The Stone Sister’s parents bought the Stone Creek vineyard in the early 1950s. These vineyards were not used commercially in the beginning. The parents, with the aim of reducing taxes made their daughters the owners of the vineyard. In the 1990s, they took control of it and developed the necessary infrastructure for the business’s expansion. However, internal funds were not sufficient for this cause. The sisters borrowed a huge load of debt to invest in the expansion of the business. Even after ten years, the company could not become financially stable. It depended on external finances. The sisters were out of options for externally financing the vineyard. Mr. Malone offered a loan for the company, and the sisters got an opportunity to remain the vineyard’s managers for the upcoming decade.
Depreciation and Amortization
Changes in Capital Expenditures
Changes in Net Working Capital
Free Cash Flows
External Financing Needs
Income Statement (5% scenario)
Balance Sheet (5% scenario)
Income Statement (10% scenario)
Balance Sheet (10% scenario)
Income Statement (20% scenario)
Balance Sheet (20% scenario)
Free Cash Flows 5%
Free Cash Flows 10%
Free Cash Flows 20%
What are the unique characteristics of this industry and the company that result in the financial challenges being faced by the Stone sisters? Make certain to mention the firm’s current goals, objectives and strategies.
Perform a SWOT analysis.
Evaluate the operating and financial performance of Stone Creek over the last 5 years. Why has the firm required the extensive use of external financing the last 5 years when profits have been positive and margins have expanded?
How have the Stone sisters met their financing needs over the 5 years? Examine all sources and uses of funds and comment on management’s decisions as far as effectiveness. Has Stone Creek’s financial strength increased with its apparent success in the marketplace?
Create pro forma Income Statement and Balance Sheets for the next 2 years using a. Only internally generated funds (5%) b. Internal and external funds that keep debt/total capital and short term/long term debt ratios constant (10%). c. With funding to aid the continued 20% growth rate. d. Compute the Free cash flow under each assumption.
Comment on the projects with respect to the overall financial strength of Stone Creek using the ratios that we have prepared and discussed during class.
If you were Mr Serrano would you make the loan?
Evaluate the valuation provided by calculating the Free Cash Flow of Stone Creek for years 1996 to 1999 by using the free cash flow computed in question 5.
Is the 11 million dollar offer reasonable?
How should the Stone sisters resolve their dilemma? (I.e. pick a growth rate and financing method that maximizes value.