Surecut Shears Inc Case

SureCut Shears Inc.

1. What have been the historical needs for external funds for SureCut? (Consider the timing, magnitude, and durations of the needs.)

The SureCut chose line of credit as an external financing. A line of credit is the way to lend money by securing a loan with collaterals. In June 1995, Mr.Fischer loaned $3.5 million from Hudson National Bank and promised to pay back by December of that year. He needed that money for the plant modernization program which was half completed and planned to be finished by August 1995.

2. What assumptions did Mr. Fischer make when he prepared the forecasts shown in case Exhibits 1 and 2? Were these assumptions reasonable? 

In Exhibit 1 and 2 appears that Mr.Fischer assumed that sales would increase during the July and December. Also, Mr.Fischer would have assumed that a loan from Hudson National Bank would have been repaid be the scheduled time. Exhibit 2 shows that the cash balance remains steady with a large amount of increase in December. These assumptions were reasonable because it is obvious that the most of the sales were sales of shears for SureCut. The sales that are cyclical in nature are unpredictable. Sales of SureCut are cyclical, even though shears industry is not, and Mr.Fischer should have considered this.

3. Why is SureCut unable to repay its bank loan as scheduled? (Give you answer in general terms and then in specific terms by comparing the projected and actual financial statements of the company.) 

The problem that SureCut faced is that its inability to repay the debts on time. To see the major factor we need to calculate current and quick ratios. Both ratios are liquidity ratios that measures the firm’s ability to repay its debt.

Forecast: Current ratio=Current Assets/Current Liabilities

=$11,200/$1,697=7.043

Quick Ratio=Current Assets-inventory/Current liabilities

=$11,952-$5563/$1,697=3.765

Actual: Current Ratio=$12,716/3,465=3.661

Quick...