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De La Salle University-Manila
Ramon V
...
Julius Buendia

Submitted on:
March 27, 2021

I
...
Each of their personalities and professional
qualities blended splendidly in running the firm
...
Holly Fashions level has become synonymous
with quality as a result of his genius
...
Suffice it to say, Hamilton's work has a
more creative and artistic element to it, while John White's is more operational
...
He concluded, however, that he needed
to become more involved with the company’s finances
...
First,
Hamilton is considering selling half of his interest in Holly Fashions
...
Periodically, the retailers with whom the firm deals with have run into financial
difficulties and have delayed payments, often causing a mad scramble for cash at the firm
...
Another reason that Hamilton is interested in the firm’s
financials is so he can better assess the managerial competence of White
...
However, Hamilton believes that
the apparel industry will face even tougher times in the coming years, and wonders if White
is competent enough to successfully overcome these challenges
...
He is also
concerned about the firm's size and the difficulty of maintaining a stable bank relationship
as a result of increasingly stringent federal regulations of banks
...
Furthermore,
Hamilton is willing to offer trade discounts, while White rarely takes these discount
decisions because he wants to hold onto their cash as long as possible
...

Hamilton acknowledges that he may be unduly critical of White’s management decisions
...


II
...


III
...


Statement of Objectives
This case study aims to achieve the following objectives:
● To identify the merits and risks of holding or selling William Hamilton’s shares
...

● To identify the relevant strategic action that would provide growth and financial
sustainability to the company
...


V
...
Facts of the Case
● William Hamilton considers selling his 50% interest in Holly Fashions
...

● Two years ago each of the partners had to contribute $15,000 of capital inorder to
meet the company’s cash needs
...
That is, the company
receives a 1-percent discount if the bill is paid in 10 days
...

● Hamiltons feels that the company is not benefiting from the leverage effect of debt
financing, and that this hurts the profitability of the firm of the two owners
...

B
...


● With the financial challenges and cash crushes that the company is facing, the group
assumes that both partners are open-minded and willing to meet halfway in solving
the drawback, implementing changes and improving the company
...

C
...
d)
Current Ratio = Current Assets / Current Liabilities
Quick Ratio - also known as the Acid-test or Liquidity ratio, measures the ability
of a business to pay its short-term liabilities by having assets that are readily
convertible into cash
...
d)
Quick Ratio = [Current Assets – Inventory – Prepaid expenses] / Current
Liabilities
Leverage Ratios - any kind of financial ratio that indicates the level of debt
incurred by a business entity against several other accounts in its balance sheet,
income statement, or cash flow statement
...
d)
Commonly used leverage ratios:
Debt-to-Assets Ratio = Total Debt / Total Assets
Debt-to-Equity Ratio = Total Debt / Total Equity
Debt-to-Capital Ratio = Today Debt / (Total Debt + Total Equity)
Debt-to-EBITDA Ratio = Total Debt / Earnings Before Interest Taxes
Depreciation & Amortization (EBITDA)
Asset-to-Equity Ratio = Total Assets / Total Equity
Times Interest Earned - measures a company’s ability to meet its debt obligations
on a periodic basis
...
(CFI, n
...
It considers the cost of goods sold, relative to its
average inventory for a year or in any set period of time
...
(CFI, n
...
(CFI, n
...
The net profit margin is equal to
net profit (also known as net income) divided by total revenue, expressed as a
percentage (CFI, n
...
(CFI, n
...
Operating
margin is equal to operating income divided by revenue
...
The
book value figure is typically viewed in relation to the company’s stock value
(market capitalization) and is determined by taking the total value of a company’s
assets and subtracting any of the liabilities the company still owes
...
d)
Market Value - how much an asset or company is worth in a financial market
...
d)
D
...
It is used to assess
the overall financial health of a business; it is specifically through looking into the
financial statements and analyzing ratios that we can draw conclusions on the
company's liquidity, operational efficiency and profitability standing
...
By analyzing the financial statements,
stakeholders can determine if their interest in the business is safe or at risk of loss
...
For this paper, the
group used the following metrics in analyzing the financial concerns of Holly
Fashions:
1
...


