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Mountainarious Sporting Co.
Transcript of Mountainarious Sporting Co.
Rene Ballowe, Peggy Samuels,
Mitch Saville and Emily Anne Taylor
1. Should he offer the full loan and line of credit?
2. Should he offer one or the other?
3. Should he deny the full loan and line of credit?
1. There are issues within the company
2. Each loan option has advantages and disadvantages
Main Issues in Company
Limited experience in soft good sales
Growth rate of 15%
Manager with inadequate experience
Recovering from fire
Problems with new store
Donnie as a Manager
Excellent product knowledge
Contacts that he has made in this line of work
Would consider selling part of interest in business
Limited experience in line in which he is trying to expand (soft goods)
Wife has no management experience
Currently has active website, but does not list products
Can negate some of the threat from online sales
Allows him to show prices as compared to competitors
Donnie thinks it is the only way to remain profitable
Has some experience with line in current store
Secured deal with major buying group
Problem is that it requires different strategy for success since it is more fashion oriented
Financial performance has been acceptable
Financial performance was hurt by fire in 2002
Loss of rental income from Doug's Guns and Ammunition
Appears to be trying the "next big thing" and not being as successful as he had hoped
Example: team sports market
Sporting goods business is extremely competitive
Big-box retailers and "megachains"
Three opened, fourth scheduled
Circuit Sports is direct competitor
Internet sales are growing source of competition
Need to shop locally is reduced
Lower upfront capital
Lower operating expenses
No loan amount
Would keep rental income
Would be able to determine if business was successful before making investment
Bank would be able to cover themselves if venture failed
Have the opportunity to use funds for technology, marketing or inventory purchase
Would still need to keep increase in credit line
Increase in marketing cost
Technology costs to create, develop and maintain website
Bank may lose a valuable client and could lose future projects
$20,000 increase in a line of credit is not much as compared to a $150,000 loan
Option #2: Do not allow increase in line of credit, but offer full loan amount
Would keep costs lower by $20,000 to bank
Bank would keep client happy and develop a stronger relationship
Mountainarious could open new store
Option #1: Increase the line of credit, but not offer the loan
Helps in the short run by allowing changes to be made to the store, but does not help with annual inventory purchases in the long run
If business fails, CCB may not recover investment
Option #3: Offer
the whole loan
in credit line
Increases the credit line and loan costs
Growth may not be enough to cover additional expenses
Increases the operating expenses since they would have to hire a whole new staff and store equipment
Loss of rental income
Bank assumes risk of losing money invested if Mountainarious fails
They are already in financial trouble
If the bank were to offer them money, they would be extremely overextending themselves
Had net income, but profit margin is 2.6%
Assets are too high relative to sales they are generating
Ability to pay back current line of credit is questionable
Option #4: Deny the loan and increase in credit line
Would cover the bank in the event that the new product line was not successful
Could lose a business relationship for future endeavors
Could lose out if the business were to obtain a loan elsewhere and the venture is successful
Recommended Course of Action
Both the loan and increase in credit line request should be denied
Offers the necessary capital to establish the extra business
Creates a whole new offering for the clients
Ensures a good working relationship with the bank for future investments
Mountainarious requested to obtain a loan and increase their line of credit
From Canadian National Bank
Increase line of credit from $80,000 to $100,000
1. The bank will make its decision objectively and an agency problem does not exist between Brad McDougall and Steven Donnie that will affect the bank’s decision.
2. If a growth rate for a certain line item was not given, it will grow as a ratio of sales for the given year.
3. Forecasts two years out will have the same growth rate as the forecasts a single year in the future.
4. Annual sales from Doug’s Guns and Ammunition is constant over the forecasting period resulting in rental income to Mountainarious remaining constant for the options in which Doug’s Guns and Ammunition continues to pay rent to Mountainarious.
5. Tax Rate is constant for the forecasted years.
6. Dividends will not be paid during the forecasted years.
7. If expansion occurs, the increase in Building and Store Fixtures is negligible and, therefore, this line item is constant for the forecasted years.
8. COGS will be reduced to 65% if there is any change in financing; the only option in which COGS will remain constant is if no additional financing is incurred.
9. Land will remain constant for all forecasted years.
10. The additional $20,000 requested in the line of credit will be withdrawn in 2008 if approved.
11. Mortgage payments of $3,600 will resume in 2009 in all options in which there is a change in financing.
12. Shareholder Loan will remain constant for the forecasted years.
13. Loan Payable will remain constant for the forecasted years if there is no change in financing.
14. Loan Payable will increase and decrease as given in the case regardless of the option given by the bank if there is a change in financing.
15. Common Stock will remain constant for the forecasted years.