ACG-2021 Lecture Notes - Lecture 2: Promissory Note, Accounts Payable, Current Liability
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Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.
A major reason for Cermcoâs success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermcoâs CRM because of its superior features.
Annual revenues for Cermcoâs three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.
Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermcoâs CRM product continues to enjoy the highest industry ratings and a loyal customer base.
Cermcoâs balance sheets for the most recent three years follow:
CERMCO Balance Sheet December 31 | ||||
20X5 | 20X4 | 20X3 | ||
Assets | ||||
Current assets | ||||
Cash and cash equivalents | $390 | $1,386 | $2,603 | |
Short-term investments | â | â | â | |
Net receivables | 720 | 664 | 1,225 | |
Inventory | â | â | â | |
Other current assets | 412 | 469 | 892 | |
Total current assets | $1,522 | $2,519 | $4,720 | |
Long-term investments | 1,215 | â | â | |
Property, plant, and equipment | 76 | 258 | 454 | |
Goodwill | 545 | 1,757 | 2,194 | |
Intangible assets | 999 | 1,844 | 3,644 | |
Accumulated amortization | â | â | â | |
Other assets | â | â | â | |
Deferred long-term asset charges | â | â | â | |
Total assets | $4,357 | $6,378 | $11,012 | |
Liabilities | ||||
Current liabilities | ||||
Accounts payable | $469 | $1,174 | $1,436 | |
Short/Current long-term debt | â | â | 600 | |
Other current liabilities | 1,227 | 1,358 | 1,496 | |
Total current liabilities | $1,696 | $2,532 | $3,532 | |
Long-term debt | â | â | â | |
Other liabilities | â | â | â | |
Deferred long-term liability charges | â | â | â | |
Minority Interest | â | â | â | |
Negative goodwill | â | â | â | |
Total liabilities | 1,696 | 2,532 | 3,532 | |
Stockholders' equity | ||||
Misc. stock option warrants | â | â | â | |
Redeemable preferred stock | â | â | â | |
Preferred stock | 3,014 | 3,211 | 2,333 | |
Common stock | 16 | 16 | 13 | |
Retained earnings | â25,513 | â23,814 | â19,165 | |
Treasury stock | â | â | â | |
Capital surplus | 25,168 | 25,564 | 25,862 | |
Other stockholdersâ equity | â24 | â1,131 | â1,563 | |
Total stockholdersâ equity | $2,661 | $3,846 | $7,480 | |
Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.
Cermco produces and sells specialty customer relationshipmanagement (CRM) solutions to small and medium-size businesses inthe United States and Canada. The company is more than 20 years oldand has a steady, loyal customer base.
A major reason for Cermcoâs success lies in the ability of itsproduct to easily integrate with various accounting and ERPsystems. As a result, even when clients upgrade their entireaccounting systems to expensive ERP solutions, they continue to useCermcoâs CRM because of its superior features.
Annual revenues for Cermcoâs three most recent years are about$11 million (20X3), $7 million (20X4), and $3 million (20X5),respectively. Overall interest expenses and operating margins haveremained a relatively constant percentage of revenues.
Cermco attributes the decline in revenues to declines in marketshare as a result of natural client turnover and the entrance ofmany other small competing software companies into the market.Nevertheless, Cermcoâs CRM product continues to enjoy the highestindustry ratings and a loyal customer base.
Cermcoâs balance sheets for the most recent three yearsfollow:
CERMCO Balance Sheet December 31 | ||||
20X5 | 20X4 | 20X3 | ||
Assets | ||||
Current assets | ||||
Cash and cash equivalents | $390 | $1,386 | $2,603 | |
Short-term investments | â | â | â | |
Net receivables | 720 | 664 | 1,225 | |
Inventory | â | â | â | |
Other current assets | 412 | 469 | 892 | |
Total current assets | $1,522 | $2,519 | $4,720 | |
Long-term investments | 1,215 | â | â | |
Property, plant, and equipment | 76 | 258 | 454 | |
Goodwill | 545 | 1,757 | 2,194 | |
Intangible assets | 999 | 1,844 | 3,644 | |
Accumulated amortization | â | â | â | |
Other assets | â | â | â | |
Deferred long-term asset charges | â | â | â | |
Total assets | $4,357 | $6,378 | $11,012 | |
Liabilities | ||||
Current liabilities | ||||
Accounts payable | $469 | $1,174 | $1,436 | |
Short/Current long-term debt | â | â | 600 | |
Other current liabilities | 1,227 | 1,358 | 1,496 | |
Total current liabilities | $1,696 | $2,532 | $3,532 | |
Long-term debt | â | â | â | |
Other liabilities | â | â | â | |
Deferred long-term liability charges | â | â | â | |
Minority Interest | â | â | â | |
Negative goodwill | â | â | â | |
Total liabilities | 1,696 | 2,532 | 3,532 | |
Stockholders' equity | ||||
Misc. stock option warrants | â | â | â | |
Redeemable preferred stock | â | â | â | |
Preferred stock | 3,014 | 3,211 | 2,333 | |
Common stock | 16 | 16 | 13 | |
Retained earnings | â25,513 | â23,814 | â19,165 | |
Treasury stock | â | â | â | |
Capital surplus | 25,168 | 25,564 | 25,862 | |
Other stockholdersâ equity | â24 | â1,131 | â1,563 | |
Total stockholdersâ equity | $2,661 | $3,846 | $7,480 | |
Produce a valuation estimate for Cermco for December 31, 20X5.Use whatever valuation method you think best but justify yourchoice. Note that you can estimate the annual income fromyear-to-year changes in the balance sheet.
