ES101 Lecture Notes - Lecture 2: Natural Capital, Ecosystem Services, Environmentalism
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1. Define the terms capital structure, cost of capital, and working capital. Focus on how they are different from each other and impact both profitability and risk.
2. Determine Grounds Keeperâs capital structure and working capital.
3. If Grounds Keeper has a required rate of return on its long-term debt of 9% (before taxes) and a required rate of return on its common stock, a tax rate of 40%, what is its weighted average cost of capital (WACC) for 2012? How could Grounds Keeper lower its WACC? (HINT: you will need to look at the balance sheet to determine the weight of debt to equity.
4. What are the advantages to Grounds Keeper in using money market instruments as financing? How does this related to financing net working capital?
| Grounds Keeper | ||
| Consolidated Balance Sheets | ||
| (Dollars in thousands) | ||
| 2012 | 2011 | |
| Assets | ||
| Current assets: | ||
| Cash and cash equivalents | 78,240 | 44,395 |
| Receivables | 399,891 | 340,062 |
| Inventories | 844,737 | 736,677 |
| Total current assets | 1,322,868 | 1,121,133 |
| Fixed assets, net | 1,244,384 | 889,613 |
| Other long-term assets | 1,048,537 | 1,187,141 |
| Total assets | 3,615,789 | 3,197,887 |
| Liabilities and Stockholdersâ Equity | ||
| Current liabilities: | ||
| Accounts payable | 309,222 | 319,465 |
| Accruals | 201,017 | 145,240 |
| Notes payable | 9,748 | 6,669 |
| Total current liabilities | 519987 | 471374 |
| Long-term debt | 834574 | 814298 |
| Total liabilities | 1,354,561 | 1,285,672 |
| Stockholdersâ equity: | ||
| Common stock, $0.10 par value: | 15,268 | 15,447 |
| Additional paid-in capital | 1,464,560 | 1,499,616 |
| Retained earnings | 781400 | 397152 |
| Total stockholdersâ equity | 2,261,228 | 1,912,215 |
| Total liabilities and stockholdersâ equity | 3,615,789 | 3,197,887 |
| Grounds Keeper | |||||
| Consolidated Statements of Operations | |||||
| (Dollars in thousands except per share data) | |||||
| 2011 | ||||
| Net sales | 3,889,426 | 2,642,390 | |||
| Cost of sales | 2,589,799 | 1,746,274 | |||
| Gross profit | 1,299,627 | 896,116 | |||
| Selling and operating expenses | 481,493 | 348,696 | |||
| General and administrative expenses | 219,010 | 187,016 | |||
| Operating income | 599,124 | 360,404 | |||
| Interest expense | 22,983 | 57,657 | |||
| Income before income taxes | 576,141 | 302,747 | |||
| Income tax expense | 212,641 | 101,699 | |||
| Net Income | 363,500 | 201,048 | |||
| Basic income per share: | |||||
| Average shares outstanding | 154,933,948 | 146,214,860 | |||
| Earnings per common share | 2.35 | 1.38 |
Below is the provided information/scenario.
Grounds Keeper is considering adding fair trade coffee to their line of products. Other larger coffee companies are now including it, at consumersâ insistence. At a recent strategic management meeting, the companyâs officers identified the following points:
Fair trade coffee may attract new customers.
Fair trade coffee would allow Grounds Keeper to demonstrate its social responsibility.
Fair trade coffee would require more paperwork to meet certification and contract requirements.
The higher cost of Fair Trade Coffee would require a higher price or a reduced profit margin.
If coffee prices worldwide continue to increase, consumers may be reluctant to pay extra for Fair Trade Coffee.
Current suppliers of coffee to Grounds Keeper might be in competition with Fair Trade Coffee cooperatives.
One officer present asked the following question: Should we as a company have a good reason to try to influence actions in other parts of the world? Donât we have governments to do that?
Fair Trade Coffee
What is fair trade certification?
Much like organic certification, fair trade certification lets you know about the origin of a product. Fair trade certified products come from all over the world, but share a common history. Farmers who grow fair trade products receive a fair price, and their communities and the environment benefit as well.
