BUSINESS VALUATION AND CREDIT ANALYSIS Harvard Case Solution & Analysis

CALAVERAS VINEYARDS

Q1. Brief Recap of History of Calaveras

            Calaveras Vineyard was established in the year 1883. It was initiated as a family-owned business. The company has expanded rapidly in its branded wines and expanded the production to many restaurants and retailers. The company had been going through many changes during the past years, mainly in its ownership structure, but still the company has managed to grow regardless of the fact that the company is owner-managed business. The company has divided its product category into 3 types based on the quality level of each type. These 3 types are further sub-divided into 5 brand names.

            The company had also hired a marketing company, Winston Fendall, so that the objective of the company could be achieved and the cash flow position could also be improved. The company had also segmented its markets in terms of different price ranges and different quality levels. Due to high levels of wine quality the company’s prices were increased from $29.52/- in 1989 to $44.26/- in 1993. The company also had a great distribution network. 80% of the volume of the total sales of the company was being handled by only 9 distributors. Special accounts were maintained by Calaveras with restaurant & airline companies. Calaveras analysis is here based on certain assumptions and looking at its historical and projected financial information. The company will grow further due to the high demand of wine in the future and also because the US population will shift towards more consumption of the wine.

Q2. The new marketing company plans to collect Account Receivable and remit payment to Calaveras.  Briefly discusses which company has responsibility for unpaid receivables after 90 days and why.

            The marketing company that has planned to collect account receivables and the remit the payments to Calaveras is Winston Fendall. The contract that has been signed between both the companies states clearly that all the receivables have been sold to Winston Fendall and that it is now the responsibility of Winston Fendall to collect the receivables from Calaveras’s customers and remit those payments to Calaveras. The arrangements of this agreement also state that if the company is not able to collect the receivables within the 90 dayperiod, then it will have to pay the amount of those receivables to Calaveras. The arrangements clearly show the services that are being provided by the Winston Fendall Company, whichincludesthe services of a factoring company, so it is also a factoring company. This factoring has been done on a non-recourse basis, which means that if after the 90 day period the customer still do not pay the outstanding amounts to Winston then Calaveras will not be liable for any of the receipts.

            This arrangement might have positive and negative impacts on Calaveras. The customers might not like that Winston forces them to repay the outstanding amounts. It might be discouraged for them being one of the loyal customers of Calaveras. On the positive side, however, this would improve the cash flow position of the company and also transfer its credit risk which would increase its performance.

Q3: Calculate free cash flow for 1994-1998 using projections in the case with the adjustments that Anne Clemens is recommending.

            The free cash flow for the company has been calculated based on the projected financial statements for the period 1994 to 1998. The projected cash flows have been adjusted for non-cash expenses such as depreciation and amortization of organizational expenses have been added back. The cash flows have also been adjusted for future capital expenditure requirements which will be needed to meet the increasing sales volume demand in the wine industry by increasing the production base of the company. Therefore, $250 million in each of the years has been deducted for capital expenditure. The payment of the term loan will also be done on a straight line basis for the 5 year period. Therefore, it has also been incorporated. Finally, adjustments have also been made regarding the incremental working capital requirements. The free cash flows calculated in this way are negative for the first two years, however, after that the cash flows become positive, it will grow in the future years.

Q4. What discount rate would you recommend for valuing Calaveras and why?  Show your calculation and support your assumptions.

            The weighted average cost of capital or discount rate is the required rate of return that is required by the equity and debt holders. This rate has been calculated because the company has obtained financing from different sources, therefore, in order to calculate an average rate the cost of the debt and cost of equity has to be averaged. The cost of debt is simply the interest rate that the company will have to bear to pay interest on its.................

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