2
...
Solvency ratios are reflective of the company’s creditworthiness and long-term health
...
Activity Ratios - the measurement of the company’s efficiency in using
assets and liabilities to generate sales
...

4
...
It is highly indicative of the efficiency of
generating profits for shareholders
...

5
...

The group considered the DuPont Ratio Analysis as the framework of this
case
...


Source:Corporate Finance Online, Pearson Canada

This metric allows the focus on the numbers to identify the strengths and
weaknesses of the firm
...
d
...
TOWS Analysis
Strengths

Weaknesses

● Both partners have over 25 years of
experience with major garment
manufacturers
● Good partnership synergy during company
inception
● Brand recognition: HF label is
synonymous to quality and “in” fashions
● Company has maintained its profitability

● Minimal collaboration between executives
on function-specific business decisions
and processes
● A disconnect of the higher managerial
functions of marketing to operations and
finance
● Cash crushes tendencies of the firm
● Uncertainty on the valuation of company
Questionable managerial competence and
capability of John White in the perspective
of William Hamilton
● Financial decision of dismissal to longterm debt; Debt avoidance causing
reduced financial flexibility; Equity
financed
● Difficulty in maintaining stable bank
relationships
● No dividends received for 5years due to
reinvesting of all earnings
● Firm’s present cash position is low by
historical standards(Exhibit 2)
● Suspected excessive inventory; capital is
tied up to inventory
● Ineffective credit standards and collection
procedures; overdue accounts receivables
● Not taking advantage of trade discounts
with partners

Opportunities

Threats

● Market growth and expansion of
company
● Sellout and profit taking on 50% of
company shares/interest
● Increase in demand of customers
● Consultants and 3rd party opinions

● Presence of competition from other
apparel companies as well as unusual
billion-dollar apparel companies in the
garment industry
● Reliance to HF retailers
who may seize payments causing
financial problems
● Unforeseen challenges the apparel
industry will face in the coming years
● Close surveillance as well as strict federal
policies and regulations for loans

VI
...
Calculate the firm’s year 20d ratios listed in Exhibit 3
...
1
● Current Liabilities = 120
...
1/120
...
62
Formula: Quick Ratio = (Current Assets - Inventories) / Current Liabilities
Where:
● Current Assets = 435
...
9
● Current Liabilities = 120
...
1-191
...
3
Quick Ratio = 2
...
3
● Assets: 480
...
3/480
...
31%

Formula: Times Interest Earned = Earnings before Interest and Taxes (EBIT)/Interest
Charges
Where:

● Earnings before Interest and Taxes = 62
...
0
Solution:
Times Interest Earned = Earnings before Interest and Taxes (EBIT)/Interest Charges
Times Interest Earned = 62
...
0
Times Interest Earned = 15
...
9
Solution:
Inventory Turnover = Sales / Inventories
Inventory Turnover = 1305/191
...
80
Formula: Fixed Asset Turnover = Sales/Net Fixed Assets
Where:
● Sales = 1305
● Net Fixed Assets = 45
Solution:
Fixed Asset Turnover = Sales/Net Fixed Assets
Fixed Asset Turnover = 1305/45
Fixed Inventory Turnover = 29
Formula: Total Asset Turnover = Sales/Total Assets
Where:
● Sales = 1305
● Total Assets = 480
...
1
Total Asset Turnover = 2
...
8
Solution:
Average Collection Period = 365 / Accounts Receivable Ratio (Net Sales/Average AR)
Average Collection Period = 365 / (1305/224
...
2
● Cost of Goods Sold = 978
...
2*365)/978
...
40

Profitability Ratios
Formula: Gross Margin (%) = ((Revenue - Cost of Goods Sold)/Revenue))*100
Where:
● Revenue = $1305
● Cost of Goods Sold = 978
...
8)/1305)*100
Gross Margin (%) = 25%

Formula: Net Profit Margin (%) = Net Income/Sales
Where:
● Net Income = 35
● Sales = 1305
Solution:
Net Profit Margin (%) = Net Income/Sales
Net Profit Margin (%) = 35/1305
Net Profit Margin (%) = 2
...
8
Solution:
Return on Equity (%) = Net Income/Common Equity
Return on Equity (%) = 35/329
...
61%
Formula: Return on Total Assets (%) = (Net Income / Total Assets)*100
Where:
● Net Income = 35
● Total Assets = 480
...
1) * 100
Return on Total Assets = 7
...
5
● Sales = 1305
Solution:
Operating Margin (%) = (EBIT/Sales)*100
Operating Margin (%) = (62
...
80%
2
...

