Zapatoes, Inc.

Anthony Cruz owns Zapatoes, Inc., a home-grown Filipino shoe company. His company has experienced tremendous growth since it
has started its operations in 2009. With a growing demand for his products, Anthony Cruz is considering expanding his operations by
opening his first production facility. Currently, he pays another company to manufacture the shoes he designs. He is contemplating to
produce the shoes Zapatoes, Inc. facility, with the hope of lowering the cost of production.

The company needs PHP10 million to finance this expansion and is at a tight cash position. Anthony Cruz is now wondering where to
get the funds needed – invite an investor or personally borrow from a bank?

Here are the comparative financial statements of Zapatoes, Inc.:

Zapatoes, Inc. sold 3,300 pairs on 2013, 4,500 pairs on 2014, and 6,200 pairs in 2015. With the brand’s target market – young
professionals and college students, it can only sell it at the PHP1,000 to PHP2,000 price range per pair.

Anthony is wondering whether owning his own manufacturing facility can really improve its profitability. Currently, he is producing
his shoes at PHP475 pesos per pair. He expects that he can lower production costs to as much as PHP300 per pair if he will
manufacture it himself. However, opening a new production facility will increase operating expenses (including depreciation) by 30%.
Currently, most of his operating expenses are marketing and distribution costs.
To finance the PHP10 million facility, he has three options:

• Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45% percent ownership of the business afterwards.
Alex does not demand any specific return.

• Short-term loan for 1 year for PHP10 million at 6% per annum from Shortime Bank.

• Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.

Anthony is very confident that his sales volume will still grow for the next 5 years. However, his confidence is tainted by his
uncertainties over the impact of opening a new production facility. What must he do?

ENRICHMENT AND SUMMARY (15 MINUTES)

1. Write on the board the main points raised by the presenting groups.

2. Provide your own analysis.

• Start by pinpointing the main issues relevant to the case. • Provide the correct figures for the profitability and leverage ratios. •
Discuss how you arrive at your decision. Highlight important recommendations/changes that must be done to the operations of
Zapatoes, Inc.
Chloe’s Closet

Chloe Mendez owns a clothing company, Chloe’s Closet. She has a team of tailors who work for 8 hours every day from Monday to
Saturday. Demand for her business is strong but there seems to be something preventing her from meeting the demands of her
customers.

Chloe sells to both big department stores and small boutique stores under the brand Chloe’s Closet. Some brands also ask her to
manufacture their own designs. Business for Chloe has been good since it started last 2014. In fact, despite the tough competition from
cheaper manufacturers abroad, she still manages to grow her customer base.

On December 4, 2015 Chloe received a billing statement from a raw material supplier for an amount of PHP400,000 which will be
due in 5 days. She is also scheduled to pay her employees’ monthly salary of PHP70,000 the following day. Upon checking her bank
account, she only has a PHP67,000 balance. She knew she had exceeded her sales target last October and November so she is
wondering why she only has this amount of cash in her bank account. Was her money stolen? Being a CPA, she checked the bank
statement and her financial records and found no mistakes.

Here is the latest financial statement of Chloe’s Closet as of November 30, 2015:

What’s wrong with Chloe’s Closet?

PRESENTATION (30 MINS)

1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time.

2. After each presentation, ask the presenting group some questions or clarifications. You can also challenge the
computations/recommendations of the learners. You may also provide general comments of the presentation flow and aesthetics. Ask
other groups to also provide comments and questions to the presentations. This should take 5 minutes.
ENRICHMENT AND SUMMARY (15 MINUTES)

1. Write on the board the main points raised by the presenting groups.

2. Provide your own analysis. • Start by pinpointing the main issues relevant to the case (AR, Inventory, Payables). • Provide the
correct figures for the profitability and leverage ratios. • Discuss how you arrived at your decision. Highlight important
recommendations/changes that must be done to the operations of Chloe’s Closet.
Sweet Beginnings Co. Case Study

Sweet Beginnings Co. is currently the most talked about clothing shop in town. Not only was the shop filled with customers every day,
but they have been a major supplier of clothing to other shops. Ms. Muff, the owner of the shop has remained confident that the
operations will go smoothly until one early morning when there had been problems with the delivery that was supposed to leave the
shop. The clothes which were scheduled to be delivered were already packed and waiting on the loading bay. It was past 30 minutes of
the scheduled delivery and no delivery truck was in sight. Ms. Muff decided to call the delivery contractor to find out what was taking
the trucks so long.

“You’ve been one month late from your scheduled payment for our delivery service,” the frustrated delivery contractor said. “We’ve
been sending you notices every day for the past week and your company doesn’t seem to be responding. Unless you will be able to
pay the amount due by this morning, we will not send any truck to deliver your goods.

