values all improve is the firm grows at the internal growth rate because
current assets all increase proportionally with growth but the only current liability to increase is A/P.
Part 3
1. Better short-term solvency financing with equity and keeping the cash. Using the cash decreases
short-term solvency below the 2009 levels but still above BURGERHAVEN’s levels.
Leverage (EM) is higher (and therefor long-term solvency is lower) if growth is financed with cash
but leverage is still lower than the 2009 level and still lower than BURGERHAVEN in 2009. This is
because increasing equity and not increasing debt (apart from A/P) lower leverage and improves
long-term solvency.
2. Profitability (ROE) is greater if growth is financed with cash. This is because there is less equity
amongst which the profits (NI) are divided.
3. ROA is greater if growth is financed with cash. This because there is less cash as a relative
percentage of assets and therefore lower total relative assets over which the profits (NI) are generated.
4. AT (Sales/Assets) is greater since there is less cash relative to assets and therefore less relative assets.
PM (NI/Sales) is unchanged since the method of financing does not affect expenses.
5. Under the “max growth using cash” alternative, short term solvency deteriorates to levels lower than
current 2009, but not below BURGERHAVEN’s.
Note that this is because we required cash as a percentage of asserts to equal 10% when solving for
the “max growth rate.” If we set the pro-forma cash number is call N24 to 5.94%
(BURGERHAVEN’s percentage) then the resulting cash ratio for BURRITOJOINT would equal
BURGERHAVEN’s.
Max Growth increases profitability since co new equity is sold, NI increases by more than the
increase in equity.
Leverage (EM) decreases and therefore long-term solvency improves if the firm grows at 51.81%
using cash. This is because the growth results in increased RE and therefore increased total equity
with the only A/P growing. Therefore the increase in equity is greater than the increase in liabilities.
Max growth increases efficiency by increasing AT since sales increase but total assets are lower since
the firms holds a lower relative amount of cash.
PM is not changed since these decisions are assumed to no effect expenses. Note: It might be proper
to assume that rapid growth (almost 52%) might affect BURRITOJOINT’s ability to operate at the
same level of efficiency and therefore it might be reasonable to decease PM.
Also note that we can’t just decide to grow at 51.81%. This is the max amount we could finance
using cash if marketing thinks BURRITOJOINT will grow at this rate.
Table 1 - Financial Statement Ratios
BURRITOJOINT BURRITOJOINT BURGERHAVEN
2009
2008
2009
Days' Sales in Inventory
1.80
1.67
2.78
Current Ratio
Quick Ratio
Cash Ratio
2.91
2.86
2.64
2.75
2.69
2.45
1.14
1.11
0.60
Earnings per Share
EBITRDA
Price-to-Earnings Ratio
Price-to-EBITDA Ratio
Price-to-Sales Ratio
Market-to-Book Ratio
$4.03
$265,938
21.88
10.44
1.83
3.95
$2.43
$180,278
25.51
11.07
1.50
3.20
$4.23
$8,176,400
14.42
8.02
2.88
4.68
ROE
EM
ROA
AT
PM
18.03%
1.37
13.19%
1.58
8.35%
12.56%
1.33
9.48%
1.61
5.87%
32.43%
2.15
15.06%
0.75
20.01%
Table 2 - Liquidity, Profitability and Efficiency
BURRITOJOINT
2009
Current Ratio
2.91
Quick Ratio
2.86
Cash Ratio
2.64
ROE
EM
ROA
AT
PM
18.03%
1.37
13.19%
1.58
8.35%
Grow 25%
Grow 25%
Grow 51.81%
use Equity
3.43
3.36
3.11
use Cash
2.73
2.67
2.41
use Cash
1.49
1.31
1.16
16.91%
1.28
13.19%
1.58
8.35%
18.39%
1.31
14.08%
1.69
8.35%
19.36%
1.20
16.10%
1.93
8.35%
BURRITOJOINT
Income Statement
Revenue
COGS
Selling General & Administrative
Interest Exp
Depeciation
Other Expenses
Income Before Taxes
Deferred Tax Expense
Taxes Paid
Net Income
Dividend (Total, not Per Share)
Addition to Retained Earnings
2009 (C-Size)
100.00%
75.07%
7.08%
0.03%
4.04%
0.33%
13.45%
2.02%
3.08%
8.35%
2009 (C-Size)
100.00%
78.46%
6.69%
0.02%
3.96%
1.31%
9.55%
0.86%
2.82%
5.87%
2009 (C-Size)
100.00%
61.35%
9.82%
2.08%
5.35%
-7.12%
28.52%
1.26%
7.25%
20.01%
0.00%
8.35%
0.00%
5.87%
9.82%
10.19%
BURRITOJOINT
Balance Sheet
Cash and Cash Equivalents
Accounts Receivables
Inventory
Other Current Assets
Total Current Assets
PPE Net
Goodwill, Net
Other Long-Term Assets
Total Long-Term Assets
Total Assets
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities
Total Long-Term Liabilities
Total Liabilities
Common Stock, Net
Retained Earnings
Total Equity
Total Liabilities and Equity
BURGERHAVEN
2009 (C-Size)
28.04%
0.82%
0.58%
1.50%
30.94%
66.19%
2.28%
0.59%
69.06%
100.00%
2.62%
8.00%
10.62%
0.00%
16.21%
16.21%
26.84%
44.30%
28.86%
73.16%
100.00%
2009 (C-Size)
22.79%
0.79%
0.58%
1.43%
25.58%
71.02%
2.66%
0.74%
74.42%
100.00%
2.90%
6.41%
9.31%
0.00%
15.23%
15.23%
24.53%
57.20%
18.27%
75.47%
100.00%
BURGERHAVEN
2009 (C-Size)
5.94%
3.51%
0.35%
1.50%
11.30%
71.24%
8.02%
9.44%
88.70%
100.00%
2.10%
7.78%
9.89%
34.94%
8.74%
43.68%
53.57%
-57.03%
103.46%
46.43%
100.00%
BURRITOJOINT
Income Statement
Revenue
COGS
Selling General & Administrative
Interest Exp
Depeciation
Other Expenses (Non-Operating Income)
Income Before Taxes
Deferred Tax Expense
Taxes Paid
Net Income
Dividend (Total, not Per Share)
Addition to Retained Earnings
Balance Sheet
Cash and Cash Equivalents
Accounts Receivables
Inventory
Other Current Assets
Total Current Assets
PPE Net
Goodwill, Net
Other Long-Term Assets
Total Long-Term Assets
Total Assets
Accounts Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities
Total Long-Term Liabilities
Total Liabilities
Common Stock, Net
Retained Earnings (or Accum. Deficit)
Total Equity
Total Liabilities and Equity
2010E ($000)
$1,898,021
$1,424,875
$134,438
$506
$76,635
$6,286
$255,281
$38,323
$58,403
$158,556
2010E (C-Size)
100.00%
75.07%
7.08%
0.03%
4.04%
0.33%
13.45%
2.02%
3.08%
8.35%
$0
$158,556
0.00%
8.35%
2010E ($000)
$336,958
$9,871
$7,018
$17,971
$371,818
$795,514
$27,424
$7,126
$830,064
$1,201,881
$31,538
$76,923
$108,461
$0
$155,891
$155,891
$264,352
$501,441
$436,089
$937,530
$1,201,881
2010E (C-Size)
28.04%
0.82%
0.58%
1.50%
30.94%
66.19%
2.28%
0.59%
69.06%
100.00%
2.62%
6.40%
9.02%
0.00%
12.97%
12.97%
21.99%
41.72%
36.28%
78.01%
100.00%