AIDAN CIRCOANA Harvard Case Solution & Analysis

AIDAN CIRCOANA Case Solution

Stability and Growth

Another major areas are the firm’s stability position that is the net worth of the firm to its total assets. The stability ratio has been increased form 98% to 99% from 2017 to 2018 with showing a substantial percentage in both of the years. Along with it, from case Exhibit 4, it could be seen that the firm has almost 3 digit growth in almost each area described showing that the firm has a great potential to increase its size.

Projections Analysis

Projection analysis could be conducted on the basis of high and low value estimations which are calculated on the basis of certain assumptions. See Exhibit 1 for Projections.

It could be seen form the projected income statement that the net profit for high and low estimations equals to $75011 and $29317 with a net profit margin of 52% and 30% respectively. This shows that under both of the conditions, the firm seems to be highly profitable in future.

From Projected Balance Sheet, it could be seen that even after including the loan items on the liability side of the balance sheet, the liquidity position of the firm is incompetent in low situation with a current ratio of 0.9 times but is quite reasonable in high situation with a current ratio of 5.3 times. This implies that the firm projected liquidity position is reasonable to justify its ability to pay its debt obligations. The projections analysis is summarized below in Table-2

Table-2

Plug Analysis (Seasonality and Sensitivity)

A plug analysis could be conducted to evaluate the seasonality and sensitivity of the firm’s financial metrics. From Exhibit 2 it could be seen that the plug with a seasonality adjustment of +10000 led to a new plug of $34000 and $13000 in the low and high situations showing that the firm, if operated efficiently, would not have much impact due to the seasonality.

A sensitivity analysis is conducted using the changes in account receivable ages and other metrics. Despite of increasing the receivable days the firm has still substantial cash flows to pay the debt obligations.

Risk Assessment

Risk assessment is conducted to evaluate the firm’s capacity to repay its debt. The repayment capacity is measured under three different ratios i.e. current ratio which measures the firms short term liquidity to pay interest obligations, Interest coverage ratio which measure the firms operational efficiency to save enough money to pay for its debt obligations and the acid test ratio which is also a key measure of liquidity. From Exhibit 3, it could be seen that the values of the three ratios are quite substantial showing a very minimum risk of the firm’s incompetency to pay its debt obligations.

Decision Argument

From the above analysis, it is recommended to approve loan for Urban Roots. As the firm has enough cash flow-sin best and worst situation, with efficient profitability, liquidity, stability and growth positions. A loan to Urban Roots will enable the firm to continue its growth without any barrier and provide a mutual benefit to itself and its lenders. The pros and cons for this decision are given as follows.

Pros:

• Fixed return on investment in terms of interest revenue from Urban Roots.
• Increased relations with a growing firm that could be a potential client in future.
• Fulfillment of social responsibility.

Cons:

• Risk of default.
• Potential investment opportunities can be lost due to loan provisions.......................
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