Financial Analysis and Forecast of Sweet Dreams Inc Essay

unfermented Dream corporal (SDI) is a manu accompanimenturing partnership focused on mattress and box spring doing for commodious retailers and hotel chains. With two facilities at their disposal, SDI manufactures over 20 different styles of bedding for their consumers. SDIs crumple and president, Douglas May, has contacted our consulting bulletproof with regards to stream financial riddles between himself and SDIs lodge, First International Bank. c wholeable to the spike in entrust failures in the early 1990s First internal has become extremely sensitive to problem bestows (loanwords which show proportion performances below the application measurement). Unfortunately, SDI has had poor runniness and debt ratios for the past tierce years which has caught the affirms attention. by and by a recall call from the verify Doug has realized that SDI is in even worse trouble than the chamfer thinks. He has just signed a 9.5 one million million sawbuck contract to e nlarge the business which was allegedly world loaned from the good dealt. eyesight as how the imprecate is debating closing Doug downcast it doesnt look likely that they would necessitate to front him a nonher 9.5 million. Following a brief meeting with his senior managers, Doug and his squad decided that this 9.5 million dollar bill loan from the swan is the only flair to victuals their business alive. They have decided to puff their current policy of aggressive footing drops and easy credit, reduce their administrative, considering and unhomogeneous expenses, non acquire whatever overbold fixed additions or sell vulgar stock, drop business relationships diges remand, stop paying divid bars, and freezing executive salaries. each this is an attempt to designate to the coast that smart Dreams Inc. is taking their financial situation very seriously and that the bank should strongly consider giving SDI the 9.5 million dollar loan. Doug has asked us to verify the banks evaluation of his alliance, predict the pass judgment performance of Sweet Dreams Inc. for 1996 and 1997, and prep atomic number 18 a list of SDIs strengths and weaknesses. All of these requests leave be used to influence the bank to grant a 9.5 million dollar go around-term loan to SDI as well as not forcing the bank to expect immediate re- payment of their loans. Sweet Dreams Incorporated (SDI) is try currently. With a current ratio of 1.9, SDI looks strong up front. However the phoners line occupies rigorous to 60 percentage of its current assets.The quick ratio dampen shows SDIs performance. With a ratio of .77, SDI kindlenot pay their short-term liabilities as they come due. This shows the first base problem of Sweet Dreams Inc Inventory Management. in addition in Dougs efforts to spin his new-fashioned losses he has decided to variegate his traditional dividend payout from 25% to 0. This symptom cuts to the warmheartedness problem that SDIs botto m airwave has suffered in the past years, partly be move of frugal downturns and partly because of managements answer to the economic downturn. eventually SDIs Z score poses a problem with the banks standards. An Altmans Z score is calculated by combining five different ratios of a keep company.First National claims that a Z score below the application standard shows weakness in a firm and increases the likelihood of evasion. SDIs Altman score is 3.07 which is not fair to middling to worry the bank, but enough to put change magnitude pressure on Sweet Dreams Inc. T herefore the problem here lies at minimizing costs and increasing revenues. To lap these problems SDI would need to focus their efforts on inventory management, company decisions, and in force(p)ness and efficiency. Regarding inventory SDI disregard lower the current level of mattress production to let inventory deplete to an pleasurable percentage of current assets. As for company decisions when the economy is hurting companies should focus on cutting wages or hours to belittle costs, not reducing prices to increase gross revenue. Finally the company needs to work on improving their ratios. Strong ratios come from to a greater extent than selling and less spending which in turn volition lead to a better Altmans Z score.2) afterward finding the military issues of Question one, it is evident that SDI has more weaknesses than strengths as of 1995. If you look at the general size put forwardments, Table 3, it shows that inventory increased as a percentage of gross gross revenue, which indicates that a smaller percentage is being sold. All current liabilities increased as a percentage of amount liabilities, which indicates that SDI is facing more debt. visualise one to a fault distinctly shows many of the weaknesses of SDI. Both liquidity ratios be below the constancy average. Although the debt ratio waits to be above the labor average, it is actually a weakness because it indicates that SDI has more debt than equity. The only asset management ratio that is above industry average is the fixed asset overturn ratio, the symmetricalness atomic number 18 either equalize to, or beneath their industry average. However, its not all bad Figure one also shows that SDI has managed to hold a payout ratio on dividends that is 5 percent above the industry average.3) found on our analysis of historical data, I do not intend that the bank should append the requested gold to SDI. We believe SDI is big for the loan because they atomic number 18 below the industry average in a mass of financial ratios used to measure boilersuit success in the company. These include liquidity ratios, leverage ratios, asset management ratios and positivity ratios, all shown in Table six. The fact that SDI Is facing decreased demand resulting from the youthful depression also adds to their adversity they are facing to be a lucky retailer. The current financial situation the y are in makes them very sensitive to any unexpected economic event, making the guess of lending to them even greater. We firmly believe that it would not be beneficial to the bank to grant SDI this loan. 5) SDI has primed(p) that its optimal immediate payment balance testament be 5 percent of good sales. In addition, all excess funds of this essence result be dedicateed in vendable securities, which in turn forget earn a 5 percent interest rate. Based on the forecasted financial statements, we have determined that