Part one is
Perking Up profit at better Brew and Perfect Blend
Part two Is
Cablevision Slim Down to Beef Up Profits
Perking Up Profits at Better Brew and Perfect Blend
After years of dreaming about owning your own business, you decided that owning a coffee shop would be perfect. Rather than start from scratch, however, you and your partners decide to look at two existing establishments, Better Brew and Perfect Blend. The two are for sale at the same price, and they are located in equally attractive areas. You manage to get enough financial data to compare the year-end condition of the two companies, as shown below. Study the numbers carefully; your livelihood depends on choosing wisely between the two establishments.
Better Brew Perfect Blend
Cash $10,000 $25,000
Accounts receivable 2,000 4,000
Coffee equipment 50,000 80,000
Supplies 11,000 18,000
Other assets 22,000 34,000
TOTAL ASSETS $95,000 $161,000
Liabilities and Owners' Equity
Accounts payable $21,000 $38,000
Bank loans payable 49,000 68,000
Owner's equity 25,000 55,000
TOTAL LIABILITIES & OWNERS' EQUITY $95,000 $161,000
Personal withdrawls from cash during 2003 $40,000 $38,000
Owners' investments in business during 2003 $16,000 $32,000
Capital balances for each business on January 1, 2003 $30,000 $12,000
December 31, 2003, year end balance sheets
1. What factors should you consider before deciding which company to buy? What additional data might be helpful to you? (Note that net income is implied).
2. What questions should you ask about the methods used to record revenues and expenses?
3. On the basis of the data provided, which company would you purchase? Detail the process you used to make your decision.
Cablevision Slims Down to Beef Up Profits
In your text review, "Cablevision Slims Down to Beef Up Profits" (page 454-455). After reading the Case for Critical Thinking, answer all of the associated questions as follows:
1. Why did Dolan decide not to reduce customer service staff in the cable operation?
2. How did the company's sinking stock price affect its financial management?
3. Why couldn't Cablevision simply borrow $600 million to close the cash flow gap?
4. Visit the investor information section of Cablevision's website, http://www.cablevision.com, and check out the financial news. How has the company performed financially in recent quarters?
The attached article for part two is enclosed
Part Two - A Case for Critical Thinking
Cablevision Slims Down to Beef up Profits
It's a dilemma most college students can certainly relate to: running a few dollars short when expenses pile up faster than income. If you can't earn more, the only choices are to spend less or to borrow enough to bridge the gap. James L. Dolan and the management team at Cablevision Systems ran into the same problem in 2002. Their only difference-the gap was $600 million wide.
Financing High-Speed Growth
In recent years, the name of the game in the media business has been size-bigger is better and biggest is best of all. From local cable companies to international giants such as Time Warner and Viacom, media firms acquired smaller companies and grew on the theory that market share was the key to success. One by one, though, many of these behemoths began to struggle under the challenge of financing their complex, far-flung operations.
New York-based Cablevision Systems started as a tiny local cable service with 1,500 subscribers and grew into a multibillion-dollar conglomerate with three million cable customers, a chain of electronics stores (The Wiz), a local telephone company, Rainbow Media Holdings (whose cable channels include American Movie Classics and the Independent Film Channel), a chain of movie the¬aters (Clear view Cinemas), stakes in a fledging wireless phone service, entertainment properties (Madison Square Garden and Radio City Music Hall), and-if all that weren't enough-the New York Knicks and several other professional sports teams.
Repairing a Weak Signal
Like most public companies, Cablevision relies heavily on sales of its own stock as a potential source of cash and as collateral for loans (if it needs to borrow). Unfortunately, like too many media and technology-related stocks, in the summer of 2002 Cablevision's market value took a nasty tumble; from a typical range of $60 to $70 a share to as low as $5 a share. It was also losing cable subscribers, thanks in large part to its refusal to carry New York Yankees games (Cablevision certainly wanted to carry the games,
Dozen unprofitable stores in The Wiz chain, refocused the Light path business, and laid off 3,000 employees.
The moves were drastic, but so far they've seemed to pay off. In February 2003 the company announced a profitable fourth quar¬ter, ending 2002 on a positive note. Cablevision lost 5,300 more basic cable subscribers that quarter but gained 136,000 higher-revenue digital customers. Net income for the quarter was over $500 million, compared to a loss of nearly $300 million for the same quarter the previous year. Dolan is confident the company is back on track, predicting plenty of money in the bank by die end of" 2003 and continued growth into the future.
But not at the price the Yankees channel was demanding). Moreover, advertising business was down as a result of a general recession stretching back to 2001. The company was losing money, and the trend was not encouraging.
At the same time, Cablevision needed to keep investing in new cable and Internet technologies in order to retain existing customers and attract new subscribers. By midsummer, the cash-flow crunch reached a critical point, with cable revenues in danger and the company's ability to generate funds by selling stocks or securing attractive loans on the decline. Financial projections showed the company would need a cash infusion of $600 million in 2003. Borrowing enough to close the gap would be tough, given the company's sinking stock-collateral value and the fact that it was already $7 billion in debt after acquiring all those business units over the years.
Banking on New Business
The company had to act; both to shore up its finances and to give investors some reason to buy Cablevision stock and thereby help push the price back up. Dolan knew how much money he needed to find; the question was how to get it. Cutting capital investments in the cable operation would delay attractive new features and run the risk of losing more subscribers to the competition. Reducing staff could affect customer service, at a time when Cablevision was already in hot water with many New Yorkers for not carrying the Yankees games.
With no single place to make enough cuts to solve the problem, Dolan developed a multipart plan for increasing revenues and cutting costs. To both protect and grow the core cable business, which offered multiple opportunities for selling new digital services such as high-speed Internet access and video on demand, Cablevision announced plans to accelerate completion of its advanced broadband network. Meanwhile, the company main¬tained existing staff in the customer service call centers and field service operations to handle increased customer inquiries. Then Dolan sold the wireless phone licenses, sold the Bravo cable channel, put Clear view Cinemas up for sale, closed more than two
Here is just a sample of what you will find in the solution:
"For example under the cash method, firms generally report income in the tax year they receive it and deduct expenses in the..."