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Executive Summary
Weston learned a lot of business in real world & he bought J.C Cord Company from Edwards.
Weston was handling the major parts of the business like borrowing, hiring & firing people,
building facilities, designing the sales force, compensation system, developing new product line
& expanding the business. Weston bought 95% of the goods in his single hand which was a best
way to keep eye on the business.
In late 2008 Weston had the opportunity to buy Shaw Supply Company (SSC) which was a giant
in St. Paul. The company sold hardware, plumbing & garden supplies to contractors & retail
customers. Weston moved from $5 million to $30 million business overnight. After purchasing
Weston got a lot of benefits from synergy by reducing overhead of J.C Cord, using SSCs larger
facilities & efficiency and using identical retail customer of Cord & Shaw.

We have calculated the equity value, chapter 7 bankruptcy of liquidation, chapter 11 bankruptcy
of restructuring, and sources of new fund to meet up the liability to Mr. Shaw. Our analysis for
each alternative includes simulation, sensitivity and scenario. We have conducted scenario
analysis and put probabilities on each scenery to get the expected equity value. We have taken
decision regarding which alternative to follow based on expected equity value and reliability of
the alternative. We have also considered real option to understand the impact of option value on
project acceptance or reject decision.












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Chapter One
Introduction

Background of the Report

This assignment has been undertaken as a part of our course F-506 (Cases in Financial Decisions
Making) under the MBA program. Our course instructor Professor Dr. M. Sadiqul Islam has
assigned us this task to gain some practical knowledge about practical cases in business world.
This really provides us the opportunity to explore and confront the reality about financial
analysis.

Objective of the Study

The main objective of the study is to fulfill the requirement of our course on Cases in Financial
Decision Making and to apply our theoretical knowledge in solving business cases. The other
objectives behind conducting this study are as follows:
To find the problems faced by Eric Weston to manage the J.C Cord Company & Shaw
Supply Company.
To find the alternatives to fix the problems.
Provide recommendation about best alternatives to solve the problem

Scope of the Study

We have analyzed the case named Eric Weston. We have attempted to identify the problems and
develop some alternatives to fix the problems. Based on our analysis, we have provided our
recommendation for best alternative to follow to fix the problem stated in the case.

Methodology of the Report

All data that are used in this report have been collected from the case of Eric Weston. The
theoretical part of this report has been collected from the case and text provided by our honorable
course teacher.



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Data Analysis

To analyze the project we have used forecasting technique, discounted cash flow
methods.
Cristal Ball Software has been used to complete the simulation.

Limitations of the Study
The limitations of the study are defined by the extensive of the facts covered by the study and
those that left out. However, these limitations can be presented in the following lines:
Learning all functions, moods of business, risk factors, in-depth knowledge of case
analysis were quite tough within specified time framework.
Time constraint.
Lack of experience may act as a constraint.















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Chapter Two
Case Summary
Eric Weston graduated from Twin City College in 1992. He was determined to get job on his
subject. He joined in Edwards Distribution in St. Paul which was a distributor of chemical &
fertilizer to retail outlets. In 1998 Edwards purchased J.C Cord which was a whole seller & a
retailer of lawn & garden products, seeds, fertilizers, outdoor furniture, exporting goods &
lawnmowers. By this time Weston learned a lot of business in real world & he bought J.C Cord
Company from Edwards. Weston was handling the major parts of the business like borrowing,
hiring & firing people, building facilities, designing the sales force, compensation system,
developing new product line & expanding the business. Weston bought 95% of the goods in his
single hand which was a best way to keep eye on the business.
In late 2008 Weston had the opportunity to buy Shaw Supply Company (SSC) which was a giant
in St. Paul. The company sold hardware, plumbing & garden supplies to contractors & retail
customers. Weston moved from $5 million to $30 million business overnight. After purchasing
Weston got a lot of benefits from synergy by reducing overhead of J. C Cord, using SSCs larger
facilities & efficiency and using identical retail customer of Cord & Shaw.
Weston reorganized the SSCs department because Shaw made the company a peculiar one. In
2010 SSC & Cord incurred a loss of $1 million because of difficulty of managing employees,
customers & suppliers of both Cord & SSC. In 2011 although sales increased the problem of
cash flow became a constant one because of economic recession & customers delay payment.
Now Weston is in a condition of economic recession and is unable to pay debt. He had to think
of bankruptcy or waiting for better economic condition.





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Chapter Three
Analysis of the economy

