Envy Rides Case Summary

Case Analysis- Envy Rides

Key Details:

• Scott Miller is the banker, Jacob Hessels has requested a loan

o Miller feels 5 year loan with 9% interest (on outstanding portion) on long term part is fair, $45,000 of interest on working capital loan in both 2010 and 2011

• This is Envy Rides’ first experience at leveraging debt

o $510,000: $60,000 long term + $450,000 working capital for day-to-day

• $60,000 to add tattoo business to existing bike shop

• Project would take from Jan-May 2010 to complete

• $450,000 used to offset outstanding debts

• working capital can fluctuate up to $250,000 during slow sales from Nov-Feb (4 months)

• Sales of $6 million in 2010 ($50,000 tattoo), $7.5 million in 2011 ($100,000 tattoo)

• Salaries would be 12% of sales in 2010 and 13% of sales in 2011

• With the $450K they could reduce A/P to 175 days

• Inventory days would remain the same in 2010 but decrease to 270 days in 2011

• A/R % would remain unchanged

• Advertising would remain at same percentage of sales as 2009 in 2010 and 2011

• Other cost of sales expenses will remain at 2009 % of sales

• Non-sales accounts would remain at same $ level as 2009

Questions to Answer:

1. As Scott Miller, analyze the past financial performance of Envy Rides Inc.

a. Liquidity (ability to pay short-term obligations or sell assets quickly):

i. Quick ratio (acid test): .11 in 2010, .15 in 2011

ii. Current ratio: 1.33 in 2010, 1.85 in 2011

iii. Working Capital: 750,000 in 2010, 1.4 million in 2011

b. Solvency (capacity to meet long-term financial commitments):

i. Debt to equity: total debt/total equity; degree of financial leverage being used (how much the company is borrowing)

1. 2.8 in 2010, 1.16 in 2011

ii. Debt to assets: total debt/total assets; % of assets that have been financed with debt (the higher the riskier)

1. .74 in 2010, .54 in 2011

iii. Interest coverage (ability to pay interest expense w/ op. income)

1. 6.15 in 2010, 7.34 in 2011

2. Prepare 2...