Prepare a 350-700-word case study analysis of Case #16: "Reed's Clothier" located in the Cases in Financial Management text, by Sulock and Dunkelberg. Be sure to address the following in your analysis:
a. Briefly summarize the case.
b. Formulate answers to questions 1, 2, 3, 4, 5, 6, 7, and 8. For question 1, you should calculate the ratios listed in Exhibit 4 of the case.
Jim Reed, II had meeting with his banker, Harold Holmes of First Virginia National Bank, which is the only bank that Reed's Clothier used since its establishment. The bank informed to him that they can no longer extend their line of credit and demand for the repayment of the over due note payable of $130,000 within 30 days. Holmes suggested Jim to reduce the store's inventory via sale, which is against its traditional semiannual sales in January and July.
Reed's Clothier was founded in 1934 by Jim Reed after he had completed his military tour targeting at Virginia Military Institute (VMI) graduates who lived in and around Lexington, Virginia. Sales were growing each year and that the primary base of ex-VMI graduates was growing. Jim decided to retire and turned the company to his son, Jim Reed II.
In 1976, Reed's occupied the first floor of a three-story building in the heart of downtown Lexington with second floor as the store's office and warehouse and third floor to rent out to the law firm. In 1981, Jim decided to expand the retail floor up to the second floor and created a long-term mortgage debt of $880,000. Jim Reed II had slowly increased the amount of inventory in the store in order to capture all the sales opportunity. As a result, sales had doubled in the last 10 years, but inventory had tripled over the same period.
The increase in purchases and the interest and principal payments on the mortgage had seriously eroded Reed's positive cash flow in the past three years. The cash crunch had been met through a combination of the increase in the line of credit with the bank and not taking the cash discounts from the suppliers. Suppliers term of credit is 3/10, net 60. However, its accounts were now almost 40 days past due, and the suppliers were demanding payment. Otherwise, they will cease the deliveries of the supplies. This causes Jim to think about increasing his line of credit for another $100,000.
However, the banker that Jim normally dealt with, Bob Roberts, had been promoted. Jim has been introduced to Holmes, who had looked to the up to date financial statements of the company. Holmes had noticed the cash ...
This solution is comprised of a detailed explanation to summarize the case.