PESTEL Analysis
PESTEL is an acronym that stands for-Political, Economic, Social, Technological,
Environmental and Legal. It is used by many international consultancies to describe an analysis
that is used for determining the opportunities and risks of global expansion. Sometimes it is
described as a PEST or PESTLE analysis.
Political, Economic, Social, Technological, Environmental and Legal issues often differ
domestically and even more so internationally. As a company looks to leverage the advantages
that the democratization of technology, information and finance, and grow beyond the national
borders that previously confined them, it is imperative that they consider a PESTEL analysis to
accompany their SWOT analysis. The PESTEL analysis provides a strong framework used by
global and multinational corporations to set the stage to develop specific tactics to mitigate the
risks involved in executing their vision in unfamiliar environments.
Political factors
1. Tax rate: In case of Weston the government can decrease the tax rate on profit anytime
by a way of giving motivation to the company. So, it is one of the most important
political factors.
2. Regulation & de-regulation trends: The imposition of any new law or modification of
existing law can have an important influence on Weston.
3. Environmental & consumer protection law: The business of garden is very congenial
to the environment so it ensures environmental safety.
.
Economic Factors
The major economic factors that may affect Weston are:
1. Economic growth: The business of gardening is directly related to the economic growth
of a country. It can affect the business directly.
2. Living standard of people: The living standard of the people is also related with the
garden business. If the living standard increases the demand of garden products will also
be increased & vice versa.
3. Maintenance cost: Weston should focus on the monitoring & maintenance cost & should
find a way to reduce the maintenance cost of the garden business.
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Socio- cultural factors
The major socio-cultural factors that may affect Weston are:
1. Number of consumer: Consumers are the people who will use the product ultimately. If
the number of consumer increases then a project can capture a huge market. In case of
Weston the number of consumers is huge so, Weston can capture a huge market on the
basis of number of consumer.
2. Public opinion, social taboos, social attitude: Public opinion, social taboos, social
attitude may vary from people to people, society to society, or from country to country.
So, Weston should focus on the public opinion, social taboos, and social attitude of
America.
3. Lifestyle of consumers: Weston should also focus on the life style of consumers who
will use the product ultimately.
4. Potential customers identification: Weston should identify the potential customer from
different areas of America.
5. Demand & supply: Strong supply chain is also another vital factor for Weston. The
demand & supply of garden business should be met up by Weston properly if it (Weston)
wants to survive in the garden industry.
Technological Factors
The major technological factors that may affect Weston are:
1. Security of data: Weston must have high security on the customer database to retain
their customer to his company.
2. Communication: To communicate with consumers Weston should use the different
methods of communication. For example it can use internet to communicate with remote
customers.

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Chapter Four
Industry Analysis

Nursery, Garden Center & Farm Supply Stores This industry comprises establishments primarily
engaged in retailing nursery and garden products, such as trees, shrubs, plants, seeds, bulbs, and
sod, that are predominantly grown elsewhere. These establishments may sell a limited amount of
a product they grow themselves. Retail nursery and garden supply stores have been in existence
since the nineteenth century, but only in the decades following World War II did this segment of
the retail economy flourish into a profitable business.
Threats of new entrants: HIGH
Required lower capital investment
Less restriction to enter into market from the government
General business model and relationship with the supplier


Intensity of rivalry
among firm
HIGH
Threats of new
entrance
HIGH
Bargaining power
of suppliers
HIGH
Threats of
substitutes
LOW
Bargaining power
of Buyers
HIGH
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Rivalry among existing firms: HIGH
There are large number of suppliers of garden products
Severe economic and competitive pressure
Growing industry
Threat of substitute products: LOW
There is no close substitute products
General service
Bargaining power of buyers: HIGH
In garden industry there is more chance to bargain
Low Brand value and loyalty
Low switching cost
Bargaining power of suppliers: HIGH
Availability lower number of suppliers in the market
Lower scope for forward integration
High switching cost


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Chapter Five
Company Analysis


SWOT Analysis
Strengths
Monitoring: The whole activities of the company are monitored by Eric
Weston only.
Financial strength: The company has become financially strong after merging
with Shaw Supply company (SSC).
Purchasing Major portion of goods: By purchasing 95% of goods in single hand
Weston can easily control over the company.
Weakness
Mismanagement of A/R: The average collection period from account
receivable is 45 to 55 days but the average payment period to account
payable is lower than average collection period.
Working capital: In the company there is a huge lack/ shortage of working
capital which is a very vital element for running day to day operation.
Economic volatility: As the company is directly related with the economic condition so
if the economy falls in a recession the company may face great difficulty.

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Opportunities
Economies of scale: After being consolidated the company is enable to reduce the
average cost of per unit of product.
Sales growth: As the company is directly related with the economic condition & the
recent economy is going towards boom so there is a huge probability of increasing sales.
Threats
Secured loan portion: This Company has a large amount of secured loan that means in
case of liquidation the secured loan holder will get the first priority of claim payment.
Economic recession: As the company is directly related with the economic condition &
long time economic recession can cause a great hamper to the company.
Competitors: There is a huge competition in the existing industry.


Ratio Analysis
Liquidity Ratio

Current ratio of J.C Cord Company shows a mixed trend from 2007 to 2010 basically the ratio
was fallen in 2010 more than the other years. On the other hand this ratio of Shaw Supply
Company (SSC) is much better than J.C Cord Company.
Quick ratio of J.C Cord Company shows a slightly increasing trend from 2007 to 2010 basically
the ratio was increased to some extent in 2009. And it was fallen sharply in 2010. On the other
hand this ratio of Shaw Supply Company (SSC) is much better than J.C Cord Company.
Cash ratio of J.C Cord Company shows a mixed trend from 2007 to 2010 basically the ratio was
fallen in 2009 to some extent. On the other hand this ratio of Shaw Supply Company (SSC) is
much better than J.C Cord Company. It showed an increasing trend from 2008 to 2010.

