Business Problem Analyses Harvard Case Solution & Analysis

PROBLEM IDENTIFICATION

After the successful incorporation of “EPO”,(online electric supply company) it was formed by two partners, Adriano and Nicolau. Despite the fact that the newly formed company has received a highly positive feedback from the public and founder’s hoping for successful growth oriented business, how ever it is facing a huge problem of the continuous reduction in the Cash flows.

 In order to overcome this problem, the management of the company is finding it difficult to identify best optimal solution. However, there are currently two offers available for the company that are accepting bid from one of the two potential finance providers, Black hole capital and EDP (by Bento Gonaives) in order to overcome the problem.

CRITERIA SELECTION

The criteria for selection is based on the EPO’s current market value, which is calculated by using Cash flow forecast of the company from which we arrive at the Enterprise value of the EPO. After finding the enterprise value of EPO we then compare it with both options of increasing financing; one from the Black hole Capital Partners while the second one is from the EDP

For EDP, comparison is based on 100% enterprise value while for Black hole Capital Partners, the comparison is based on 40% of enterprise value. After comparison, the worthwhile bid will be selected however,if both offers from the company do not seem to be attracting, then alternative ways financing could be used.

 ALTERNATIVE DEVELOPMENT 

Alternative No.1:Considering the bid from one of the financers “EDP” or “Black Hole Capital”

Alternative No.2:Restructuring there operational policies and procedures, which may result in   quick cash flow recovery

Alternative No.3: EPO should avail the running finance facility from the banks, which may help the EPO to some aspects by overcoming their current cash problems.

ANALYSIS

The potential and current performance of the company has been analyzed on the basis of current and future estimates and forecasts. As the EPO is facing losses since its early years and is also facing reduction in its cash flows, which seems to be the problem identified by the company itself. Also, EPO hastaken some steps in order recover its investment as early as possible as it has generated a new sales strategy of doing 25% sales on prepaid basis in the year 2013 and the following two year 50% of sales

In the given exhibit, all the current and estimated values given as per the EPO’s financial statement have been analyzed thoroughly. The main step of our analysis is to arrive at enterprise by discounting the cash flow forecast based on the company’s net operating profit before tax plus depreciation and amortization, which are non-cash items therefore,we added it back. In the given income statement, the revenue for the year 2013, 14 and 15 is calculated by taking product of estimated sales and price of the EPO.

The cost of goods sold for these years is forecasted which is given in the Exhibit based on the assumption that the cost being in a phase continuously reducing due to the de regulations by the Portuguese government.

The rent and salaries expenses show a rising trend due to the increase in the number of employees and office premises as the business will expand over the year. The growth rate in rent expenses has been calculated on yearly basis, which shows an increase of 26% yearly. The other expenses have risen by 50% over the year, which also includes interest expense increase that may be due to the increase in the maturity of the loan taken by the company at the time of incorporation. The EPO is currently facing cash reduction problem and it may find it difficult to repay.Business Problem Analyses Case Solution

After calculating the earning before tax,the next main component which is the most important of them all is the bid price evaluation in which we have assumed a discount rate of 10%, which may be considered high due to the following fact that the company is currently up till 2012 is facing losses and is not looking in a good shape.This may not be a good sign for the investors due to which the opportunity cost of capital could be high.

Moreover, EPO’s current focus is towards  the company for which it is determinedon doing excessive marketing campaigns for the promotions of its websites.Currently, EPO is considering involving the finance director of Black hole Capital Partners who is contingent upon their bid approval....................

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