Alac International Harvard Case Solution & Analysis

How profitable is the DINP opportunity for ALAC?

In exhibit 1 calculation has been done, which depicts the complete understanding about the change in profitability due to DINP opportunity. In Exhibit 1, the income statements of the financial year 2009 is compared with the projected income statement of financial year 2010.

The reason for comparing income statements of financial year 2009 with the projected income statement of financial year 2010 is that the company had seriously focused on the sales of DINP in the financial year 2010. Therefore, it can be assumed that any major changes in the income statement of 2010 as compared to the income statement of 2010 might be because of the DINP project.

The calculation shows that the DINP has resulted positively on the portfolio of the company. It has allowed the company to enhance its sales by 146%. In 2010, the Gross Profit and the profit before tax has been increased by 332% and 905% respectively, as compared to the financial year 2009.

Moreover, in the financial year 2009, the gross profit margin and the profit before tax margin were 9.6% and 2.18% respectively. On the other hand, in 2010, the gross profit margin and the profit before tax margin are 16.88% and 8.91% respectively. This also shows that the DINP project has a very significant positive effect on the profitability and effectiveness of the operations of the company.

Thus, by analyzing the financial information of 2009 and 2010, it is proved that the DINP project is very profitable in the interest of the company.

How much working capital does ALAC need?

In exhibit 2, a complete calculation is done in which it is shown that the estimated working capital that would be needed to fund 6 shipments of 2000 metric tons annually is $27,000,000. The current Working Capital that the company is using to fund 2 shipments of 2000 metric tons and 4 shipments of 1000 metric tons is $18,000,000.

If the company has to fund the 6 shipments of 2000 metric tons in financial year 2011, then the company would need to enhance its working capital by $9,000,000.

How risky are the DINP shipments? How much could money could they lose on a single shipment?

The DINP shipments are brought to Taiwan at a fixed rate. The time period between ship and sell is three months. Due to the big scale of time period, there is a risk that the prices of the shipments might decline in the country which could result in loss to ALAC. The company could lose $450000 on a single shipment.

Why is ALAC finding it difficult to fund its working capital

ALAC has always taken short term borrowings from Frishman’s friends and relatives as well as wealthy individuals to run its operations effectively and these loans are renewed regularly as they gets matured. ALAC pays interest on this borrowing approximately 13%. This has allowed them to reserve a large share of the earnings for all of the partners.

Alac International Case Solution

The amount of loan required to fund its working capital is very huge, which according to Frishman is that they would not be able to take from their friends. Moreover, according to Frishman taking loan from bank is a very large process as they will first inspect the nature of the business then only they would provide loan. The employees of the bank will first do the field exam of their assets, then they will consume time to review the financial statements of the financial year 2010 as well as other paper work.

Moreover, the bank wants Alan to secure its receivables and inventory at 80% and 60% respectively. Alan is of the view that if he secures its assets it would limit the growth of the company. Moreover, he doesn’t want that the bank interferes in the operations of the company.

He is of the view that if we could offer greater return to senior subordinates then they will be motivated to give some amount and he thought that the remaining amount could be taken from the preferred equity.

What would you advise Alan and Lily Frishman

It is suggested that Alan and Lily Frishman should opt for bank loan option to fund the working capital requirements as well as secure their assets to banks as per banks requirements. The company should go for West Coast tank terminals as it would reduce the time period of the shipment significantly as well as it will also reduce the working capital requirements.................

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