2007 2008 2009 2010 2008 2009 2010
Liquidity Ratio
Current Ratio 1.16 1.17 1.26 0.68 1.54 1.09 1.12
Quick Ratio 0.49 0.49 0.50 0.27 0.56 0.46 0.52
Cash Ratio 0.05 0.03 0.04 0.01 0.07 0.03 0.32
J.C Cord Company Shaw Supply Company
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Activity (Efficiency) Ratio

0.00
0.50
1.00
1.50
2007 2008 2009 2010
Liquidity Ratio
J.C Cord Company
Current Ratio Quick Ratio Cash Ratio
0.00
0.50
1.00
1.50
2.00
2008 2009 2010
Liquidity Ratio
Shaw Supply Company
Current Ratio Quick Ratio Cash Ratio Current Ratio Quick Ratio Cash Ratio
Activity Ratio 2007 2008 2009 2010 2008 2009 2010
Receivable Turnover 9.46 10.22 12.64 11.11 10.95 13.29 15.37
Average Collection Period 38.59 35.70 28.89 32.86 33.33 27.46 23.74
Total Asset Turnover 2.62 3.08 3.46 2.20 2.04 2.55 3.90
Fixed Asset Turnover 12.18 4.65 15.21 4.93 5.73 6.63 42.82
Equity Turnover 21.80 20.03 16.00 -45.13 5.38 14.37 -157.13
Inventory Turnover 4.05 4.70 4.79 3.88 3.72 5.85 6.06
Average Inventory Turnover Period 90.07 77.72 76.17 94.02 98.24 62.36 60.28
J.C Cord Company Shaw Supply Company
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In case of J.C Cord Company the receivable turnover showed a slightly increasing trend but in
2010 it was fallen to some extent. In case of SSC this ratio showed a increasing trend.
From the ACP (Average Collection Period) we see that the ACP in case of SSC is much better
than J.C Cord Company.
In case of J.C Cord Company total asset turnover ratio shows that the effectiveness of
management of total asset is slightly lower than SSC.
-100.00
-50.00
0.00
50.00
100.00
150.00
Receivable
Turnover
Average
Collection
Period
Total Asset
Turnover
Fixed Asset
Turnover
Equity
Turnover
Inventory
Turnover
Average
Inventory
Turnover
Period
Activity Ratio
J.C Cord Company
2007 2008 2009 2010
-200.00
-150.00
-100.00
-50.00
0.00
50.00
100.00
150.00
Receivable
Turnover
Average
Collection
Period
Total Asset
Turnover
Fixed Asset
Turnover
Equity
Turnover
Inventory
Turnover
Average
Inventory
Turnover
Period
Activity Ratio
Shaw Supply Company
2008 2009 2010
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In case of J.C Cord Company fixed asset turnover ratio shows that the effectiveness of
management of total asset is slightly lower than SSC.
Equity turnover ratio of both companies is not so good because in 2010 this ratio for both of this
company is negative but in case of SSC the extent is more than that of J.C Cord Company.
Inventory turnover ratio of J.C Cord Company shows a mixed trend from 2007 to 2010 basically
the ratio was fallen in 2010 more than the other years. On the other hand this ratio of Shaw
Supply Company (SSC) is not much better than J.C Cord Company.
Inventory turnover period of J.C Cord Company was not so good but in case of SSC this ratio
shows a decreasing trend that means the inventory in case of SSC is sold more quickly than J.C
Cord Company.
Profitability Ratio


Profitability Ratio 2007 2008 2009 2010 2008 2009 2010
Gross Profit margin 0.32 0.33 0.34 0.32 0.28 0.24 0.27
Times Interest Earned(TIE) 1.14 0.78 0.87 -0.71 -0.44 0.00 -1.60
Operating profit Margin 0.02 0.02 0.02 -0.03 -0.08 -0.01 -0.06
Net Profit Margin 0.02 0.01 0.01 -0.06 -0.03 0.00 -0.07
Financial Leverage 8.31 6.50 4.63 -20.52 2.63 5.63 -40.27
DuPont Ratio 0.36 0.24 0.23 2.72 -0.01 -0.99 4.07
Return on Equity 0.36 0.24 0.23 2.72 -0.01 -0.99 4.07
J.C Cord Company Shaw Supply Company
-30.00
-20.00
-10.00
0.00
10.00
Gross Profit
margin
Times Interest
Earned(TIE)
Operating profit
Margin
Net Profit
Margin
Financial
Leverage
DuPont Ratio Return on
Equity
Profitability Ratio
J.C Cord Company
2007 2008 2009 2010
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Gross profit margin ratio of J.C Cord Company is much better than SSC because in case of J.C
Cord Company this ratio is greater than SSC gross profit margin ratio.
In case of J.C Cord Company TIE was good in 2007 but after this TIE was fallen below 1 & in
2010 it was negative that means this ratio shows that the interest payment through EBIT is
decreasing day by day. IN case of SSC the situation is worse.
Net profit margin ratio of J.C Cord Company is much better than SSC but this betterment us not
so good.
Financial leverage ratio in case of both this company shows a negative trend which has shown a
bad signal to the both of this company.
The breakdown of return on equity through Du Pont ratio in case of J.C Cord Company is much
better than SSC from year 2007 to 2009. But in 2010 this ratio of SSC shows a better result than
J.C Cord Company.
Return on equity (ROE) ratio in case of J.C Cord Company is much better than SSC from year
2007 to 2009. But in 2010 this ratio of SSC shows a better result than J.C Cord Company.


