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    Guslits Grunwald Case

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    Armin Joel Dimalibot
    The new product line will increase Guslits' annual profit and cash flows. Net profit will rise from $1.56 million to $2.01 million and cash inflows will increase from $1.96 million to $2.56 million. To finance the $3 million investment in new equipment, Guslits took on $3 million in long-term debt, increasing its debt-to-equity ratio from 50% to 87.5%. While this highly leveraged position increases risk, shareholders will likely be impressed by the improved financials. The investment also seems attractive overall as the debt ratio remains manageable and the net profit margin increases by 1%, suggesting good returns from the new product line.

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    Guslits Grunwald Case

    Uploaded by

    Armin Joel Dimalibot
    78 views2 pages
    The new product line will increase Guslits' annual profit and cash flows. Net profit will rise from $1.56 million to $2.01 million and cash inflows will increase from $1.96 million to $2.56 million. To finance the $3 million investment in new equipment, Guslits took on $3 million in long-term debt, increasing its debt-to-equity ratio from 50% to 87.5%. While this highly leveraged position increases risk, shareholders will likely be impressed by the improved financials. The investment also seems attractive overall as the debt ratio remains manageable and the net profit margin increases by 1%, suggesting good returns from the new product line.

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    The new product line will increase Guslits' annual profit and cash flows. Net profit will rise from $1.56 million to $2.01 million and cash inflows will increase from $1.96 million to $2.56 million. To finance the $3 million investment in new equipment, Guslits took on $3 million in long-term debt, increasing its debt-to-equity ratio from 50% to 87.5%. While this highly leveraged position increases risk, shareholders will likely be impressed by the improved financials. The investment also seems attractive overall as the debt ratio remains manageable and the net profit margin increases by 1%, suggesting good returns from the new product line.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    78 views2 pages

    Guslits Grunwald Case

    Uploaded by

    Armin Joel Dimalibot
    The new product line will increase Guslits' annual profit and cash flows. Net profit will rise from $1.56 million to $2.01 million and cash inflows will increase from $1.96 million to $2.56 million. To finance the $3 million investment in new equipment, Guslits took on $3 million in long-term debt, increasing its debt-to-equity ratio from 50% to 87.5%. While this highly leveraged position increases risk, shareholders will likely be impressed by the improved financials. The investment also seems attractive overall as the debt ratio remains manageable and the net profit margin increases by 1%, suggesting good returns from the new product line.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Armin Joel Dimalibot Christine Joyce Natividad

    Jian May Foster Rafael Carlos Silvestre

    CASE STUDY - GUSLITS & GRUNWALD CASE


    Computation:
    NEW PRODUCT CURRENT AFTER NEW
    LINE PRODUCT LINE PRODUCT LINE

    Net Sales 2,800,000 12,000,000 14,800,000

    Cost of Sales (1,600,000) (7,500,000) (9,100,000)

    Operating Expense (200,000) (1,800,000) (2,000,000)

    Interest (100,000) (100,000)

    Income 1,000,000 2,600,000 3,600,000

    Tax (400,000) (1,040,000) (1,440,000)

    Cost After Tax (150,000)

    Net Income 600,000 1,560,000 2,010,000

    NEW PRODUCT CURRENT AFTER NEW


    LINE PRODUCT LINE PRODUCT LINE

    Depreciation 150,000 400,000 550,000

    Total Cash Inflow 750,000 1,960,000 2,560,000

    Return in Asset 20% 20% 20%

    Total Assets 12,000,000 15,000,000

    Equipment needed 3,000,000

    Current Liability 3,000,000 3,000,000

    Long Term Debt 3,000,000 1,000,000 4,000,000

    Total Liability 3,000,000 4,000,000 7,000,000

    Equity 8,000,000 8.000

    Total Liabi & Equity 3,000,000 12,000,000 15,000,000


    REQUIREMENTS:

    1. What impacts will the new product line have on profit measures and cash flows?

    Cash inflows going to follow the implementation of the new line of products would be
    $2,340,000.00, up from $1,800,000.00 the year before. The implementation of the new line of
    products will result in a total profit of $2,010,000, compared to a net profit of $1,560,000.00 last
    year.

    2. Examine and comment on Guslits’ strategy to finance the investment. Is it likely


    that shareholders will be impressed with the investment? Why?

    CURRENT PRODUCT LINE AFTER NEW PRODUCT


    LINE

    Total Liability 8,000,000 8,000,000

    Equity 12,000,000 15,000,000

    Debt to Equity 50% 87.50%

    Net Income 1,560,000 2,010,000

    Total Cash Inflow 1,960,000 2,560,000

    Guslits decided on debt financing instead of issuing stock or making an equity investment to
    fund the company's new product line. By opting to issue long-term debt to fund the new line, the
    company's debt-to-equity ratio will rise to 87.5 percent, up from 50 percent last year before the
    new line, putting them in a highly leveraged position and potentially exposing them to a default
    in the worst-case situation. The benefit, nevertheless, exceeds the expense of paying the interest.
    The shareholders will be impressed by the new investment since both the net profit and cash
    inflows have improved dramatically.

    3. In your opinion, is the investment attractive? Explain your answer.

    CURRENT PRODUCT LINE AFTER NEW PRODUCT


    LINE

    Debt Ratio 0.33 0.47

    Net Profit Margin Ratio 13% 14%


    All in all, the new funding is still enticing because it's much more fruitful, regardless of the fact
    that it has become more able to leverage. Although it is a significant financial investment, the
    debt ratio still seems to be manageable, indicating that a company seems to have at least once or
    twice quite so many assets as liabilities. Provided that this proportion would include tax payment
    in addition to all other expenditures, the profitability ratio increased by 1%, implying that the
    business will do very well following the introduction of the proposed new product line.

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