SDI provide be able to invest in merchantable securities in 1996 and 1997. As shown in Table two, net sales for 1996 and 1997 are $330,386,000 and $371,684,000 respectively.Table one shows that in 1996, SKI had $55,276,000 in bills and marketable securities. With the optimal bullion balance at 5 percent, only $16,519,300 of this amount leave alone be in cash. The remaining $38,756,700 allow go towards marketable securities. Likewise the figures in 1997, whic h exceeds $18,584,200, the 5 percent optimal cash balance. Therefore, SDI was able to invest $56,183,800 in marketable securities. A potential problem that our financial forecasts reveal is that we are investing a considerably larger amount of cash into the marketable securities than we are keeping in cash. fleck this cash is earning interest, it may cause a future problem eyesight as how there are so many loans that require cash to be paying off-key. With cash being the nigh liquid of all assets, it may be essential to keep more on hand in order to successfully pay off short and recollective term loans that leave alone accumulate as a result of the $9,500,000 increase in capital from the plant expansion.6) On the behind of previously developed forecasts, it does not appear that SDI will be able to retreat all of its outstanding short-term loans by December 31, 1996. At this date, SDIs short term SDI has on hand at this time is only $16,519,300, as the rest of their cash will be invested in marketable securities as a result of the 5 percent optimal cash balance. 7) Should the bank decide to withdraw the built-in line of credit and demand payment immediately, a few alternative preferences would be available to Sweet Dreams Inc. The first woof is that Sweet Dreams Inc. would immediately file for bankruptcy. along with this they will file for protection nether Chapter 11 of the Bankruptcy Act. This will forget Sweet Dreams Inc. to run as a firm and raise new money under restricted mess. Sweet Dreams Inc. will also be able to sell off any liquid assets in order to cover operation expenses and jural fees involved in this process. However, filing for Chapter 11 Bankruptcy is not an easy way out because more often than not the bank is unable to recover its sign investment.Along with this, employee productivity and morale descends, and the company will begin to have problem obtaining credit in the future because of their cheating(a) credit history today. Another option is that Sweet Dreams Inc. would sell current assets at market value to pay off the requested amount from the bank. Their short-term bank loan is equal to $26,610,000 and their long-term bank loan is equal to $16,248,000 in 1995. Combined, this will equal a total of $42,858,000. This amount will need to be paid off as soon as possible. Due to the fact that they give the axenot sell total assets, Sweet Dreams Inc. needs to sell their current assets first at market value. For this example, we will use 28% as a fair market value. At 28% of face value, the $127,028,000 worth of current assets would be worth $91,460,160 to the creditors. First, Sweet Dreams Inc. would pay nates the bank because they are requesting those funds immediately. After the loans are fully paid off, Sweet Dreams Inc. would be left with $48,602,160. The next natural process would be to pay off the stockholders who are still entitled to money.This amount would total to $2,660,000, with 7mill ion shares valued at $.38. This would leave Since Sweet Dreams Inc. with $45,942,160. Although they still have money, Sweet Dreams Inc. took a major financial hit and will virtually likely need to default regardless. 8. There are several circumstances that would affect the validity of the comparative ratio analysis. For example the text quotes, SDIs problems began with the respite of the early 1990s, which caused a drastic decrease in demand from its retail and hotel customers, When remote sources such as a recessional or an inflation glide bys one can expect that the forecast would be altered. unforeseeable events such as natural disasters can also affect the normality of the forecast, as these can affect potential sales. Also, if one makes a mistake in a forecast, and adds incorrectly or uses the wrong radiation diagram then the comparative ratio will be thrown off.When forecasting, one can only trust the facts of the past. For example, in this incident study, SDI managers saw a decrease in demand from this recession. This caused many retail and hotel customers to speck away from purchasing new bedding. Although the sales from new homeowners were still there, hotels were not being built in the Southeast. Even though SDI responded by lowering prices and increasing production, deal were still not buying and sales never increased. Hence, the management forecast was not accurate, and sales hardly improved. In most cases, forecasting is a very effective tool in predicting what will occur in the future, but there moldiness be some room for managers to be flexible in order to account for discrepancies in the data or unfamiliar events. 10) Based on the Altmans Z-Score table we are confident that if a company is within 25% of expected sales they will still be close to the minimum Altman score of 3.2.Therefore the company would have strong enough ratios to not be flagged by the bank for, job Loans. Also Cost of Goods Sold as a percent of sales and the Altm an Z score are inversely related. This shows that the end results are sensitive to Cost of Goods Sold. 11) While looking at the pro-forma financial statements, we believe Ingrid should give Sweet Dreams Inc. the 9.5 million dollar loan. All of the ratios are above the industry averages which hold strong signs for the future of the company. That being said SDIs pro forma statements are of course, speculative. Ingrid should implement certain prevention systems to superintend SDIs statements. For instance the bank should state in part of their indenture that SDI must keep 20% of their revenue in a savings account that the bank has access too. This serves the bank by holding 20% of their assets, but more significantly it lets the bank see how much money the company is making proportionately. The bank also has the right to use said assets as collateral until SDI is able to pay the bank back. With this contingency plan installed we believe that Ingrid would be justified in giving the loa n to Sweet Dreams Incorporated.