STEVE’S SKIS AND BIKES Harvard Case Solution & Analysis

Steve’s Skis and Bikes Case Study Solution

Question # 1

The purpose of calculating the sustainable growth of the Steve’s Skis and Bikes is to determine its maximum growth rate in sales in which the internal financial resources are involved while not increasing the debt and the equity. The reasons for calculating Steve’s sustainable growth rate was so it could provide the information to Mr Carl Grizzly for acquiring the loan to increase its cash balance which has significantly decreased throughout the years.

The formula for calculating the sustainable growth of the company was through first determining the Return on Equity of the company for 4 years. The ROE for the year 2002 was calculated as 15%, for 2003 it was 15%, for the year 2004 the ROE was 14% and finally, for the year 2005, ROE was of 15%.

After determining the ROE of Steve’s Skis and Bikes for four years, the next step was to identify the dividend payout ratio which was 0.50 or 50%. Next, we calculate the sustainable growth rate of each year by multiplying ROE with (1 – dividend ratio). In which the average of the sustainable growth rate of the years 2002- 2005 was calculated as 8% which shows that the company would grow at the rate of 8% each year by using its own resources and not seeking outside help.

Question # 2

The sustainable growth rate of Steve’s Ski and Bike was determined to be 8% of each year. However, looking at the actual growth rate in sales, the rates which had been identified for each year were higher than the sustainable growth rate. The actual rates for the year 2003 were 49% in sales growth rate, 50% in the sales growth rate in 2004 and 33% in the year of 2005. The actual growth rate had been determined by decreasing the sales of the current year with the previous year and further dividing with the previous year sales.

Since the sustained growth rate of the company for the 4 years was lower than the average of the sales for the three years 2003 – 2005 of 44%, this indicated that the growth would not be sustainable unless it improves its management through the following techniques:

• Increasing its debt through taking loans
• Increasing the net income through either improving the sales or reducing its cost of goods sold
• Increasing its equity
• Improving the company’s operations.

Question # 3

The conclusion which could be drawn from comparing the actual sales growth and the sustainable growth is that the Steve’s Skis and Bikes sustainable growth is lower than the actual growth which shows that the company would be able to sustain its growth by improving its management. If the sustainable growth was higher than the actual sales then this would show that the company is underperforming.

Since the company’s sustainable growth was lower than the actual sales, Steve’s Skis and Bikes would be able to improve overall by taking loans from banks and increasing its debts. Steve had already requested for aloan from the Bank for \$140,000 and it would be in the best interest of the bank to provide ng loan for Steve’s business as it actual sales indicates the business would improve.

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