-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
Gross Profit
margin
Times Interest
Earned(TIE)
Operating profit
Margin
Net Profit
Margin
Financial
Leverage
DuPont Ratio Return on
Equity
Profitability Ratio
Shaw Supply Company
2008 2009 2010
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Bankruptcy Probability


Possibility of Default Grey Zone Safe Zone
Z <1.81 1.81<Z <3 Z>3



2007 2008 2009 2010
J.C Cord Company 3.34 4.08 5.08 1.45
Shaw Supply Company 3.79 3.30 5.10
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2007 2008 2009 2010
Altman Z score
J.C Cord Company
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2008 2009 2010
Altman Z score
Shaw Supply Company
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We use the Altman Z Score model to determine the possibility of bankruptcy in case of both
companies. It shows that from 2007 to 2009 the J.C Cord Company was safe from being
bankrupt because in these years the result is more than 1.81 but in 2010 the Z value of J.C Cord
Company was fallen below 1.81 that means this company has a possibility of being bankrupt in
future. In case of SSC the probability of being bankruptcy is zero because from 2008 to 2010 all
Z values of SSC are greater than 1.81 which is considered as a safe zone.
Business Risk Analysis


2007 2008 2009 2010 2011 Mean ST DEV CV
Sales 3,139.0 4,186.0 4,579.0 4,486.0 3605.00 3999.00 613.06 0.15
% Change 33.35% 9.39% -2.03% -19.64%
Gross profit 1,006.0 1,373.0 1,574.0 1,426.0 1147.00 1305.20 226.93 0.17
% Change 36.48% 14.64% -9.40% -19.57%
Net Profit 74.0 71.0 96.0 (386.0) -306.00 -90.20 235.42 -2.61
% Change -4.05% 35.21% -502.08% -20.73%
DOL 1.09 1.56 4.63 1.00
DFL -0.11 2.41 53.40 1.06
DCL -0.12 3.75 50.65 1.06
Business Risk (J.C Cord company)
-20.00
0.00
20.00
40.00
60.00
2008 2009 2010 2011
Business Risk
(J.C Cord company)
DOL DFL DCL
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2006 2007 2008 2009 2010 2011 Mean ST DEV CV
Sales 19,214.0 19,829.0 24,245.0 23,834.0 15,650.0 15,593.0 19727.50 3562.03 0.18
% Change 3.20% 22.27% -1.70% -34.34% -0.36%
Gross profit 5,196.0 4,846.0 6,711.0 5,738.0 4,252.0 4270.00 5168.83 933.57 0.18
% Change -6.74% 38.49% -14.50% -25.90% 0.42%
Net Profit 101.0 (887.0) (75.0) (2,338.0) (579.0) -745.00 -753.83 968.17 -1.28
% Change -978.22% -91.54% 3017.33% -75.24% 28.67%
DOL -2.10 1.73 8.55 0.75 -1.16
DFL 45.32 -2.38 -208.11 2.91 67.73
DCL -95.37 -4.11 -201.23 2.19 -78.72
Business Risk (Shaw Supply company)
-300.00
-200.00
-100.00
0.00
100.00
2007 2008 2009 2010 2011
Business Risk
(Shaw Supply company)
DOL DFL DCL
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Chapter Six
Problem Statement & Alternatives

Problem Statement
It was late Friday, January 27, 2012, Eric Weston snapped his briefcase closed and thought about
the weekend of work that lay ahead for him. He had some very difficult decisions to make about
the future of his business. His company had been teetering on the brink of the bankruptcy for
several months.
Weston knew that the immediate prospects for the business were not bright; the economy was
still poor. Weston kept coming back to the dilemma. If the economy turned up in time, the
business could be saved. If it did not, he would end up owing his suppliers a great deal of money.
Was it fair to take that risk?

Available Alternatives
To start the project $ 136000 million fund is necessary.
Following four alternatives are available to finance the rest of the funds:
1. Liquidation: Chapter 7 Bankruptcy
2. Chapter 11 Bankruptcy: Restructuring
a) Sale of Business units
b) Sale of Assets
c) Equity Issue
d) Debt Issue


Alternatives
Chapter 11:
Restucturing
Sell off business unit
Shaw Supply
Company (SSC)
Sale of Assets Equity Issue
Debt Issue
Liquidition
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Chapter Seven
Analysis of Alternatives

Valuation of Base Case
J.C Cord Company
Our basic assumptions for doing the valuation of the company are:
Sales growth for the first 5 years (from 2012 to 2016) is -5% & the reason behind this
assumption is that this company is in a risky position now that means it is not enable to pay its
fixed debt obligation. And the sales growth for the next 5 years (from 2017 to 2021) is 7.50% &
the reason behind that this company will be able to pay its fixed debt obligation & also will be
able to earn more revenue in future.
Assumptions

