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Capital Budgeting and Derivatives

It is August 8, 2005. You are a Financial Advisor. On July 20, 2005, you were contacted by management of Growing To Fast, Inc. (Company). They have asked you to help them turn the Company around. The Company has been in existence for 30 years manufacturing widgets that are used in the aerospace industry. The Company had been a leader with continued after tax profits. Three years ago, the Company expanded and modernized its facilities in the United States using tranches and derivatives to reduce short-term risk. The Company also invested in machinery and equipment under a fixed rate with a 7-year amortization and a 3-year balloon. This past year was the first year the Company had negative net income. After 6-months of current operations, management has projected another loss for the current year. The Company is experiencing negative cash flow, its current ratio is .85 to 1, its accounts receivable and inventories are growing with inventory turnover changing from 5.2 times to 2.1 times per year. It has lost a major account due to price competition, and its total debt to asset ratio is .65 to 1. The Company currently has not issued Preferred Stock nor does management use business planning or forecasting. Overseas competition is fierce and the Company's major competitor has relocated its plant operations overseas. The Company's Bank has asked for a plan. The stakeholders want a plan, NOW! The value of the stock in the market has lost 30%. Management is ready to downsize but is not sure.

Explain in detail what are the company's strengths and weaknesses? Also, what steps you would take to help this company using capital budgeting, derivatives and other financial tools? what are your recommendations? Prepare the report as you would for a written presentation to management. Limit your report to 750 words.

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Explain in detail what are the company's strengths and weaknesses? Also, what steps you would take to help this company using capital budgeting, derivatives and other financial tools? what are your recommendations?
The company's strengths are that it has been in the business and so has the experience and know how that few others in the business have. In addition, the company supplies widgets to the aerospace industry that is showing no signs of slowing down. The company is a leader in its industry and has been earning profits for a long time in a sustained manner. That it has modernized its industries and has expanded into the United States is also a strong point of the company. I addition, that the company's debt to asset ratio is .65 to 1 also shows that company has got borrowing capacity.
The company's weaknesses are that it has used derivatives to finance its operations in the United States, derivatives are a type of financial instruments whose value is 'derived' from the price of some underlying asset (eg an interest level or stock market index). They are designed to help companies "hedge" (protect themselves against the risk of price changes) or as speculative investments from which great profits can be made. The rapid growth in derivatives trading has played a major part in the growing volatility of the global financial system. Growing To Fast it seems has used equity based derivatives. In addition it has used tranches. Tranche is a term often used to ...

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