Ms. Muff was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Muff hurriedly approached the company’s accountant,
Mr. Phil in hopes of drawing cash from the company. Mr. Phil regrettably reported that the company does not have cash to pay the
delivery contractor. In fact, the company has been consistently borrowing short term funds for three months from the start of the year.
The company has yet to pay any of these borrowings and Mr. Phil informed Ms. Muff that the short term lenders have been reluctant
to lend money at this point.

As a result, the shipments will not be delivered to the customers until the company figures out how to pay their delinquency with the
delivery contractors. The outside customers have been understanding enough to acknowledge that there will be a delay on the
deliveries for this day. However, too much delay may frustrate these customers and may cause bad reputation to the company. Ms.
Muff is looking into taking a loan from Fresh Rural Bank to pay for the delinquent fees. The bank manager of Fresh Rural Bank has
requested a meeting with Ms. Muff to discuss the financial condition of Sweet Beginnings Co. and plans for restoring its liquidity.

Outraged, Ms. Muff told Mr. Phil, “Why don’t we have any balance in our cash account? Our company has been very profitable but
we seem to be depending on loans to finance our operations. We need to figure out what is going wrong. Otherwise, we may lose our
customers.”

Company Background

Sweet Beginnings Co. was founded in 20X0 as a manufacturer of summer clothes. The first shop was located near a calm beach with
sky blue waters and powdery sands. Families and tourist would usually flock to the beach on summer weekends which gave the
clothing shop foot traffic and gained the market’s attention. Due to its high-quality products, the clothing store became a popular stop
shop for vacation goers. In 20X1, a known blogger fancied the clothing line displayed in Sweet Beginnings and published an article
promoting the shop. This earned the company nationwide publicity which led to other clothing stores offering shelf space for Sweet
Beginning’s brand. In 20X3 it expanded its garment productions due to the increasing demand of their products. To this day, the
company maintained its position as a summer clothing store since this line has brought its brand equity.

Clothing Market

The demand for clothing was characterized by a stable year-to-year growth. Unit demand increased with both population and
individual income. However, the seasonal character of the company’s product has resulted to cyclical sales.

Competition among other clothing shops in the town is unlikely to clash with the company’s sales growth. The company believes it
will maintain its average growth rate for sales for the succeeding years.

Sales Forecast

Sweet Beginnings Co. had been consistently profitable. Moreover, sales had grown at an annual rate of 18 percent in 20X5. Gross
sales were projected to grow at 20% of the sales of the same months on the first quarter, 30% of sales of the same months on the
second quarter and 25% of sales of the same months on the third and 4th quarter. This growth rate is expected to be constant until
20X8.

Financial Information

To prepare a forecast on a business-as-usual basis, Ms. Muff and Mr. Phil agreed on various parameters. Cost of goods sold would run
at 73.7% of gross sales—a figure that was up from recent years because of increasing price competition. Operating expenses would be
about 6% of sales —also up from recent years to include the addition of a quality-control department and two new sales agents.
Depreciation is at 10% of cost of property, plant and equipment (PPE). Additions during 20X6 is expected to amount to PHP1,200,000
which will be paid on January 20X7. The Company’s policy is to expense full year’s depreciation on the date of purchase. The
Company expects inventory level for 20X6 to be the same as 20X5.

The company’s income tax rate was 30% paid for each quarter in May, August, November, and April of the following year,
respectively. The company opts to use optional standard deduction of 40% from the company’s gross profit to arrive at the taxable
income for the quarter.

The delivery contractor’s fee (at 3% of sales) was collected at the loading gate as trucks left to make deliveries to customers. Ms. Muff
proposed to pay dividends of PHP450,000 per quarter. For years Sweet Beginnings had paid high dividends.

Mr. Phil observed that sales collections in any given month had been running steadily at the rate of 40% of the last month’s sales plus
60% of the sales from the month before last. The value of raw materials paid in any month represented on average 55% of the value of
sales expected to be made two months later. Wages and other expenses in a given month were equivalent to about 34% of purchases in
the previous month. As a matter of policy, Ms. Muff wanted to see a cash balance of no less than PHP640,000.

Sweet Beginnings Co. had a line of credit from Fresh Rural Bank, where it also maintained its cash balances. Fresh Rural Bank’s
short-term interest rate was currently 16%. Return on investment for short term investments is at 12%.

Historical Information

Problem

Ms. Muff needs to prove that the company will be liquid enough to pay for its loans with Fresh Rural Bank so that it will be allowed to
ask for another loan to meet the delivery contactor’s fee. How should Ms. Muff explain to First Rural Bank that the company is in a
good financial position? Moreover, should the company prove to have financial liquidity problems, what can to company do to cope
with their need for cash?

Learner’s Guide

1. Assume that you are Ms. Muff and you will be presenting to the Fresh Rural Bank. Convince the bank that you are in a good
financial position evidenced by your cash budget and projected financial statements. 2. Prepare a monthly cash budget for Sweet
Beginnings Co. for the year ending December 20X6. Start with the monthly sales forecast (Tip: Forecast sales up to Feb 20X7). 3