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Case 1 TEACHING NOTE KHF CORPORATION

INTRODUCTION 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. SUGGESTED TEACHING APPROACH We suggest assigning this case after coverage of a) financial statement analysis and b) opportunity cost of failing to take a cash discount. While collections of receivables and improving payments are implied as a solution to this situation, the real issue is the opportunity cost of failing to take a cash discount. 100% of the business of KHF involves credit purchases of inventory. KHF is not taking advantage of the cash discount, which causes cost of goods sold to be unnecessarily high. The questions posed to the student are designed to review the facts of the case and to ask them to identify the issue(s). In our experience, only the few astute students will pick up on the tremendous potential of borrowing (at a bank, perhaps; even with Horne's destruction of the firm's credit rating, he could still get loans from his boyhood friends - the bankers) at a reasonable rate, say 8%, and paying all payables within the discount...