The Brick House Essay

854 Words4 Pages
Financial Forecasting 1) Do you agree with Ms. Ward that a NZ$800,000 credit line will suffice to meet foreseeable funding needs? How much will she need to borrow to finance her business over the next few years? To answer, construct pro forma income statement and balance sheet projections for FY15-FY19 under different scenarios for annual sales growth over FY15-FY19: a) 30% b) 25% c) 20% d) 15% e) 10% f) 5% In each scenario, forecast The Brick House’s funding need each year as well as key financial ratios including leverage and liquidity ratios. Compare the scenarios for levels, trends, etc. and explain briefly. For what growth rate of sales is the Liabilities/Net Worth ratio stable. Based on each of these growth scenarios, Brick House will struggle at lower growth rates, particularly later on as their current operational efficiencies will spiral into negative performance. It needs a very high growth rate to overcome these efficiencies and sustain prior operating benchmarks. This is partly as a result of some of the assumptions we have made such as increasing PPE by 35% (historical CAGR), which in turn leads to higher levels of depreciation. With these assumptions, many of the liquidity and leverage ratios decline over the next five years because the amount of debt needed (as a result of the operational inefficiencies from collections) is quite high. This indicates that there really isn’t a scenario in which debt to net worth is stable. 2) What sources of finance could The Brick House potentially tap into? Which, if any, are realistic alternatives to a larger credit line? Which, if any, are likely to be preferable? Explain. Lizzie could start by securing a bank loan based on her model in question 1. She could bring in a third party as an active equity partner, preferably someone with sound corporate finance/accounting acumen. Factoring is also an
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