A
...
Therefore, it cannot be used as a substitute for sound
judgment
...


● The analysis is usually based on historical data, and as such, it should not
be used solely as an indication of future results
...
Comparative financial analysis can only be
accurate if they have the same accounting principles and methods of stock
valuations
...
Thus, it is very important
to understand them so that businesses can avoid the frequency of
misinterpretation
...

B
...
If used intelligently,
industry comparisons can still provide valuable insights into whether the company
was able to implement the right strategies than its sector peers
...

3
...
Is this a reasonable position?
Explain
...
The position of the company away from interest-bearing debt is
brought by what seems to be questionable managerial competence and fear of financial
misplanning on the side of White
...
The raised money provides a working capital that can be utilized for
procurement of resources that will facilitate growth and expansion of the company
...
It would
require increasing amounts of capital injected to its need for investment on inventory and
accounts receivable and is a very viable option given that the business generates enough
cash flow to make interest payments
...
The case mentions that White rarely takes trade discounts, which are typically 1/10,
net 30
...


No
...
The rationale of White holding onto cash as long as possible without taking
advantage of trade discounts is not a practical way for the business to save and maximize
capital
...
Savings can also
be used in purchasing machinery or other resources needed in the production process
...

Holly Fashion can use trade discounts as an opportunity to boost business growth and
stability by maximizing capital and minimizing expenses
...
Calculate the company’s market-to-book (MV/BV) ratio
...

A
...

Where:
● Total Asset:
● Total Liabilities:

$ 480
...
30 M

Solution:
Equity = $ 480
...
30 M
Equity = $ 329
...
80 M/ 5,000
Book Value per Share = $ 65,960
B
...
96
MTBR = $ 0
...
96

MTBR = $ 0
...
Hamilton’s position is that White has not competently managed the firm
...

Hamilton is fairly reasonable in his assessment that Holly Fashion's potential profitability
can be harmed by its inability to use debt as growth and tax-shielding tool
...

Furthermore, Hamilton believes that Holly Fashion’s inventory is excessive and
unsustainable and that capital is unnecessarily tied to inventory
...
HF is frequently offered terms of 1/10, net 30
...

In addition, White, according to Hamilton, has been generous in granting payment
extensions to clients, with almost 40% of the company's receivables being overdue for
more than 90 days at one point
...
Further, the average collection period is 62 days
because of White's agreed-upon extensions
...
It also
implies that the company is able to give up flexibility in order to retain and secure existing
clients
...

7
...
Defend this position
using your previous answers and other information in the case
...
Also, despite Hamilton's
financial concern, White’s management strategy has since put the business in a good
income position and customers are retained
...
Play the role of an arbitrator
...

Yes, because White’s actions and decisions will reflect in the financial statements first and
then to the firm’s ratio and all other information for being part of the firm
...
White’s actions and decisions
make the ratio analysis with different year’s lots of ups and downs such as granting the
extension for payment by the customers and rarely taking trade discounts
...
A
...

All the computed ratios are based on the Book value, which are recorded at the books of
the firm
...
Would you prefer ratios based on market or book values? Explain
...
Companies
with lots of machinery, like railroads, or lots of financial instruments, like banks, tend to
have large book values
...
Book value is not very useful in the latter case, but for companies with solid
assets it's often the No
...
The following difference about the
relationships between book value and market value can highlight which one to apply:
1
...
When
this is the case, it's usually because the market has lost confidence in the ability of the
company's assets to generate future profits and cash flows
...
Value investors often like
to seek out companies in this category in hopes that the market perception turns out to be
incorrect
...