A fire destroyed your firmâs ending balance sheet and income statement after the year-end
but before the financial statements are released. However, you have been successful in obtaining the
numbers for the beginning balance sheet and the statement of cash flows, which are provided to you and
your team members in Excel format. Fields representing the missing balance sheet and income statement
are End of year2 in the Excel sheet
CONSOLIDATED BALANCE SHEETS (USD $) | End of year 2 | End of year 1 | |
In Thousands, unless otherwise specified | |||
Current assets: | |||
Cash and cash equivalents | ã | 598 | |
Receivables, net | ã | 230 | |
Inventories, net | ã | 2309 | |
Other current assets | ã | 47 | |
Total current assets | ã | 3184 | |
Property and equipment, net of accumulated depreciation | ã | 1292 | |
Assets held for sale | ã | 1 | |
Goodwill | ã | 76 | |
Intangible assets, net | ã | 29 | |
Other assets, net | ã | 32 | |
Assets, Total | ã | 4614 | |
Current liabilities: | ã | 0 | |
Current portion of long-term debt | ã | 0 | |
Accounts payable | ã | 2030 | |
Accrued expenses | ã | 380 | |
Other current liabilities | ã | 150 | |
Total current liabilities | ã | 2560 | |
Long-term debt | ã | 604 | |
Other long-term liabilities | ã | 239 | |
Commitments and Contingencies | ã | 0 | |
Stockholders Equity Attributable to Parent [Abstract] | ã | 0 | |
Preferred stock, nonvoting, $00001 par value | ã | 0 | |
Common stock, voting, $00001 par value | ã | 0 | |
Additional paid-in capital | ã | 520 | |
Treasury stock, at cost | ã | -27 | |
Accumulated other comprehensive income (loss) | ã | 3 | |
Retained earnings | ã | 715 | |
Total stockholders equity | ã | 1210 | |
Liabilities and Stockholders Equity, Total | ã | 4613 | |
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) | 12 Months Ended | ||
In Thousands, except Per Share data, unless otherwise specified | Year 2 | ||
Net sales | ã | ||
Cost of sales, including purchasing and warehousing costs | ã | ||
Gross profit | ã | ||
Selling, general and administrative expenses | ã | ||
Operating income | ã | ||
Interest expense | ã | ||
Other income, net | ã | ||
Total other, net | ã | ||
Income before provision for income taxes | ã | ||
Provision for income taxes | ã | ||
Net income | ã | ||
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) | 12 Months Ended | ||
In Thousands, unless otherwise specified | Year 2 | ||
Cash flows from operating activities: | |||
Net income | $392 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | |||
Depreciation and amortization | 208 | ||
Share-based compensation | 13 | ||
Loss on property and equipment, net | 1 | ||
Other | 2 | ||
Provision for deferred income taxes | -2 | ||
Excess tax benefit from share-based compensation | -16 | ||
Increase Decrease in Operating Capital | |||
Receivables, net | -32 | ||
Inventories, net | -204 | ||
Other assets | 11 | ||
Accounts payable | 113 | ||
Accrued expenses | 63 | ||
Other liabilities | -4 | ||
Net cash provided by operating activities | 545 | ||
Cash flows from investing activities: | |||
Purchases of property and equipment | -196 | ||
Payments to Acquire Businesses, Gross | -186 | ||
Sale of certain assets of acquired business | 19 | ||
Proceeds from sales of property and equipment | 1 | ||
Net cash used in investing activities | -362 | ||
Cash flows from financing activities: | |||
(Decrease) increase in bank overdrafts | -3 | ||
Decrease in financed vendor accounts payable | 0 | ||
Issuance of senior unsecured notes | 449 | ||
Payment of debt related costs | -9 | ||
Borrowings under credit facilities | 0 | ||
Payments on credit facilities | 0 | ||
Dividends paid | -18 | ||
Proceeds from the issuance of common stock, primarily exercise of stock options | 4 | ||
Tax withholdings related to the exercise of stock appreciation rights | -22 | ||
Excess tax benefit from share-based compensation | 16 | ||
Repurchase of common stock | -81 | ||
Contingent payment accrued on acquisitions | 5 | ||
Other | -1 | ||
Net cash provided by (used in) financing activities | 331 | ||
Net increase (decrease) in cash and cash equivalents | 514 | ||
Cash and cash equivalents, beginning of period | 598 | ||
Cash and cash equivalents, end of period | 1,112 | ||
Supplemental cash flow information: | |||
Interest paid | 35 | ||
Income tax payments | 219 | ||
Non-cash transactions: | |||
Accrued purchases of property and equipment | 21 | ||
Retirement of common stock | 0 | ||
Contingent consideration accrued on acquisitions | 0 | ||
Changes in other comprehensive income | 1 | ||
Declared but unpaid cash dividends | $4 |