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Solving Problems in Difficulties in Paying Trade Payables

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This case involves the evaluation of Kitty (Hawk Food), Inc., a restaurant food wholesaler in eastern North Carolina. The firm is experiencing difficulty paying trade debt and collecting trade receivables on time, which is causing cashflow difficulties and threatening the creditworthiness of the firm. The case should require 1 to 1 1/2 hours of outside preparation by students, and can be effectively discussed in a one-hour class. It is appropriate for managerial finance courses at the undergraduate level, and perhaps at the lower MBA level as a minor exercise.

KHF Corporation is experiencing a threat to its creditworthiness due to difficulties in paying trade payables. Its colorful CEO, responsible for collections of receivables, is not providing for collections very well. He is much more of a good ole' boy marketing type. The firm is not performing very well, and faces large seasonal swings in business. The student is tasked with solving the dilemmas posed by the case.

1. Look at a map of Eastern North Carolina. Which of the towns served by KHF are resort areas? What proportion of KHF's business is resort business?
2. What are the characteristics of resort business in comparison to year-round business? Assuming these areas open for business around March 15th, and close around October 15th, would you say that KHF's overall business is seasonal?
3. Survey the financial condition and performance indicated by KHF's financial statements, and summarize your findings. Does anything stand out?
4. KHF is basically a merchandising firm, buying inventory, marking it up, and then selling it. Is KHF's dependence on trade accounts (both receivables and payables) surprising for a merchandising firm?
5. Develop a plan for solving KHF's problem.

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1. Look at a map of Eastern North Carolina. Which of the towns served by KHF are resort areas? What proportion of KHF's business is resort business?

The towns of Nag's Head, Kill Devil Hills, and Kitty Hawk are all resort areas. Many of the restaurants are seasonally open. They account for 53% of KHF sales. Together, they represent the entire recent expansion.

2. What are the characteristics of resort business in comparison to year-round business? Assuming these areas open for business around March 15th, and close around October 15th, would you say that KHF's overall business is seasonal?

53% of KHF sales are generated between March and October. The rest of KHF sales are generated year-round. It should be obvious to students that the firm is in a largely seasonal business.

3. Survey the financial condition and performance indicated by KHF's financial statements, and summarize your findings. Does anything stand out?

While net income was positive in 1999, the financial performance is not stellar by any means (only a 2% profit margin). A series of ratio calculations may reveal some cash ...

$2.19
See Also This Related BrainMass Solution

Statement

Question 1

Gross profit is equal to

a.sales minus cost of goods sold.
b.sales minus (selling and administrative expenses).
c.sales minus (cost of goods sold and selling and administrative expenses).
d.sales minus (cost of goods sold and depreciation expense).

Question 2
Which of the following is not a true statement about the goal of maximizing shareholder wealth?

a.It takes into account the timing of cash-flows.
b.It is a short-run point of view which takes risk into account.
c.It considers risk as a factor.
d.None of the above.

Question 3
The major difficulty in most insider-trading cases has been

a.that lenient judges have simply released the guilty individuals.
b.that insider trading, even though illegal, actually serves a beneficial economic and financial purpose.
c.that inside trades have not been legally well defined.
d.inside trades actually have a beneficial effect on the wealth of all stockholders.

Question 4
Which of the following is not a primary source of capital to the firm?

a.assets
b.common stock
c.preferred stock
d.bonds

Question 5
When a corporation uses the financial markets to raise new funds, the sale of securities is made in the

a.primary market.
b.secondary market.
c.on-line market.
d.third market.

Question 6
One of the major advantages of a sole proprietorship is

a.that the owner has limited liability.
b.that stock in the proprietorship can be easily transferred
c.that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm.
d.low operating costs.

Question 7
How many of the following items are found on the balance sheet, rather than the income statement?

. Accounts receivable
. Retained earnings
. Income tax expenses
. Accrued expenses
. Cash
. Selling and administrative expenses
. Plant and equipment
. Operating expenses
. Marketable securities
. Interest expenses

a.3 of these items are found on the balance sheet
b.4 of these items are found on the balance sheet
c.5 of these items are found on the balance sheet
d.6 of these items are found on the balance sheet

Question 8
With a Subchapter S corporation

a.income is taxed as direct income to stockholders.
b.stockholders have the same liability as members of a partnership.
c.the number of stockholders is unlimited.
d.life of the corporation is limited.

Question 9
Agency problems are least likely to arise in which organizational form?

a.sole proprietorship
b.limited partnership
c.corporation
d.subchapter S corporation

Question 10
Increased productivity due to technology has

a.increased corporations' reliance on debt for capital expansion needs.
b.created larger asset values on the firm's historical balance sheet.
c.made it cheaper (in terms of interest costs) for firms to borrow money.
d.helped to keep corporate costs in check.

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