Essay on Dragon Soup Harvard Business Case

1315 Words May 7th, 2014 6 Pages
1. Using the excel spreadsheet provided, and the recommended consequential disclosures as a basis you your analysis, what recommendations would you give Phillips on each of the items listed below? In each case, justify your recommendations and estimate how much the decision will change the “true” value of the company and its value in the eyes of an investor in a private company.

a. The lease or buy decision, including whether to structure as an operating lease. The new canning equipment should be leased over the 14 year term with no bargain purchase option so as to structure it as an operating lease. The major factor to consider is what will boost Net Income the most given that the goal is raise the share price. After a
…show more content…
Dragon soup should reduce their End of Year Inventory to a safe level in order to maintain customer service levels. The case states that Dragon Soup’s competitors operate with 12% inventory levels, but Phillips feels comfortable reducing to a conservative 14% of sales for the time being.

c. Whether or not to ask Dunwood to guarantee the account receivable.

The account receivable should not be guaranteed by Dunwood. By accepting the guarantee Dragon Soup can increase its valuation to approximately by $1.2 million. However, since Dunwood is the majority stakeholder in the company most of this benefit would go to her should the company be sold. This would more than outweigh her minimal or total commitment to pay off $150,000 (⅓ of the $450,000) of J. N. & C.’s current debt total. Allowing the guarantee to be permitted would greatly increase the value of Dragon Soup in the short run. However, in a worst case scenario, Dunwood sells her stake in the company and refuses to keep her end of the bargain. This would revert the value of the company back down to its lower state, and it would be as if Dunwood stole the difference from those who purchased her share. Dragon Soup would have a very difficult time ever regaining investor confidence and would be badly damaged as a result. This conflict of interest should be noted and Dunwood should not be allowed to pay for others debt. After all the

Related Documents