Rawhide Brewery There are three different proposals contained in the case study:
ID: 394566 • Letter: R
Question
Rawhide Brewery
There are three different proposals contained in the case study: two proposals made by Andrew Upson, and one counter-proposal made by Bruce McAlpline. For your assignment, you are to evaluate these.
First, describe the basics of the proposals. Would any of them significantly reduce Rawhide’s debt-to-equity ratio? If so, how would they accomplish that. If not, explain why not. Based on an accounting valuation, which proposal is the best for Rawhide?
Second, develop a decision model for the decision. Assign a probability of acceptance to each of the three proposals and calculate an expected value for each decision. If you have to make some assumptions, be sure that you state them. Based on the expected values, which decision is the best for Rawhide?
Finally, discuss the differences between your answers above. What is the optimal decision for Rawhide and why? Please do not use any the other people answers be Original and cite with Sources Thanks in advanced.
Explanation / Answer
Rawhide Brewery is a Canadian brewery base which has annual sales estimated to $5.3 million as at 2011. Rawhide brewery is experiencing some downturns, and its current CEO Andrew Upson experiences some trouble in his company in ensuring profits consistency flow. On the other hand, the firm is facing another problem; which is that the debt ratio for the industry, being a 10-year loan is greater than the carrying capacity for the business. Sales projections for the industry are not looking good for the enterprise, and with little sales, it means that the debts for the industry will be not paid anytime sooner.
Tabby Cat Beer (Tabby) on the other hand is a competitor for Rawhide. It has witnessed high sales of above $2million for the first time since it opened. Tabby's rapid growth was mainly attributed to its success in marketing its product line of light and flavorful beer to women (Gold, 2016, pg. 19). Like any other company's' CEO, Bruce Mc Alpine is not an exception in facing problem at his business. But his problem is highly different from the problem faced by Upon's
The problem they are facing is productivity and meeting demands of their company clients. The aim for Bruce
McAlpine is to find a permanent solution to expand his line of operation and meet the demand of consumers and stay profitable without having the bad debt cloud which is haunting his company.
When Upson heard about Tabby's trouble, he invited McAlpine to dinner and offered him two proposals.
Analysis
Both CEOs are trying to find solutions for their company. Upson wants to bring his business back to profitability and lower the company's debt to a ratio which can be sustained by the firm.
Rawhide advancement in 2009 came at an expense of a bank loan of a 10-year term. Sales projection for the company still indicated that in the foreseeable future, the firm would not have achieved better returns (Gold, 2016, pg. 19). On the other hand, McAlpine is having a problem with expanding so as to meet demand and better returns as his company has small debt. Carrying a big hefty debt could lead him to a headache that Upson is facing now.The reason for the problem is because there are no future sales which projected due to some factors such as the oil price increase, which contribute to the cost growth in delivery of the company products in the store, a high cost of brewery operations due to the electricity cost increase.
All this cost will be adjusted and appropriated so as to cater for all costs hence increasing the price for the product hence the reason there is no accurate future projection of sales, therefore, hard to determine what the future holds.
Another challenge to Mc Alpine is competition from a new start-up business or an established business which brings in its products to the market hence causing slow sales to his company.
These kinds of outcomes occur not only in public enterprises, where disappointing quarterly results provoke executive job firing but also in private and closely held companies that do not receive constant external scrutiny (pragmaticmarketing.com 2016).
Proposal one
By outsourcing Tabby's operation to Rawhide, Upson offered McAlpine a 5-year contract, And through this,
Rawhide will be charging them a fee per every case; in return, Tabby will guarantee a minimum case of an order per year. Based on the figures given to McAlpine by Upson, he estimated the price per case offered to as 20 cents higher than their current cost.
Under this proposal, there is a less high risk of obtaining a loan. On the other hand, it has a disadvantage if the number of cases agreed by Tabby is greater since if their sales slowed down, the company will be struck by several cases and therefore they will have to face or process penalties since there is no contract without restrictions.
Proposal two
The second proposal was to transfer operations of Rawhide, and Tabby's to a new entity known as Newco. It will process products at the same price per case for both the companies. With the new company being a joint venture the cost per case will be 15% less than proposal 1. But the issue with this project is that Tabby and Rawhide would pen down a shareholder agreement by giving Rawhide extensive power over making decision process.
Counter Proposal
It is homogeneous to Proposal two. It will bring all operations for Rawhide to a new firm Newco.
Tabby will have a share of 40 %, and Rawhide will have 60% of Newco regarding shareholders. They will both process their products at the same cost the same as Proposal two there will be no single decision will be done if one member is not available.
This could save both companies problems they are facing as mentioned Rawhide needs to lower its debt to the ratio which is high based on the calculation from Exhibit 2. The formula to calculate debt to ratio is Debt - Equity Ratio = Total Liabilities / Shareholders' Equity (Investopedia.com 2016)
This comes to 1.13 which is higher than accustomed average in the company. 1.13 means the company has a debt of 113% which is extremely high. This is a gesture that the business is going into debt so as to stay in operation, but this is not impressing for their shareholders. The only best way to ensure the company remains in operations without these massive debts is by reducing all cost of operations and maximizing profits hence turning around the business to profitability.
The counter-proposal will be moderate for both the firms. It will help solve Rawhide problem of debt and expansion for Tabby. Tabby can also learn from Rawhide's development techniques since they expanded before and had been in the business longer. They can learn from their past mistakes and establish a concrete foundation since they have a joint management where they can contribute ideas and come up with a fewer risk decision since both are now one company know as"Newco."
Now Upson is counting on his CFO to see if the new counterproposal is appropriate so that they can start their new adventure
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