Laura Henderson, a 2008 graduate of George Fox University with 3 years of bankin

Question

Laura Henderson, a 2008 graduate of George Fox University with 3 years of banking experience, was recently brought in as a financial analyst for Healthy Snack Foods Inc. (HSFI), a small food producer that operated in northern Florida and whose specialty was healthy pecan and other nut products sold alongside snack foods. HSFI's president, Al Watkins, decided in 2011 to undertake a major expansion and to "go national" in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that HSFI's products were, and would be, of higher quality than the competition's. He further believed that this quality differential would enable it to charge a premium price, and that the end result would be greatly increased sales, profits, and stock price. Calculate the Operating, Investing and Financing Cash Flows for HFSI. Based on the Cash Flows, should Laura characterize the new Strategy as a "Success" or a "Failure". Can the new Strategy ever be a success? Please answer "Yes" or "No".

Explanation / Answer

Cash Flow Statement $ For the Year Ending 2012 Cash at Beginning of Year 57600 Operations Cash receipts from customers 5753040 Cash paid for Inventory purchases 5721600 General operating and administrative expenses 519988 Interest 136012 Income taxes -106784 6270816     Net Cash Flow from Operations                   (517,776) Investing Activities Cash paid for Purchase of property and equipment 822950 -822950 Net Cash Flow from Investing Activities Financing Activities Cash receipts from Borrowing 511000 Accrual 790408 Cash paid for Dividends 11000 Net Cash Flow from Financing Activities             -                1,290,408 Net Increase in Cash             -                    (50,318) Cash at End of Year                  -                         7,282 Accounts Receivables opening Balance 351200 Add: Sales for the year 6034000 less closing balalnce 632160 Cash recd from customers 5753040 Inventories Opening balance 715200 Add: purchases (bal fig) 6100160 Less: COGS 5528000 closing balance 1287360 Fixed assets Opening balance 491000 Add: purchases 822950 Less: closing balance 1313950 Accounts Payables opening balance 145600 Purchases 6100160 Less: Payment to suppliers (bal fig) 5721600 closing balance 524160 B. New strategy can not be characterised as a "success". With a sizeable increase in sales, COGS has also increased, thus reducing the operating margin& reduced net income. As seen from the cash flow statement, there is heavy borrowing resulting in higher interest costs & reduced stock price. c) No. All areas such as profit margin, earnings to owners, stock price, inventory carrying costs,optimal level of borrowings are to be equally analysed before fixing sales quantity & price.

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