Terminal growth rate is assumed by us 3% & the reason behind this we basically focus on
restructuring rather than liquidation in case of this company. And by using the best alternative
we think this company will be able to raise sufficient capital & can also be able to invest the
capital appropriately.
Cost of goods sold (COGS), Operating expenses (OPEX), Depreciation is assumed 65% of sales,
25% of sales & 2% of sales respectively.
Assuptions
-5.0% next 5 years from 2012 to 2016
7.50% from 2017 to 2021
Terminal Growth rate 3.00%
Cost of goods sold 65% % of sales
Operating Expenses 25% % of sales
Depreciation 2% % of sales
Tax Rate 30% % of sales
Capex (2012 to 2016) 5.0% % of sales
Capex (2017 to 2021) 2.0% % of sales
NWC 10% % of sales
WACC 10.40%
Bankruptcy Cost 25% % of Firm Value
Probability of Distrees 75%
Sales Growth
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Tax rate is assumed 30% & the reason behind that the corporate tax rate in case of garden
business in America is about equal to this percentage.
Capital Expenditure (CAPEX) for the first 5 years (from 2012 to 2016) is assumed about 5% of
sales & the CAPEX for the next 5 years (from 2017 to 2021) is assumed 2% of sales and the
reason behind this we know that in case of this company initially huge capital is needed to repay
its debt obligation & to run its business properly but in later only the capital that will be needed
is to run the business properly.
Net working capital (NWC) is assumed 10% of sales & the reason behind this company need
most of its capital to operate its day to day business activities.
Bankruptcy cost is assumed 25% of the firm value & the probability of being bankrupt are
assumed 75% because this company has the highest probability of being bankrupt in future.
WACC Calculation
At first we have calculated the cost of equity by using the CAPM (Capital Asset Pricing model)
& the assumptions that have been taken by us that are risk free rate is 5%, equity beta is 1.65,
and market return is 11%. So, the cost of equity that we get is 14.90%. The interest rate on notes
payable is 12% as this company will get tax exemption on cost of debt so the after tax cost of
debt is 8.40%. And the weights of equity & debt are 30.77% & 69.23% that have been calculated
as proportion of the total capital to equity capital & debt capital. At last we get our desired result
that is weighted average cost of capital by multiplying the cost with the respective weight of the
cost & the WACC is 10.40% which is used to determine the firm value.

Sources of Capital Amount Weight Cost of capital Weighted Cost
Equity 96000 30.77% 14.90% 4.58%
Debt 216000 69.23% 8.40% 5.82%
Total 312000 WACC 10.40%
Interest rate on debt 12%
Tax Rate 30%
Cost of Debt 8.40%
Risk Free rate(Rf) 5%
Market Return 11%
Beta 1.65
Cost of Equity 14.90%
J.C Cord Company
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Output of base valuation:

By using the free cash flow to firm (FCF) method we get the firm value which is 1536.09
thousands. By deducting debt & financial distress cost we get the equity value of the firm which
is 936.07 thousands.
Simulation Graph

Coefficient of variability is 162%%. It is more than 50%. So this implies that the company is
risky.


Enterprize Value(000) 1536.09
Debt 312
Distress Cost 288.02
Equity Value 936.07
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Sensitivity chart
Sensitivity chart is a graphical presentation about the various factors that affect the equity value.

From the above graph, we can see that cost of goods sold has the greatest -86.8% control over
equity value calculation.

Shaw Supply Company
Our basic assumptions for doing the valuation of the company are:
Sales growth for the first 5 years (from 2012 to 2016) is -5% & the reason behind this
assumption is that this company is in a risky position now that means it is not enable to pay its
fixed debt obligation. And the sales growth for the next 5 years (from 2017 to 2021) is 5% & the
reason behind that this company will be able to pay its fixed debt obligation & also will be able
to earn more revenue in future.
Terminal growth rate is assumed by us 3% & the reason behind this we basically focus on
restructuring rather than liquidation in case of this company. And by using the best alternative
we think this company will be able to raise sufficient capital & can also be able to invest the
capital appropriately.
Cost of goods sold (COGS), Operating expenses (OPEX), Depreciation is assumed 70% of sales,
25% of sales & 2% of sales respectively.
Tax rate is assumed 30% & the reason behind that the corporate tax rate in case of garden
business in America is about equal to this percentage.
Capital Expenditure (CAPEX) for the first 5 years (from 2012 to 2016) is assumed about 5% of
sales & the CAPEX for the next 5 years (from 2017 to 2021) is assumed 2% of sales and the
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reason behind this we know that in case of this company initially huge capital is needed to repay
its debt obligation & to run its business properly but in later only the capital that will be needed
is to run the business properly.
Net working capital (NWC) is assumed 10% of sales & the reason behind this company need
most of its capital to operate its day to day business activities.
Bankruptcy cost is assumed 25% of the firm value & the probability of being bankrupt are
assumed 70% because this company has the highest probability of being bankrupt in future.
Assumptions


WACC Calculation
At first we have calculated the cost of equity by using the CAPM (Capital Asset Pricing model)
& the assumptions that have been taken by us that are risk free rate is 5%, equity beta is 1.55,
and market return is 11%. So, the cost of equity that we get is 14.30%. The interest rate on notes
payable is 12% as this company will get tax exemption on cost of debt so the after tax cost of
debt is 8.40%. And the weights of equity & debt are 33.33% & 66.67% that have been calculated
as proportion of the total capital to equity capital & debt capital. At last we get our desired result
that is weighted average cost of capital by multiplying the cost with the respective weight of the
cost & the WACC is 10.37% which is used to determine the firm value.
Assuptions
-5.0% next 5 years from 2012 to 2016
5.00% from 2017 to 2021
Terminal Growth rate 3.00%
Cost of goods sold 70% % of sales
Operating Expenses 25% % of sales
Depreciation 2% % of sales
Tax Rate 30% % of sales
Capex (2012 to 2016) 5.0% % of sales
Capex (2017 to 2021) 2.0% % of sales
NWC 10% % of sales
WACC 10.37%
Bankruptcy Cost 25% % of Firm Value
Probability of Distrees 70%
Shaw Supply Company
Sales Growth
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Outcome of Valuation
By using the free cash flow to firm (FCF) method we get the firm value which is 1198.29
thousands. By deducting debt & financial distress cost we get the equity value of the firm which
is 28.59 thousands. The equity value of SSC is lower than J.C Cord Company because SSC has
more debt outstanding than J.C Cord Company.

