Horniman Notes

(1) Statement of problem: Issue of economic vs accounting realties

Horniman Horticulture is a nursery business acquired by Bob Brown and his wife, Maggie Horniman in 2002 for $999,000.

In the past two years revenue growth has increased dramatically increased.

This growth far exceeds the industry average, anticipates future demand boosting revenue growth to 30%

Maggie Horniman, head of finance, has not used any outside financing, and is risk averse to debt financing.

There is concern over rising labor prices.

Most importantly, Horniman Horticulture has a target cash to sales ratio of 8%, but in 2005 that ratio fell to just .9%.

The company is profitable and sales growth exceeds all industry benchmarks.

However, the accounting is deceiving: Horniman Horticulture has a cash flow problem and there is question whether they are actually creating economic value?

If they do not address their issues now, the company will be headed for bankruptcy shortly.

(2) Facts and assumptions

In 2006, Bob Brown expects sales to grow at 30%.

We tested this growth rate and also used last year’s annual revenue growth rate of 15.48%.

The we used a sustainable growth rate model to calculate the long term growth rate to be 5.36% annually when the company reaches maturity

The percentage of sales method was used to forecast sales, COGS, total assets, and most liabilities.

Wages are assumed to be the same as last year at 2.33% of revenue.

We presumed the company would purchase the 12-acre parcel and explored both debt and equity financing.

We assumed a 9% discount rate if the company used their cash to finance the land.