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After years of dreaming about owning you own business, you decided that owning a coffee shop would be perfect. Rather than start from scratch, however, you and your partners decide to look at two existing establishments, Better Brew and Perfect Blend. The two are for sale at the same price, and they are located in equally attractive areas. You manage to get enough financial data to compare the year-end condition of the two companies.
What factors should you consider before deciding which company to buy? What additional data might be helpful to you? (Not that net income is implied). We have the Balance sheets for the year end which is the statement of financial position and the snapshot of the company's financial position on a particular date. The financial statements give us an indication of how the business is performing and where it stands at a particular time. I would want some history of the two businesses such as the age of the business, profitability, liquidity, activity, and leverage. This information is useful in analyzing how well the company is performing in relation to previous performance, the economy as a whole, and the company's competition (Bovée, Thill, & Mescon, 2005, p. 421). Other factors to consider are the appearance of the business, length of time of ownership, seasonal peaks, reasons for personal withdrawals, owner's salaries, supplier information, existing inventory systems, type and age of equipment, leases on equipment and buildings, available space for the business, possibilities for expansion, number of employees, benefits offered to employees, and accounting principles used. Additional data that would be helpful include other financial documents including the an income statement to get a general sense of the company's size and performance as well as the statement of cash flows to see how the company's cash was received and spent for the operations, investments, and financing (Bovée, et al., 2005). Another factor to consider is information on the industry average or regional competitors.
What questions should you ask about the methods used to record revenues and expenses? It is important to know if the accounting for the businesses is done on a cash-basis or accrual-basis. In the cash-basis method, the revenue is recognized when cash is received and the expense is recognized when the cash is paid out.
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"Comparing Better Brew and Perfect Blend Coffee Comapnies." 123HelpMe.com. 23 Jan 2020
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On the basis of the data provided, which company would you purchase? Detail the process you used to make your decision. At first glance, one might consider that Better Brew would be the least risky choice with a lower level of debt. However, using ratio analysis, we can use quantitative measures to compare each company's financial results from the data given on the balance sheets. The following table shows a comparison of the current ratio, quick ratio, debt to equity ratio, and the debt to total assets ratio results. The Current ratio is a measure of the firm's ability to meet its short-term obligations when they are due and a ratio of 2.0 is considered safe. The quick ratio, or acid-test ratio, is also used to measure liquidity and short-term obligations where a ratio of 1.0 is considered safe (Bovée, et al., 2005). Although the ratios for both companies are not at the level of safe risk, Perfect Blend has better liquidity ratios at 1.24 and 0.76 respectively. The Debt-to-Equity ratio indicates the extent that a company is financed by debt and the lower this ratio, the lower the risk. Again, the Perfect Blend Company has a lower ratio of finance from debt and equity when compared to Better Brews 2.80. The final ratio that we have for comparison is the Debt-to-Total Assets ratio. This ratio is a measure of the company's ability to carry long-term debt and should not exceed 50% of the value of the total assets. Neither of these companies is below the 50% level, but the Perfect Blend Company is again the lower risk at 0.66 percent for Debt-to-Total Assets ratio.
Current Quick Debt to Debt to
Ratio Ratio Equity Total Assets
Current Assets Current Assets - Inv. Total Liabilities Total Liabilities
Current Liabilities Current Liabilities Total Equity Total Assets
Better Brew 23,000 / 21,000 12,000 / 21,000 70,000 / 25,000 70,000 / 95,000
total 1.10 0.57 2.80 0.74
Perfect Blend 47,000 / 38,000 29,000 / 38,000 106,000 / 55,000 106,000 / 161,000
total 1.24 0.76 1.93 0.66
In conclusion, without the extra data and information that would be necessary to make the best financial choice of companies to purchase, I would be more inclined to purchase the Perfect Blend Company based on the financial ratios analyzed above. I think that Perfect Blend has made improvements in the operation that has allowed the company to service more customers and also has the best opportunity for growth.
Cablevision Slims Down to Beef Up Profits
Why did Dolan decide not to reduce customer service staff in the cable operation? Dolan knew that to protect and grow the core cable business that offered multiple opportunities for selling new digital services such as high-speed Internet access and video on demand, the company would have to invest and accelerate the completion of its advanced broadband network. This meant that he knew the basic cable subscribers would not take advantage of the digital service and would not be instrumental in the increase of digital revenues. At the same time, with the new digital services being added and the demand for high speed Internet services, the company would still need its cable customer service at its current staffing while considering increases in the same staff as the subscribers increased.
How did the company's sinking stock price affect its financial management? The company was a public company that relied heavily on the sales of its own stock as a potential source of cash and as the collateral for loans. While losing subscribers with the sinking stock price per share, the company was losing money but at the same time the company needed to invest in new technologies in order to retain existing customers and attract new subscribers. The company's financial projects had shown that the company needed $600 million in 2003 and with the sunken stock prices, the company could not generate the funds for the attractive loans that it would need for its forecasted expenditures. The financial managers had to figure out a way to re-organize the company by focusing on divisions that had the most potential to generate revenues while maintaining the company's core business units.
Why couldn't Cablevision simply borrow $600 million to close the cash flow gap? The company already had $7 billion in debt and relied heavily on the sales of its own stock as a potential source of cash and as the collateral for loans needed to cover budgeted expenses. While losing subscribers with the sinking stock price per share, the company was losing money but at the same time the company needed to invest in new technologies in order to retain existing customers and attract new subscribers. The company's financial projects had shown that the company needed $600 million in 2003 and with the sunken stock prices, the company could not generate the funds for the attractive loans that it would need for its forecasted expenditures.
Visit the investor information section of Cablevision's website, http://www.cablevision.com, and check out the financial news. How has the company performed financially in recent quarters? Starting with the first quarter in 2003, the company had increases in revenue, operating income, and adjusted EBITDA. There were increases in the digital video customers, high speed data customers, and basic video customers. The basic video customers are a significant increase with prior expectations of losing subscribers. The 2nd quarter shows similar increases with the 3rd quarter having restated financial reports due to improper recording in 2002. As for the past six consecutive quarters, there has been substantial growth in the Basic subscriber customers and the company continues to show increases across its business units. In the 3rd quarter of 2004, the company had announced that it was seeking $1.75 billion in financing for its new company, Rainbow Media Enterprises (Cablevision.com, 2005). The company's stock price has dropped from approximately $32 in August to its present $24, but it has remained around the $24 price for the last 3 months due to issuing stock to finance its new business unit (Cablevision.com, 2005).
It is apparent that James Dolan's re-organization strategies have paid off for the firm and within a year the company had started regaining the basic video customers that it had previously lost. The core business that Dolan had counted on growing and keeping the company afloat has, in fact, been its lifesaver. Since the 1st quarter of 2003, the company has continuously had increases in net revenues of most of its core units and affiliates.
Bovée, C. L., Thill, J. V., & Mescon, M. H. (Rev ed.). (2005). Excellence in Business. Upper Saddle River, NJ: Pearson Education, LTD.
Cablevision.com. (2005). Corporate Information. Retrieved December 17, 2005, from http://www.cablevision.com/index.jhtml?pageType=financial_news.