Sources of Capital Amount Weight Cost of capital Weighted Cost
Equity 480000 33.33% 14.30% 4.77%
Debt 960000 66.67% 8.40% 5.60%
Total 1440000 WACC 10.37%
Interest rate on debt 12%
Tax Rate 30%
Cost of Debt 8.40%
Risk Free rate(Rf) 5%
Market Return 11%
Beta 1.55
Cost of Equity 14.30%
Shaw Supply Company
25 | P age


Simulation Graph

Coefficient of variability is -100%. It is more than 50%. So this implies that the company is
risky.

Sensitivity chart
Sensitivity chart is a graphical presentation about the various factors that affect the equity value.

From the above graph, we can see that cost of goods sold has the greatest -86.8% control over
equity value calculation.

26 | P age


Real Option Valuation (Production of seed & fertilizers)
From our assumptions and information provided in the case, we have found following four real
option of producing seed & fertilizers.
We calculate the value of the real option by using the Black-Scholes-Merton Model.
Reasons:
a) Gardening is a hobby, when consumers have low income they do not like it and do not
spend money for it.
b) Economy is now in down turn, and it will recover few years later, so there is a probability
of increased demand of garden stores products.
c) Formits supplying experience, it can now produce those products.
d)
The inputs used in a real value option are decorated below-

The stock price along with the strike price of the options are calculated and the value of option is
calculated based on d1 and d2.

Initial Investment for new product development 1200000
Expand started by 2015
WACC 10.40%
Time until the option expires (t) 10
Best 30%
Base 40%
Worst 30%
Probability
Probability Adjusted NPV ProbabilityReturn
211707.28 25% 70.57%
214755.89 40% 44.74%
43183.75 35% 10.28%
469646.93 39.137%
Standrad Deviation 0.2028
Variance 0.0411
Standrad Deviation 0.203
Variance 0.041
27 | P age


And the value of the option-

Value of the natural resource option $ 53,533.90




Rf 5.00%
t 10
X/K 1200000
0.203
Var 0.041
S 469646.93
d1 -0.362686
d2 -1.003859
0.606531
N(d1) 0.36
N(d2) 0.158
V 53533.90

28 | P age

Alternative 1: Not to continue the operation: Liquidation- Chapter 7
It was mentioned in the case that Weston was facing the possibility that bankruptcy was his only
viable option. The main problem created when he purchased a bigger company than his
company, Shaw Supply Company, when he had not enough money to do so.
Assumptions:

J.C Cord Company Liquidation Value

Best Base Worst
Cash 100% 100% 100%
Accounts Receivables 70% 60% 50%
Inventories 70% 60% 50%
Other Current Assets 50% 40% 30%
Other assets 50% 40% 30%
Net Fixed Assets 80% 70% 60%
Cord investment in Shaw 0% 0% 0%
Cord note to SSC 0% 0% 0%
Loans to stockholders 0% 0% 0%
Transaction cost 10%
Legal fees 5%
Item
Recovery of assets (% of book value)
Item Best Base Worst
Cash 2491.00 2491.00 2491.00
Accounts Receivable (net) 157592.4 135079.2 112566
Inventories 439842.2 377007.6 314173
Other Current assets 0 0 0
Other assets 23156.5 18525.2 13893.9
Net Fixed Assets 105394.4 92220.1 79045.8
Cord investment in Shaw 0 0 0
Cord note to SSC 0 0 0
Loans to stockholders 0 0 0
728476.50 625323.10 522169.70
29 | P age





Scenario value weight
Weighted
value
Best 728,476.50 0.25 182,119.13
Base 625,323.10 0.50 312,661.55
worst 522,169.70 0.25 130,542.43
625,323.10
62,532.31
31,266.16
531,524.64
Average liquidation value
Less: Transaction cost
Less: Legal fees
Liquidation value
Classification of Claim Amount Security
Pre-secured claim
Accured expenses 75182
Taxes Payable 135694
210876
Fully Secured Creditors Book Value of security Fair Value of security
Short-term notes to bank 528318
Long term debt (current Portion) 5040
533358
Unsecured Creditors
Accounts Payable 528318
Short -term notes ( to Cord) 420000
Loan from stockholders 132000
Loan from Lillian Weston 84000
1164318
Building &
Inventories
760089 469227.7
Liquidation value 531,524.64
less: pre-secured claim 210876
320,648.64
Less: secured creditors 533,358.00
(212,709.37)
Payment to claim
30 | P age

