Hansson Private Label Essay

2640 Words Feb 10th, 2014 11 Pages
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Essay Sample: Page 2
EBIT = Revenue – COGS – SGA

OCF = EBIT – Taxes + Depreciation

Second, we calculate the changes in working capital using the DSO, DSI and DPO ratios provided in the request form.

Capital Expenditure = Change in Net Working Capital

Net Working Capital = Current Asset – Current Liabilities

= A/R + Inventory – A/P

A/R = DSO * (Revenue / Number of days in Period)

Inventory = DSI * (COGS / Number of days in Period)

A/P = DPO * (COGS/ Number of Days in Period)

Afterwards we have all calculation available to estimate the Free Cash Flow (FCF), calculated as following

FCF = OCF – Capital expenditure

Referring to Exhibit 5, Executive VP of Manufacturing Robert Gates based his capital request form on a ten-year deal to estimate the project’s FCFs. However, from the information provided in the case we know that “the customer would commit to only a three-year contract”. Robert Gates financial assumptions expect capacity utilization to be increasing during the course of the project, but don’t take into account the operational risks that might occur from a changing “relationship with the customer” or a disappearing “demand (…) at the end of the initial three-year contract”.

Consequently, this would decrease revenue and reduce the FCF. Also, the risk measurement for a ten-year estimation shouldn’t be neglected. First, “making this (…) investment and incurring the associated debt (…) increases HPL’s (…) risk of financial distress should
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