Sula Vineyards Harvard Case Solution & Analysis

Q8. : If the original equity investment consisted of 200K shares at $1 each, what generated the capital surplus of $400K in the 2003 balance sheet, assuming the initial formation of the company occurred in 2003?

If it is assumed that the company was formed in the year 2003, and the initial shares of 200,000 were issued at a share price which was the par value of $ 1. Then looking the s400, 000 amount we can say that this is the surplus amount which can be called as share premium. This is the amount of the extra share price or funds that have been invested by the individual investors above the par value of the company. The reason for this is the success of the company in the wine industry and its stable growth. Looking at this, the investors invested in the company and this had raised the share price of the company.

Q9. : How did the product mix change over time, and how did this impact future cash flow?

There were two kinds of wine that were being produced by Sula Vineyards, one was the red wine and the other was the white wine. Both were different in taste and color. Another style that was also produced by the company was Champagne style brut. White and the red wine were further divided into other 3 categories. The price among these three categories was highest for the Champagne style brut but its demand was low. After that the second highest price was of red wine as compared to the white wine. If the company wants to generate future cash flows, then it should sell more of the red wine.

Q10. : Red and white wines are both liquids in the physical sense of the word.  In the financial sense, which is more liquid and why?

Yes, the red and the white wines are both liquid, but the white wine category is more liquid in a financial sense. This is because of the higher prices of this wine category and also higher production. Another important factor for this was that the aging period required for the red wine was 24 months and this wine could be sold after 2-3 years after the date of its production.

Q11. : 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.

Looking at the common size income statement and balance sheet it can be seen that there was no significant improvement in the financial performance of the company over the last five years from 2003 to 2007. However, the financial ratios show that the company’s performance was deteriorating. If we look at the figures of the cash conversion cycle then it can be seen that the cycle’s period is increasing over the five years. This might cause the company to face working capital problems. Refer to appendices for the calculations and analysis.

Q12. 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?

After the careful analysis and reasonable assumptions, it can be said that there was a continuous increase in the Additional Fund Needed (AFN). This meant that the company will have to borrow more loans and such facilities to meet its expanding requirements. This might create problems for the company in future if we look at its ratios. Therefore, it is advisable to the management that it should seek for internal financing or raise the required funds through equity financing to meet the expansion requirements.

Q13. 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.

Refer to appendix for calculations.............................

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