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%