Shaw Supply Company Liquidation Value



Item Best Base Worst
Cash 31003.00 31003.00 31003.00
Accounts Receivable (net) 773144.4 662695.2 552246
Inventories 1194520.6 1023874.8 853229
Other Current assets 70715 56572 42429
Other assets 38893 31114.4 23335.8
Net Fixed Assets 335137.6 293245.4 251353.2
2443413.60 2098504.80 1753596.00
J.C Cord Company Liquidation Value
Scenario value weight
Weighted
value
Best 2,443,413.60 0.25 610,853.40
Base 2,098,504.80 0.50 1,049,252.40
worst 1,753,596.00 0.25 438,399.00
2,098,505
209,850
104,925
1,783,729
Average liquidation value
Less: Transaction cost
Less: Legal fees
Liquidation value
J.C Cord Company 531,524.64
Shaw Supply Company 1,783,729.08
Liquidation value 2,315,253.72
Classification of Claim Amount Security
Pre-secured claim
Accured expenses 182981
Taxes Payable 38727
221708
Fully Secured Creditors Book Value of security Fair Value of security
Short-term notes to bank 1923979Building 418922 293245.4
Long-term notes (to Mr. Shaw) 960000Inventories 1706458 1023874.8
2883979 2125380 1317120.2
Unsecured Creditors
Accounts Payable 1707304
1707304
Total Liquidation value
31 | P age



Liquidation value 1,783,729.08
less: pre-secured claim 221708
1,562,021.08
Less: secured creditors 2,883,979.00
(1,321,957.92)
Payment to claim
32 | P age

Alternative 2: Continue the operation with restructuring- Chapter 11
Bankruptcy
Weston has the following Restructuring options under chapter 11 bankruptcy recovery:
Alternative-2a: Sale of Business units-Shaw Supply Company
Alternative-2b: Sale of Assets
Alternative-2c: Equity Issue
Alternative-2d: Debt Issue


Alternative 2a: Sale of Business units- Shaw Supply Company (SSC)
As the Shaw Supply Company has greater debt and its sell is not satisfactory.


Additional fund needed to fulfill the claims to creditors under the alternative is
negative and US$ 47484.16.
Total Asset except cash 3927348.00
Scenario
Sell price (% of
Assets value)
Sale Amount
Best 90% 3534613.20
Base 80% 3141878.40
worst 70% 2749143.60
Transaction cost 3%
Legal fees 3%
Sell of Shaw Supply Company
Scenario value weight Weighted value
Best 3,534,613.20 40% 1,413,845.28
Base 3,141,878.40 40% 1,256,751.36
worst 2,749,143.60 20% 549,828.72
Amount by selling SSC 3220425.36
Add: Cash 31003.00
Less: Transaction cost 96612.76
Less: Legal fees 96612.76
Net amount 3058202.84
Less: Payment
to Liability
3105687.00
Amount Needed -47484.16
33 | P age


Assumptions

Output




Assuptions
Sales Growth(12-16) 2.0% from 2012 to 2016
Sales Growth(17-21) 10.00% from 2017 to 2021
Terminal Growth rate 5.00%
Cost of goods sold 65% % of sales
Operating Expenses 25% % of sales
Depreciation
2% % of sales
Tax Rate 30% % of sales
Capex (2012 to 2016) 5.0% % of sales
Capex (2017 to 2021) 2.0% % of sales
NWC 10% % of sales
WACC 10.40%
Bankruptcy Cost 25% % of Firm Value
Probability of Distrees 75%
J.C Cord Company
Enterprize Value(000) 2697.54
Debt 312
Distress Cost 505.79
Equity Value(000) 1879.75
Source of capital Amount Source of capital Amount
Equity 96000Equity 96000
Debt 216000Debt 216000
New Debt 50000.00
Before After
34 | P age

Simulation output:


Coefficient of variability is less than 0.50 which indicates that this alternative is less risky.



Cost of goods sold is most positively sensitive to Equity Value by -84.5%.







35 | P age

Alternative 2b: Sale of Assets
Eric Weston needs minimum US$ 250,000 to pay Mr. Shaw for his 12 year notes to avoid
bankruptcy, so he can sale some of his business assets to continue the operations.


Total Equity value is US$ 784,720.


Assuptions
Sales Growth(12-16) -7.0% from 2012 to 2016
Sales Growth(17-21) 4.00% from 2017 to 2021
Terminal Growth rate 2.50%
Cost of goods sold 68% % of sales
Operating Expenses 25% % of sales
Depreciation 2% % of sales
Tax Rate 30% % of sales
Capex (2012 to 2016) 5.0% % of sales
Capex (2017 to 2021) 2.0% % of sales
NWC 10% % of sales
WACC 10.40%
Bankruptcy Cost 25% % of Firm Value
Probability of Distrees 75%
J.C Cord Company
Assuptions
Sales Growth(12-16) -10.0% from 2012 to 2016
Sales Growth(17-21) 5.00% from 2017 to 2021
Terminal Growth rate 3.00%
Cost of goods sold 70% %of sales
Operating Expenses 25% %of sales
Depreciation 5% %of sales
Tax Rate 30% %of sales
Capex (2012 to 2016) 5.0% %of sales
Capex (2017 to 2021) 2.0% %of sales
NWC 10% %of sales
WACC 10.37%
Bankruptcy Cost 25% % of Firm Value
Probability of Distrees 70%
Shaw Supply Company
Assumptions
Sale price of Fixed assets 80% of Book value
Amount needed 250000
Net Fixed Assets Amount US$
J. C Cord Company 131743
Shaw Supply Company (SSC) 418922
Total Net Fixed Assets 550665
Sale of Fixed asset 312500
Total Net Fixed assets 238165
Before
After
J.C Cord Company 172.53
Shaw Supply Company 612.19
Total Equity Value 784.72
Equity Value
36 | P age

Simulation

Coefficient of variability is less than 0.50 and this is less risky.






