Running Head: Sure Cut Shears case study.
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- Describe Sure Cut Shears in terms of its market, competitive and operating characteristics? How risky is Sure Cut in operating and competitive terms?
Sure Cuts Shears Company generally specializes in producing industrial shears as well as household scissors. The distribution chain of Sure Cuts Shears products includes department stores, hardware stores, and wholesalers, around the country. It goes without saying that Sure Cuts Shears products have a large variety chain where they can be sold. The company faces severe competition from overseas companies; nonetheless, it has continued to register steady growth in sales and profits over the years. In its operations, the company has over the years made efforts to remain consistent in its operation as well as production, thus keeping it ahead in terms of competition.
- What assumptions did Mr. Fischer make when he prepared the pro-forma financial statements (forecasts) shown in case Exhibits 1& 2? Were these assumptions reasonable? (provide support for your answers)
While preparing the forecast (pro-formal financial statement) Mr. Fischer assumed that the loan would be serviced in full by the end of the year that is December 1995. Basing on this assumption, he arranged a line of credit of about three point five million dollars with the Hudson National Bank for purposes of covering necessities for the fall. Mr. Fischer also presented a pro forma estimate to Mr. Stewart to support his request for the fund requirements of the company over the next twelve month period. By June 1996, Mr. Fischer forecast that there was need for an additional one million dollars for purposes of supporting a program aimed at modernizing the company’s plant. These assumptions were not reasonable since they did not put into consideration other factors that would affect the ability of the company to pay back the loan in time as well as a possible increase in the cost of the modernization program for the plant. This explains why Sure Cuts Shears Company had to ask for more time to repay the loan as well as seek for an additional amount of about $350,000 to complete the plant modernization program.
- Why was Sure Cut Shears unable to honor its loan repayment to the bank by March 31, 1996 as originally scheduled and agreed?
The company was unable to honor its loan repayment to the bank by March 31, 1996 as originally scheduled and agreed because of the decline in its products sales. Confirming the inability of the company to pay the loan in time, Mr. Fischer called the bank in early April 1996 asking for more time to repay the loan while explaining that the company’s inability to pay the loan in time was largely attributed to the recession in retailing and thus liquidation of the loan at the time was impossible. In addition, the costs of plant modernization program by the company were higher than the company had initially anticipated.
- How attractive is the company at the time of the financing need?
At the time of the financial need, Sure Cut Company was attractive in the sense that the company still had sufficient capital for purposes of covering its permanent necessities over the immediate prospect. Despite the fears competition from oversea companies, Sure Cut Company continued to register a steady growth both in sales and profits since the year 1958. In addition, the company held large amounts of deposit in major banks across the country. Another attraction to the company was the fact that most if not all its short- term loans from these principal banks were generally scheduled in the period between July and December of every year. These borrowings were typically meant to serve as additional working capital particularly when there was a need to boost a seasonal sales crest. Throughout the years, the company has made efforts to remain consistent in its operation as well as production. All this made the company attractive at the time of the financing need.
- Can the need for financing be dealt with by deferring expenditures? Payables? And why
Deferred expenditure denotes an accounting concept of expenditure, for which either a liability has been incurred or payment has been made and it is revenue in nature meant to benefit the company in future. It therefore follows that the long term financial needs for the company can be surely dealt with through such an arrangement of deferring expenditure and payables. Nonetheless, the short term financial needs of a company may not be achieved through such arrangements since the benefits of deferring expenditure and payables are not immediate but rather, they are felt in the long run. For this reason, short term and urgent need for financial support aimed at producing immediate result cannot be dealt with through deferring expenditures and Payables.
- How certain can Mr. Stewart is of the new forecasts?
Owing to the fact that Sure Cut Shears Company has in the previous years continued to register steady growth in sales and profits over the years, and its operations, as well as production has been consistent. Mr. Stewart can therefore, be certain that even though the company sales have declined, the company can be able to pay back the loans once it completes is modernization program as well as adjust to the new economic environment. This can be confirmed by the fact that in the history of the company there is a clear record of its consistency in it operations and production as a matter of policy.
- Has Sure Cut’s financial condition worsened sufficiently to cause Mr. Stewart any great concern?
The financial condition of SureCut Company has not worsened sufficiently to cause Mr. Stewart any great concern. This is because the company still has sufficient capital for purposes of coveringits permanent necessities over the immediate prospect. Additionally, the company as a matter of policy makes attempts to be consistent in production throughout the year. In addition, despite the severe competition the company has faced in the past, it has continued to register steady growth in sales and profits over the years. Nonetheless, it is pertinent for Mr. Stewart to investigate whether the change in the company’s loan needs caused by plant transformation program may require call for a change in the type of loan advanced to the company.
- Would you as Mr. Stewart agree to an extension of the loan repayment? Under what terms and conditions?
As Mr. Stewart i would indeed agree to an extension of the loan repayment period considering the fact that the company is in the process of a plant modernization program. The terms and conditions for the repayment of the loan would include among others an agreed date for the completion of the loan repayment, and an additional interest rate while paying the loan following the initial default in the payment. This would motivate the company to pay in time without failure.
- When do you thing Sure Cut Shears be able to repay the loan in full?
In six months time Sure Cut Shears can be able to pay back in full the loan. By the end of the six months, the company would have had enough time to complete its plant modernization program. In addition, the sales of the company by the end of the six months may have increased considerably following modernization of the production system which means improved quality of its products.
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