Assignment on Redhook Ale case (80 pts)
Assume you are a representative of U.S. Bank working with Red Hook Ale on their loan request.
Assume Mickelson looked at the model (exhibit ) and noted some problems! He noted that operating profit (excluding interest income) for the year of 1990 was below 9 month results for 1990, and he knew his firm would make more money during the rest of the year. He also could not understand the massive interest income for years 1991-1993 and some of the entries on interest expense. He modified the model to incorporate interest income and expense more to “reality” and to allow changes in the model to recalculate debt, interest income (expense) and ST investments for different scenarios.
Line of credit debt (as opposed to term debt) and excess cash (ST investments) were made plug figures in his model. Operating projections were not changed for rest of the model after 1990. The model assumes any deposits with Anton Steinecker would earn 8% for the firm (interest to be returned by Steinecker) and 8% on ST investments and 11.5% pre-tax cost of all debt).
Besides the change to his model, Mickelson saw that with more reasonable interest income modeled that he would indeed need a $6.8 million line of credit/term loan for a bit of a cushion. Let’s also assume that Mickelson was eager to exit debt and that he planned to pay down as much of the line of credit associated with the new term debt and the bank agreed. Assume the bank also imposed a maximum borrowing limit on the new term debt of $6.8m in 1992, $5.8m in 1993 and $4.8m in 1994. Hence, debt repayments would have to be made in 1993 and 1994. Also, he modified the model to require $50,000 minimum cash, except in 1992, when he knew there would be a crunch and he was willing to drop cash to $7,000.
The brewing industry is fairly competitive with lots of entrants and exits over time.
Redhook Ale Case Assignment Questions
1. Evaluate the plan put forth by Red Hook Ale for financing as follows:
a. Do the projected profits seem too large? You might consider items like operating margins and return on invested capital in a fairly competitive industry. You might also consider the firm’s past operating history and performance during a large expansion (1988-89). Figures for years before 1990 are in Tab labeled Historical.
b. Qualitatively, does the expansion that Redhook is contemplating raise any concerns that could pose larger opportunities or problems/dangers than the 1988-89 expansion and are historical past figures perhaps not as instructive as they might normally be? Cite specific concerns and how those concerns may or may not endanger the firm’s ability to service debt and maintain profitability.
In the file redhookdebt.xlsx is a Tab labeled Forecasts that is modified to allow for “shocks.” The model is contained in columns J-N. The original values are in columns C-G. The model flows the shocks through various other line items and percentage change in some items are displayed in columns P-R. The model allows you to pick shocks from the following items:
Construction cost overrun: You can add any dollar amount. Note that this will impact the level of net equipment in 1993 and 1994 and other cost of goods sold expense in 1994 (depreciation in overhead). LOCATION CELL = O3 (remember all figures in case are in dollars, not thousands or millions)
Price: Change the price by category. This is pegged at 1 of original forecast currently. If you want a 10% decline in price in a given year, then replace 1 with 0.9. Any new figure is basically what percentage of the prior value you want. Price assumptions are for each category of beer in column T4-T8 (1992), and column V4-V8 (1993) and column X4-X8 (1994).
Units: Change the quantity sold. This is pegged at 1 of original forecast currently. If you want a 10% decline in quantity, then replace 1 with 0.9. Any new figure is basically what percentage of the prior value you want. Units are presented for each category of beer in column U4-U8 (1992), W4-W8 (1993) and columns Y4-Y8 (1994).
You may want to look at other scenarios than Redhook base case in evaluating situation (see memo below)
Finally, to make the model converge, hit file, then options, then formula and check box to enable iterative calculations.
The model (something to do with excel and convergence algorithms – or maybe me!) is very sensitive. DO NOT change any of the red values or values directly in the model. Only the orange values should be altered (I know this may limit ghastly outcomes).
If you are tinkering and inadvertently cause a bunch of reference items to pop up in years 1992-1994, put numeric values in lines L69-N69 and L71-N71. Then just copy the formulas from column K69-K71 into columns L, M and N. Alternatively start over. Not that big a deal since you are only inputting shocks if you deem to do so.
2. CFO Mickelson has asked you to review the expansion and financing plans. Remember that Mickelson does not want a D/E ratio above one and he is also concerned about being reliant on bankers. Bankers are often reluctant to extend new capital to firms as well (beyond value of original loan). You are advising the firm as to what is their best course of action. Write a one page memo advising Mickelson as to whether to alter or cancel his expansion plans or alter the way he proposes to finance them?
Redhook Ale Case Assignment
Last Updated on July 15, 2020 by Essay Pro