2
...
Nearly all consistently profitable companies will have market values
greater than book values
...
Book Value Equals Market Value:
The market sees no compelling reason to believe the company's assets are better or worse
than what is stated on the balance sheet
...


Alternative Courses of Action

ACA 1: Status Quo - Retain current ownership and organizational structure
...


Cons
● Financial problems of the company
with regards to the cash position and
activity ratios may not be dealt with
and can cost the business in the long-

run
...


● Weak leadership, disagreement, and
trust issues between Hamilton and
White can affect business stability
...


● Loss of opportunity for the business to
grow and expand

ACA 2: Hamilton will sell his 50% share in Holly Fashions and allow the entry of a new
partner who is an expert in the financial aspects of a business
...


● Less management control and
influence for Hamilton

● Less risk of losses for Hamilton in
case the business fails

● White will continue as the Chief
Operating Officer of Holly Fashions
but the firm may face unforeseen
challenges in the coming years
...


ACA 3: Hamilton will not sell 50% of his interest, but hire third-party consultants to
introduce a new financial and operational model for Holly Fashions
...

Though this action will definitely be
worth the price, Holly Fashions may
allocate budget to accommodate

additional costs
...
Their
technical expertise and advanced
knowledge in the financial field will
benefit the company in executing the
new plan effectively
...


● External consultants will eliminate any
biases and existing feud of Hamilton
and White in coming up with a
resolution to the case at the bench
...


Decision Criteria and Evaluation of Alternative Courses of Action
A
...
Thus, relative
sustainability plays a vital
role in the operation of the
company
...

The lower the risk, the higher
the score
...


Adaptability

Degree of acceptability of
the
strategy
among
stakeholders
including
meeting
required
capabilities in continuous
growth
...
Considering the
financial positioning in the
economic activities of the
company will help the
management to foresee its
survival capabilities
...


Weight

ACA 1

ACA 2

ACA 3

Financial and
Expertise
Sustainability

25%

15

24

23

Risk management

20%

8

12

19

Financial Flexibility

30%

15

28

23

Adaptability

25%

25

15

20

100%

63

79

85

TOTAL

B
...

For financial and expertise sustainability, it garnered the highest grade as retaining
Hamilton’s 50% interest in the company and hiring a third-party consultant that will
introduce a new financial and operation model will not just address the prevailing financial
issue in the company but will also sustain the ownership stake and control of Hamilton
...


For Risk Management, ACA 3 topped all other alternatives as the new financial
model will not only reduce the risks that the company might not survive the challenges in
the future, but at the same time prevent any further tensions between White and Hamilton
...

As to the Financial Flexibility criteria, ACA 3 was second among alternatives
...
The grade of ACA 3 has been placed considering
the recurring liquidity issue of the company
...

Under the Adaptability criteria, ACA 3 garnered the second-highest score among
alternatives, surpassing ACA 2, but falling behind ACA 1 or the status quo
...
Setting new models would
require cooperation among concerned departments for it to effectively address the issues
surrounding the company’s financial state
...


Recommendation and Conclusion
Based on the results of the evaluation of the alternatives, the business strategy that
Hamilton should take is to not sell his 50% interest in Holly Fashions and instead hire thirdparty consultants to introduce a new financial and operational model for Holly Fashions
(ACA 3)
...

Tapping third-party consultants in setting up a financial model for the company to adhere
to would help the firm strengthen its balance sheet and address the financial problems as
noted in this study
...
The said ACA can also
allow Holly Fashions to seek the consultants with the specialized skill set that it needs,
specifically the technical expertise and advanced knowledge in the financial field
...
Through this ACA, Hamilton and also White can gain new
perspectives and information that they can apply to eventually strengthen the business to
face the tough challenges ahead and mitigate the risk of business failure
...
Although ratios are just numbers, they remain to be good indicators
for measuring the effectiveness of current managerial practices, decisions and policies
...


References
Bloomenthal,
A
...
investopedia
...
asp

20)
...

(n
...

Ratio
Analysis
https://www
...
com/articles/ratio-analysis
...


Definition
...
d) https://corporatefinanceinstitute
...
(n
...
Chapter 2: Financial Statement and Ratio Analysis
...
pearsoncanada
...
pdf



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