Sula Vineyards Harvard Case Solution & Analysis

Question No. 9: How did the product mix change over time, and how did this impact future cash flow?

Answer:

The Sula Vineyards were producing two kinds of wine: white wine and red wine with the difference in the color and taste. Champagne style brut was yet another kind of wine produced by the company. Hite and Red wines were subdividedinto three more wine categories, with the highest price of Champagne Style Brut, but this has low demand as compared to White and Red wines. In case of White and Red wines, the highest price was allotted to the categories of Red wines. The company should produce and sell more of the red wine to have a great effect on the future cash flows.

Question No. 10: Red and white wines are both liquids in the physical sense of the word.  In the financial sense, which is more liquid and why?

Answer:

Red and white wines are liquid, but White are more liquid in a financial sense, as because of the competitive prices and higher production of white wines made them more liquid. One of the other main reason was the aging period required for red wine was 24 months and can be sold withintwo or three years after the date of production.

Question No. 11: Assess Sula Vineyards’ financial performance over the last five years (2003-2007) using common size statement analysis and financial ratios and the data provided in Exhibits 5–7 (Exhibits 5 and 6 are provided in excel as a starting point).  What conclusions can be drawn with respect to the company’s operating and financial performance over this period?  As part of your analysis, include a discussion of changes in Sula’s cash conversion cycle and what was driving the changes.  Also include a calculation and discussion of the company’s sustainable growth rate based on 2007 data.

Answer:

Refer to appendix.

Question No. 12: Evaluate scenario C presented in exhibits 11 – 16 (Exhibit 13 is provided in excel as a starting point).  Create a pro forma income statement and balance sheet for Scenario C for 2008-2012 based on data from case exhibits 5-14.  If external financing is needed, use the category “Additional Funds Needed” (AFN) on the projected balance sheet as your plug figure.  If excess funds are generated, created a short-term asset called “Short Term Investment” in order to balance the balance sheets.  What conclusions can you draw from your analysis?

Answer:

Refer to appendix. After the careful analysis, reasonable assumptions and judgments, we can conclude that Additional Fund Needed (AFN) was continuously increasing which is not a sign of relief for the company’s management. It means the company will be deploying in more loans and other facilities to meet its expanding requirements. It is advised to the management of the Sula Vineyards that instead of focusing more on external sources of financing the expansion plan, they should go for the internally generated funds or even they can have the option of equity generating through shares.

Question No. 13: Calculate the free cash flow for Sula Vineyards for 2003-2007 and for projections based on Scenario C using the projected financial statements you prepared in question 12 above.

Answer:

Refer to appendix.

Question No. 14: Value the company for Scenario C using discounted cash flow techniques and multiples analysis.  Use a discount rate based on WACC, assuming Sula’s before tax cost of debt is 7% and their beta is 1.0.

Answer:

See appendix.

Question No. 15: What financial and strategic recommendations would you make?  Include recommendations on capital structure, sources of financing, and potential uses of funding.

Answer:

After the analysis and evaluation of the case, we suggest that, since it was assumed that the growth of wine in the Indian market will be 20-25% per year. Based on these expectations of this market growth, the management of the Sula Vineyardsmust make sure to improve its cash flows by incorporating efficient and economical management of the working capital in order to increase the net profits. Additional fund needed requirement could be completed by equity funding through external source of capital such as common stock and preference sharescan provide quick access to funds.

Between the years 2004 to 2007, Sula Vineyards has not generated feasible cash flow from its operations. On the other hand, Sula Vineyards have not been able to generate sufficient operating income even to cover interest expense, which means there will be no more room for taking extra debt. After the close analysis of the networkingcapital changes, the cash flows were negatively affected bythe inventories................................

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