Cherub Chocolate Harvard Case Solution & Analysis

Question 1

Use these base case assumptions to prepare a three-year annual forecast for Cherub Chocolates, including standard format Income Statement, Balance Sheet, and CF Statement, and provide Larry Lender with a recommendation on the loan and your rationale. Where would you focus your due diligence?

Answer 1

Small Introduction of Company

The Cherub Chocolates are very famous in their locality about their delicious variety of chocolates. The company is located in the Nanaimo city in North America. The company is run by sole proprietors, who have enough knowledge about the chocolates and their mixture of the flavors. Furthermore, the company is facing problems for purchasing some property, plant and equipment and other required materials for the making of chocolates.

Case Scenario and their Justification

The Proprietors required a loan for the company which war an amount of one fifty hundred thousand dollars for purchase of the equipment and other material. The proprietors had applied for the loan from the bank and that loan would be approved on the basis of the financial strength of the company. The respective members of the bank will evaluate the financial performance of the company on certain assumptions which are mentioned in the case scenario and also mentioned in the attached excel file which is annexed with this word report.

The analysis is done with respect to the assumptions which shows the better financial health of the company in terms of financial statement that is Income Statement, Balance sheet and Cash Flow Statement. The company had the net income in 2011, 2012 and 2013 which was $224,709, $521,219, and $632,304 respectively. This effect was due to the revenue growth of the company consecutively in the respective years. The cash available for the company was above the minimum balance required that was ten thousand. The plus point for the bank was that the company has better asset turnover ratio. On the other hand, the cash flow of the company was also having good results in monetary terms. The entity has no tax rate to calculate tax amount which the company should deposit in the federal account of the government. The depreciation is calculated on the fixed amount with the rate of eleven percent, which is the effective rate of the depreciation. This depreciation method used is the reducing balance method in which company accumulated the depreciation amount for the future incentive.

Moreover, the bank should pass the loan, for this company. The reason is justifiable through the financial strength of the company. The projected data and an assumption is used that the economy of the country will be stable for the betterment of the global relationship of the company and their respective environmental parameters.

Question 2

Use these new assumptions – everything else is as above – to prepare a three- year annual forecast for Cherub Chocolates, including standard format Income Statement, Balance Sheet, and CF Statement, and provide Larry Lender with a recommendation on the loan and your rationale.

Answer 2

The analysis have been performed with respect to new assumption and new technological aspects for Cherub Chocolates. In this analysis, there are new things which is the standard deviation of the revenue growth with respect to ten percent increase and decrease in the revenue. The cost of goods sold also follows the same deviation similarly like the revenue growth. There is a change in gross margin, which is fifty eight percent, sixty three percent and sixty nine from year 2011 to 2013 respectively. Furthermore, the standard deviation also impacts on the operating expense margin with respect to the five percent increase and decrease in the expense. Other expenses related to interest and taxation are same. This change only impacts the income statement of the company. There has been further changes with respect to the balance sheet, which was that the inventory level was calculated through the triangular stimulation method.

The formula of this stimulation is calculated through ((a+4m+b) /6). In this formula “a” represent the value of minimum days, “b” represent the value of maximum days, and “m” is refer as the slope of the days. The four and six numbers are depicted as a constant variation of the formula. Furthermore, the triangular stimulation is the means for the test of the company`s variable with three sides and extract the optimal product on it. In this analysis, it also shows the better position of the company, but in the year 2011 with standard deviation of minus ten percent, shows the negative cash flow of the company. But it does not affect the financial strength of the company in the prior years. Apart from that, the cash again comes to that position of 2010...................

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