37 | P age

Alternative 2c: Equity Issue
As Eric Weston has few months in hand, he can issue equity to repay Mr. Shaw fully of his US$
960,000. Then the operation of the company will be combined and a company created in the
name of J. C. Cord Company and the existence of Shaw Supply Company (SSC) will be
abolished.
Assumptions



Output:


Sources of Capital Amount Weight Cost of capital Weighted Cost
Equity 1856000 89.6% 14.90% 13.35%
Debt 216000 10.4% 12.00% 1.25%
Total 2072000 WACC 14.60%
Fund needed 960000
Discount Rate 25%
Face Value of
New Equity
1280000
Assuptions
Sales Growth(12-16) -5.0% from 2012 to 2016
Sales Growth(17-21) 7.50% from 2017 to 2021
Terminal Growth rate 3.00%
Cost of goods sold 65% % of sales
Operating Expenses 25% % of sales
Depreciation 2% % of sales
Tax Rate 30% % of sales
Capex (2012 to 2016)
5.0% % of sales
Capex (2017 to 2021) 2.0% % of sales
NWC 10% % of sales
WACC 14.60%
Bankruptcy Cost 25% % of Firm Value
Probability of Distrees 10%
Enterprize Value(000) 6045.47
Debt 312
Distress Cost 151.14
Equity Value 5582.33
38 | P age

Simulation:

The coefficient of variability is more than 0.50 that indicates that the alternative is risky.

Cost of goods sold is more sensitive to the equity value.


39 | P age

Alternative 2d: Debt Issue
As Eric Weston has few months in hand, he can issue equity to repay Mr. Shaw fully of his US$
960,000. Then the operation of the company will be combined and a company created in the
name of J. C. Cord Company and the existence of Shaw Supply Company (SSC) will be
abolished. Although it will be costly to issue debt, as the economic condition is not favorable for
this industry. Investors will not be willing to purchase debt of this company. High discount on
issue will increase the cost of capital.
Assumptions


Sources of Capital Amount Weight Cost of capital Weighted Cost
Equity 576000 32.9% 14.90% 4.90%
Debt 1176000 67.1% 17.00% 11.41%
Total 1752000 WACC 16.31%
Assuptions
Sales Growth(12-16) -5.0% from 2012 to 2016
Sales Growth(17-21) 7.50% from 2017 to 2021
Terminal Growth rate 3.00%
Cost of goods sold 70% % of sales
Operating Expenses 25% % of sales
Depreciation 2% % of sales
Tax Rate 30% % of sales
Capex (2012 to 2016) 5.0% % of sales
Capex (2017 to 2021) 2.0% % of sales
NWC 10% % of sales
WACC 16.31%
Bankruptcy Cost 25% % of Firm Value
Probability of Distrees 10%
40 | P age


This alternative will produce positive equity value of US$ 1018,680.
Simulation

From the forecast chart of equity value, we see that coefficient of variability is more than
benchmark of 0.50 thats why the alternative is more risk.

Sensitivity information shows that cost of goods sold is more sensitive to project equity value.

Enterprize Value(000) 1364.80
Debt 312
Distress Cost 34.12
Equity Value 1018.68
41 | P age

Comparison

After adjusting the real option value to the all alternative, among six alternatives we see that one
alternative produces negative equity value. Other alternatives produce positive equity value.



Alternatives Actions Equity Value
Real Option
Value
Real Option value
Adjusted equity value
1 Liquidition -1534.67 53.53 -1481.13
2a Sale of SSC 1399.75 53.53 1453.29
2b Sale of assets 784.72 53.53 838.26
2c Issue equity 1205.94 53.53 1259.48
2d Issue Debt 1018.65 53.53 1072.18
42 | P age

Chapter Eight
Recommendation & Conclusion

Based on our analysis, we recommend the Eric Weston to sale of SSC and not to liquidate the
whole operation.
By selling Shaw Supply Company, Eric Weston can repay the liability to Mr. Shaw of US$
960,000. And he needs to borrow extra US$ 50000 to repay the whole amount of US$ 960,000.
Another problem will solved by this alternative which is running two separate business units for
same type of products. And he can concentrate to narrow segment of the business.

Eric Weston have to concentrate others operational aspects too.
a) Inventory Management: Inventory mismanagement is one of the pitfall of the company.
So Eric Weston should concentrate to the Inventory Management process.
b) Recovery of Accounts Receivable: Performance of the recovery of account receivable is
not satisfactory. It should concentrate to this.
c) Sales Tax: Sales tax should be managed properly as it required more working capital.
d) Narrow Business Segmentations: Eric Weston should concentrate to the narrow
segment of the garden store industry.


















43 | P age

References


Corporate Finance (7th Edition) Ross, Westerfield, J affee
Fundamentals of Corporate Finance (8th Edition)Ross, Westerfield, J ordan
Investment Valuation (2nd Edition), Aswath Damodaran
Mergers, Acquisitions, and Corporate Restructuring, 2nd Edition, Patrick A. Gaughan