Water Treatment Facility Case Study Solution
The income statement and cash flows for each company:
The income statement for both the company is created by using eth direct method. The company Hyde Park shows the bid cost of 60,000 and deducting eth tax results in 21,000 net incomes in 2018, while the Evanston Company is getting mark up of 15% on the bid cost that increases the net income of 24,150.
The cash flows is the distinction in measure of money accessible toward the start of a period (opening balance) and the sum toward the end of that period (closing balance). It is called positive if the end adjust is higher than the opening balance. Income is expanded by (1) offering more merchandise or services, (2) offering a net profit, (3) decreasing costs, (4) expanding the selling price, (5) changes in assets (6) paying slower, (7) acquiring more value, or (8) loan taking.[1]
By marinating the lowest amount possible the Hyde Company would be able to earn profit more profit as compared to without earning return of 11% as shown below.
Along with this, it is observed that the company can bid lowest cost of 53,400 in order to earn the same 11% return and make the competitive advantage by bidding at lowest cost.
| Income statement | ||||
| Hyde park industrial | Evanston Amalgamated | |||
| Bids request cost | 60,000 | Bids request cost | 60,000 | |
| Tax | 39,000 | Total cost plus | 69,000 | |
| Net income | 21,000 | Tax | 44,850 | |
| Net income | 24,150 | |||
| Cash flows | ||||
| Net income | 21,000 | Net Income | 24,150 | |
| net income adjustment | 10,000 | net income adjustment | 44,850 | |
| A/R | 14,000 | A/R | 14,000 | |
| Changes in inventory | 5,000 | Changes in inventory | 5,000 | |
| liabilities | 20,000 | Liabilities | 20,000 | |
| total cash flows | 70,000 | total cash flows | 108,000 | |
Hyde Park to bid the lowest amount possible such that it still earns it’s 11% required return.
| Bids request cost | 60,000 |
| return | 6,600 |
| Total | 66,600 |
| Tax | 43,290 |
| net income | 23,310 |
| Cash flows for 2018 | |
| Net income | 23,310 |
| net incom adjustmentq | 10,000 |
| A/R | 14,000 |
| Changes in inentoru | 5,000 |
| liabilities | 20,000 |
| total | 72,310 |
Lowest bid:
| lowest bid | 53,400 | |
| % | 11% |
Problem 2:
How much goodwill will be added to Hyde Park’s balance sheet as a result of this transaction?
Based on the information given the goodwill will be added as fair value of intellectual property and the additional amount would be added as 60,000 in the assets side and it will increase the assets by 106,534[2].
The company’s intellectual property is now only worth $19,500.
On the other hand if we assume the fair market value of goodwill is 92,000 and it is declined to 19,500, therefore, it would result in write down of 72,500 in value. And hence it will lead to loss and company’s position cannot be stable.
| Cash and Cash Equivalents | 11,500 | Accounts Payable | 1,200 | |||||||
| Accounts Receivable | 900 | Accrued and Other Liabilities | 250 | |||||||
| Other Current Assets | 425 | Total Current Liabilities | 1,450 | |||||||
| Total Current Assets | 12,825 | |||||||||
| Long Term Debt | 1,600 | |||||||||
| Other Long Term Liabilities | 120 | |||||||||
| additional debt for goodwill | 30,000 | |||||||||
| Property Plant & Equipment | 1,250 | Total Liabilities | 33,170 | |||||||
| Intellectual Property - Capitalized Research | 32,000 | Common Stock & Paid-in Capital | 38,809 | |||||||
| Goodwill | 60,000 | additional shares for GW | 30,000 | |||||||
| Other Non-Current Assets | 459 | Retained Earnings | 4,555 | |||||||
| Total Assets | 106,534 | Total Liabilities & Owners' Equity | 106,534 | |||||||
Problem 3: Cambridge Interactive Sports Gaming
Provide an estimate of CISG’s 2017 revenue
The revenue is recognized as 35% decrease on previous year’s sales as there is 60% probability that legislation would pass and 40% chance is that legislation would not pass and hence the collective probability results in decline in sales by 35%. And the revenue is resulted as 384,370.
| legislation passes | 55% decrease in revenue | |||
| Legislation do not pass | 6% increase in revenue | |||
| Probability that legislation passes is | 60% | |||
| 1-p | 40% | |||
| revenue would decrease by | 35% | |||
Provide an estimate of Cambridge’s 2017 EBIT. Please be sure to footnote and describe any assumptions you make.
The Estimated EBIT results in decrease in the income by 19,733 as compared to 62,020 in 2016 because there has been estimated that legislation will pass and it would decrease the revenue by 35%.
| Operating Results: | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 estimated | ||
| Revenue | 400,000 | 550,000 | 625,500 | 685,000 | 595,000 | 384,370 | ||
| Less: Cost of Goods Sold | 268,000 | 330,000 | 350,280 | 383,600 | 422,450 | 272,903[3] | ||
| Gross Profit | 132,000 | 220,000 | 275,220 | 301,400 | 172,550 | 111,467 | ||
| Less: SG&A | 32,000 | 71,500 | 100,080 | 102,750 | 41,650 | 26,906 | ||
| EBIT | 100,000 | 148,500 | 175,140 | 198,650 | 130,900 | 84,561 | ||
| Less: Interest Expense | 23,438 | 31,765 | 39,859 | 36,818 | 38,333 | 24,763 | ||
| EBT | 76,563 | 116,735 | 135,281 | 161,832 | 92,567 | 59,798 | ||
| Less: Taxes | 25,266 | 38,523 | 44,643 | 53,405 | 30,547 | 40,065 | ||
| Net Income | 51,297 | 78,213 | 90,638 | 108,427 | 62,020 | 19,733 | ||
[1] The cash flows as of 2018 for both company is prepared by taking assumption as depreciation is 10,000; changes in accounts receivables by 14,000 and changes in inventory by 5,000. Therefore, it results in cash flows of 70000 and 108,000 for Hyde Park and Evanston Company respectively.
Water Treatment Facility Harvard Case Solution & Analysis
[2] Hence, in order to make the accounting equation equal it is estimated that the company would have used goodwill by issuing 50% debt and 50% equity and it also increases eth liabilities and equity side by 30,000 and 30,000 respectively.
[3] The EBIT is estimated by using the vertical analysis, in which the sales are taken as 100% and taking the average of percentages..............
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