PROBLEM STATEMENT
Panera Bread Company operating successfully since 1980s has been facing financial troubles in the recent years, the company had strong financial results showing consistent high growth due to this very reason the company had the luxury to use internal finance for all of its operations as with high turnover the company was able to maintain strong retain earnings.
The lead the company to allow the expiry of a $10m credit facility, but the recent years have turned the story around, the company is not been able to maintain the same margins as the cost of products have increased leading to a very slim margin now the company faces a dilemma either to raise prices to maintain its margins which would most probably would shrink the growth of the company that would lead to a decline in shares price of the company, not raising the prices will continue the growth but the fact company won’t be able to meet its margins the internal finance facility would be no longer available.
The company would need to repurchase its stock to show intent in the market and ensure shareholder confidence for which the company needs to raise $75million, it is evident the company needs to consider external sources of financing to be able to achieve this.
FINANCING OPTIONS
There are two main types of finance available to any company that is the Equity finance and the Debt finance.
EQUITY FINANCE:
Within the Equity financing option the company does not borrow the funds from anyone rather than generates or raises the funds itself. The company first looks into its own pockets that is the retain earnings and use its internally generated funds for operational purpose, considering Panera’s position is does not hold sufficient retain earnings anymore due to the reduction in margins.
The other option under the equity finance is through issuance of shares by the company in the market, this is conducted through the process of an Initial Public Offer and for the need of further financing the company holds the liberty to issue more shares, considering the Panera company case the company is already listed on an exchange and is facing severe decline in share, the company needs to buy back shares making issuing further shares not an option.
DEBT FINANCING
If the company lapses all of its Equity financing options the company then mores into consideration for Debt financing, under the debt financing the company borrows funds from another entity mainly being bank in the form of loans or from public through issuance of bonds.
Considering the case of Panera, Bank Loan seems a more feasible option since it holds less complexity and more flexibility then a Bank Loan. The company could either choose for a long term finance or a short term finance deeming on its needs and ability of repayment, but consideration has also to be given to the fact that short term finance holds a higher interest expenditure then long term finance but overall debt is still a cheaper source of finance then issuance of shares equity financing option.
NEED OF FINANCE
To compute the exact need of finance for the company to be able to repurchase its equity worth $75million a forecast of 5 years of the company has been created with the forecast of 2007 already given a forecast from 2008 to 2012 has been created.
To compute growth trends,analysis over historic periods was conducted where all the costs computed in the historic income statements such as bakery café, dough sold to franchisees, depreciation where taken as a percentage of revenue of that particular year.
Similarly items of balance sheet such as current assets, property, plant and equipment, goodwill, current liability were also taken as a percentage of revenue of the respective year other than tax for the year that was taken as percentage of operating profit.
Panera Bread Company Case Solution
This historic analysis has shown that the cost of the company has been increasing in the last 5 years where as current assets are decreasing, for the forecast purpose it is assumed that the company will undertake a loan facility to be able to purchase off its equity of the value $75million due to which a positive influence would be created in the market enhancing the share price of the company not only that but the company can use the debt option to finance its growth due to which there will be no need to increase the price to maintain the margin to generate internal funds to finance growth, and with the price not increased it will also lead the company on its growth strategy.
It is assumed that the company will grow at 25% growth in the next two years and will show 5% growth in the subsequent years, whereas ......................
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This case can be used to discuss the multi-period financial forecasts and the desirability of different sources of funding. In 2007 came to an end, Panera Bread Company faced a new problem. At present, he relied on retained earnings and a slight infusion of capital to finance its activities. But the decline in margins would limit future funding from its own resources. To complicate matters the fact that its share price was at historic lows and management thinking big buybacks. "Hide
by Marc Lipson Source: Darden School of Business 8 pages. Publication Date: December 31, 2008. Prod. #: UV1066-PDF-ENG
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