Carlton Polish Co. Harvard Case Solution & Analysis

Description of Issues

Carlton Polish Company is very famous in many regions, having a great image of their products in the market, but in the recent trend it faces some issues regarding finance structure which is showing high gearing ratio. Now Mr. Charlie has to decide whether to go with sharing its own ownership or go with the decision of leverage buy out with Mr. Jim Miller; Mr. Miller isthe employee of the enterprise.

This issue will be resolved through the analysis of the enterprise value in both cases;they move to sell their stake or buyout option. With “selling the stake” option the result is showing potential value of $1,628,000. On the other hand showing the result of $875,000 for “buyout option”, later being not a better option. All the matters with relate to finance are considered in evaluating both methods which are on practical market approach.


Carlton must initially appraise the company to understand how much it is valued. If the value of the organization has increasedto $2.5 million, then it should sell its shares. But solution for the cleaning is good with the share of ownership with “JIM MILLER” because it increases the enterprise value. This solution is based on some analysis which are given in this report and along with case study material. Itwould be favorable for the company to follow these requirements which give it an edge among the industry. As shown in the balance sheet the equity position is not good in two preceding years. This is because the responsibility of handling of the company’s affairs is on a single head, so for growth of the organization, it should have to put the eggintothe basket for the convenience of development/improvement. Itsfinancial structure is still on the high gearing ratio, which is not good for the organization. The analysis has been done with a technique of discounted cash flow and certain Assumption which are given below.

  • Beta analyze with average of industry competitors
  • Return on the market is assumed 19.5% as per industry analysis
  • Capital Asset Pricing Model CAPM is used to calculate cost of equity
  • Working is mentioned in case that at least $750,000/-
  • Capital Expenditure not recorded above $250,000/-
  • The interest rate is given in the case on an assumption which is 13.5, but with interest tax shield will be 7%
  • Weightage of equity and debt will be calculated on historical data as mention in the case
  • Tax is assumed at 50% with calculation of historical data
  • Depreciation is assumed $42,000/-, will continue for forecast income statement 

These are the main assumption which is taken with practical theories and with relevant case studies of Cleaning. These assumptions are used in the extracting the value of the enterprise which are given in the Appendices. Appendix “A” includes the existing situation of the organization with pro-forma, Appendix “B” includes sharing the ownership of Cleaning with reflect to its enterprise and incorporated all financial debt sources, which is showing pretty good position and Last Appendix “C” is showing the basic information of rates. Additional Assumption with respect to appendix “A”and “B” are as follows

  • There are no changes in the ownership of the enterprise of exiting situation
  • Assumed that cost of capital is 19% in the existing situation
  • Enterprise value is showing their worth of the organizationwith respect to existing debt in sharing ownership
  • Assumed that cost of capital is 9% of the shared ownership

Some Queries

Solution 1

Cleaning Solution

Cleaning solution for the decision relates to its market and structure is dependent on the adopting the analyzing method; which are shown in the appendices. Now the companyhas to makea final assessment to leverage buyout or not, but as per the analysis, the company would go for sharing the ownership choice. This is because it maintains the current structure of the company.

Solution 2

Company Strategy

The organization’s strategic planning is basically simple; they manufacture the product and distributetothe largest distributors with the helpof sales managers within different geographical locations. This main policy is concerned with product distribution strategy, but italso hasafinancial strategy, which is to attain more and more revenue, with giving hand toward the distributor, in return, they will helpattract more consumer with thebrand.The Enterprise is totally market oriented;with having a positive image in the consumers’ mind which is a good strategy for its development and growth. With respect to case, the market is showing $4.5 billion worth, which itself, highlightingthe company’s strategy and its planning approach. Now it should analyze its strategy related to non-financial factors which can affect the position of finance. There should be soft–commitment andplanning which is essential part of it.

Solution 3

Profitability Concern

As per the understanding and best estimation of financialleverage buyout method, the profitability.....................

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Students were asked to determine the fair market value of the Carlton Polish company and decide if i should buy-Carlton half his partner for $ 25 million. Carlton alternative is to sell his half of the $ 25 million. Students must also assess the financing plan. "Hide
by William A. Sahlman Source: Harvard Business School 17 pages. Publication Date: May 23, 1983. Prod. #: 283008-PDF-ENG

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