Calaveras Vineyards Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Calaveras Vineyards Case Study Help

Question No. 3

Sensitivity Analysis

The value of the project will also be calculated, based on the sensitivity analysis. The sensitivity analysis defines how the value of the independent variable is different from the dependent value. It is also known as what-if analysis. The sensitivity analysis of the company shows both of the 2 previous questions. Risk premium are 7.2%, 8.6%, 12.4%, and 13.8%. The cost of equity will be: 10.1%, 10.92%, 13.17% and 13.99%. Because of the changed cost of equity;WACC is also changed as: 6.95%, 7.15%, 7.67% and 7.87%. The net present value is the change of the present value of cash inflows and outflows for a period. The decision of construction of the company’s processing plant is dependent on NPV, as it is used to find whether the investment is profitable or not. Because of the changes in the WACC,Cost of Equity, and risk premium; theNPV are 3446970, 3363966, 3165450 and 3100651. This means as the risk premium, cost of equity and WACC are increasing; the net present value of the company is decreasing.

Question No. 4

Terms

As the lender has offered different services to the Golden gate; there can be some changes in the terms and conditions ofthe loan. These changes can be the changes in the interest rate and the recovery period.

Interest rate

The interest rate is the charge or extra rate of amount which a lender charges from the borrower. The proposal of the managing director of the Nations Bank:Tom Howell needs to lower the interest percentage of the loan recovery,to attract the Golden Gate and Anne. Using a simple interest rate is a good policy which the Nation Bank can use, as it is an option that offers a certain percentage of loan interest for the entire loan period. Many other companies use compound rates also but this will create a fear of paying interest on loan again and again, and many investors want to borrow loansbased on compound interest. Lower interest will also convince Anne to borrow, as there will be lower risks associated with lower interest rate.And, if the Nation Bank does not reduce its interest rate; there will be fewer chances that Golden Gate will participate in the deal.

Nation Bank offered the company with a revolver of $2.5 million and the interest rate on this revolving loan would be 2%, andthe interest rate will be prime plus 3% for five years. So taking the estimations under consideration; the interest rate for Anne Clemens will be around 9.5% on revolver and term loan.The revolving and term loan should be changed for changing the interest rate of the loan, and for convincing Anne to borrow.

Intervals

There are many intervals that the Nation Bank may offer to its borrowers. First is the annual payments of interest where the borrower will pay the installments of the loan, once in a year. The second time duration is the semi-annual where the borrower will receive the interest payments twice in a year. Quarterly payments are paid after every threemonths or four times in a year. Lastly, the company can offer loan payments every month. The Nation Bank should offer quarterly payments as wine is sold occasionally and making payment will be easier if the company offers easy payment.

Question No. 5

The Nation Bank’s decision will be based onthe financial situation of the borrower. The offer is not as attractive as the sales of alcohol nationally stagnating. The capital structure is not stable as Golden Gate also considers that Calaveras is not performing the way its competitors are, which is why its competitors are growing at a faster pace than Calaveras. There is a high debt to equity ratio and other ratios of the company are also not suitable for the Nation Bank when it comes to offering loans.The decision of the loan should be no, as the calculations are not positive for the loan proposal by the Nation Bank.The NPV, sensitivity analysis and the cost of the company estimated by the Nation Bank are different and even lower. The liquidation valuation also shows that the company will not be able to pay the interest, indicating that Calaveras needs to raise its capital for accruing loans.................................

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