Fair trade certified coffee directly supports a better life for farming families in the developing world through fair prices, community development and environmental stewardship. Fair trade farmers market their own harvests through direct, long-term contracts with international buyers, learning how to manage their businesses and compete in the global marketplace. Receiving a fair price for their harvest allows these farmers to invest in their families' health care and education, reinvest in quality and protect the environment. This empowerment model lifts farming families from poverty through trade, not aid, creating a more equitable and sustainable model of international trade that benefits producers, consumers, industry and the Earth. The Fair for Life label is backed by IMO, one of the third-party certifiers of fair trade products for the U.S. market.
The Fair for Life label guarantees:
Fair price: Family farmers receive fair prices for their harvest, and premiums specifically earmarked for community development projects; even higher premiums are given for certified organic products. Farmer organizations are also eligible for pre-harvest credit.
Environmental sustainability: Harmful agrochemicals and GMOs are strictly prohibited in favor of environmentally sustainable farming methods that protect farmers' health and preserve valuable ecosystems for future generations. Fair trade farmers protect the land and wildlife habitat by intercropping plant species to improve soil fertility and protect against erosion. Stringent environmental management programs, including water conservation, proper waste disposal and prohibitions on planting in protected areas further encourage environmental stewardship.
Fair labor conditions: Workers on fair trade farms enjoy freedom of association, safe working conditions and fair wages. Forced child labor is strictly prohibited.
Direct trade: Importers purchase from fair trade producer groups as directly as possible, eliminating unnecessary middlemen and empowering farmers to develop the business capacity needed to compete in the global marketplace.
Democratic and transparent organizations: Fair trade farmers and farm workers decide how to invest fair trade revenues, and proof of a democratic process is required.
Community development: Fair trade farmers and workers invest fair trade premiums in social and business development projects like scholarship programs, healthcare services and quality improvement training.
Examples of community projects include:
Members of the COSURCA coffee cooperative in Colombia successfully prevented the cultivation of more than 1,600 acres of coca and poppy used to produce illicit drugs.
In the highlands of Guatemala, indigenous Tzutuhil Mayans in the La Voz cooperative are sending local kids to college for the first time.
Near Lake Titicaca, in Peru, the CECOVASA cooperative is assisting members from Quechua and Aymara indigenous groups in improving coffee quality and transitioning to certified organic production.
The CECOCAFEN cooperative in Nicaragua established a reproductive health program providing tests for the virus that causes cervical cancer.
What is IMO "Fair for Life" fair trade certification?
"Fair for Life" is a brand neutral third party certification program for social accountability and fair trade in agricultural, manufacturing and trading operations. The program complements existing fair trade certification systems. Social accountability and fair trade have become important indicators to select business partners in a global market place. The Fair for Life Social & FairTrade Certification Program offers operators of socially responsible projects a solution for objective inspection and certification by a highly qualified external verifier. It combines strict social and fair trade standards with adaptability to local conditions.
Why is fair trade certification needed today?
Throughout the global south, family farmers follow generations of tradition to cultivate food products we enjoy every day. Yet many family farmers in the developing world don't receive a fair price for their crops. These isolated rural communities lack direct market access, often selling their premium crops below the cost of production to local middlemen who misrepresent global prices. This cycle of debt forces many to abandon their land and years of agricultural heritage, destroying the social and cultural fabric of these communities. When farming communities in the developing world suffer, the whole world suffers - forced immigration, inferior-quality products and large-scale farming methods that often compromise the environment.
Who benefits from fair trade certification?
Producers: Beyond receiving a fair, stable price, fair trade also empowers producers to invest in their organizations, improve their communities and protect the environment.
Consumers: Fair trade certification enables consumers to "vote with their dollar" by providing an independent guarantee that products were produced and traded fairly. We all lead busy lives, and we want to do the right thing, but we're busy. What if we could make a positive impact just with the purchases we make every day? And not have to go out of our way to do this? That's the compelling proposition of fair trade.
The Earth: Fair trade certification requires and rewards environmentally sustainable farming practices that protect farmers' health and preserve valuable ecosystems for future generations, and provides the resources and technical assistance needed for organic certification.
