- Custom Snowboard Inc. is a Delaware company that trades publicly on Midwest Stock Exchange.
- The company deals in the manufacture of quality, durable and reliable snowboards to the market.
- The financial performance of the company has been good for the past three years making the company with the need top expand and venture into other markets.
A Historical Analysis of Past
- The performance of Custom Snowboards Inc as indicated by the company’s gross profit margin is impressive.
- Net earnings of the company declined over the three years from $120,000 in year 12 to $101,400 and $70,725 in years 13 and 14 respectively.
- Declining net earnings for the company is a bad indicator for the company and discourages creditors and investors because it indicates poor performance.
- However, the trend analysis reveals increasing net sales for the company from 100% in year 12 to 103.2% and 105.2% in years 13 and 14 respectively. The implication of the trend analysis is that the company is performing well financially in terms of net sales.
- The trend analysis of the financial data of the company reveals that the net revenue from sales increased for the past three years.
- The company is involved in several manufacturing and selling activities. Costs are tracked using activity costing.
- The firm should use other methods such as variable costing and absorption costing.
- The cost incurred when using these methods is less when compared to the cost the firm incurs at the moment. Therefore, their use will improve the financial performance of the firm.
- The current operations of the company are good and the organization should track costs for every activity and process undertaken.
Internal and External Risks
- Risks pose danger to the existence of the firm. Internal risks are risks realized from within the organization while external risks are from the business environment.
- The internal risk facing the firm is increasing operational costs that has led to decreasing sales revenue and profit of the organization.
- Due to declining net profit, the company faces financial risks that include liquidity and credit risks.
- Financial risks pose a danger to the ability of the company to obtain any borrowing from creditors.
- The external risk that pose a great danger to the firm is increased competition in the industry.
Risk Mitigation Measures
- Risk management for the company should create value for the company. The financial risks facing the company can be avoided by the company increasing its equity in its acquisitions and assets.
- An increase in equity will reduce the debt of the company while improving the value of the company.
- Custom Snowboarding should embrace advanced technology. This includes using the internet in most of its activities. modernizing its supply chain to online operations will reduce the operating and administration costs of the company and improve the financial performance. Cost reduction will reduce financial risks by increasing profit of the company hence low liquidity risks.
- The company should increase its research and development so that only high quality and best products that fit into consumer needs are produced. This will increase customer loyalty leading to a high cash flow in the company that will reduce liquidity and other financial risks.
Potential Returns to be Considered
- The company intends to expand in other European markets.
- An analysis of the potential returns to be realized form these international ventures are positive and should be considered.
- The analysis indicates that net sales and gross profit are to gradually increase each year over the five year period. the net sales are estimated to increase each year.
- However, expenses are also expected to increase at a decreasing rate hence leading to higher net earnings.
- Due to saturation in the domestic market, Custom Snowboard Inc. intends to venture into other international markets especially in Europe.
- The management is considering venturing into European market through a merger, an acquisition or licensing.
- The management of Customs Snowboard Inc are considering a merger, licensing strategy with European SnowFun or acquiring the same firm (European SnowFun).
- The data on a merger indicates that earnings per share after the merger would be $1.868.
- Expected total earnings from licensing are $107,937, $120,937, $137,837, $159,807 and $ 188,381 for years 15, 16, 17, 18 and 19 respectively.
- The analysis of internationalization option indicates that the company should use a merger to venture into Europe.
- The company can finance the merger by increasing the debt through borrowing from the bank and from creditors.
- Customs Snowboard can obtain funds from shareholders by increasing the number of shareholders through a public offer of more shares.
- A public offer is preferable for the company because it does not add to the debt of the company.
- On the contrary, the company can finance the merger strategy using a debt from the bank. The problem with this form of financing is that it will affect the financial leverage of the company.
- External debt extension from the bank can become a burden to the company especially when the interest of repaying the debt is considered.
- Brigham, F. & Houston, F. (1998). Fundamentals of Financial Management, 8th Edition. FL: Orlando, Dryden Press.
- Brigham, F., Gapenski, L. & Ehrhardt, M. (1999). Financial Management Theory and Practice,9th Edition. FL: Orlando: Dryden Press
- Myers, S. (2001). Capital Structure. Journal of Economic Perspectives, 15. pp.81–102
- Ross, A., Westerfield, W. & Jordan, D. (1998). Fundamentals of Corporate Finance, 4th Edition. MA: Boston: Irwin, McGraw-Hill Publishers.