Tempest

Part 1: establishment of the accounting and financial documents

The company was created 15 years ago by A. Bompard and his wife, when he ended his career as
swimming champion. Indeed the company name was inspired by the nickname given to him on the
circuit: "the tempest". Since its inception the company is experiencing strong growth in its turnover
due to the talents of Ms. Bompard designer, as the involvement of its founder and brand inherited
from its prestigious prize list.

Year N-5 N-4 N-3 N-2 N-1 N

Revenue (kEUR) 24 749 27 496 32 309 40 307 63 157 78 388
Nbr of pieces (000) 890 960 1 147 1 550 2 387 3 335
Headcount as of 31/12 450 480 550 780 1 050 1 300

From the beginning, Dupont de Nemours is the main supplier of the company, given the use of its
exclusive fiber, spandex, as basic material of almost all of its models. Mr. Bompard considers this
dependence as a significant risk but has so far never achieved to find out an alternative according to
the performance of this fiber. Among the consequences penalizing the company, the DPO is limited
to 30 days. A strategic review of its business positioning convinces Mr. Bompard the need to diversify
its business, with a triple objective:

- Resume the growth of the company,

- Secure its diversification from a double point of view (products and suppliers
- Finally, reduce the seasonality of the sales

The decision is therefore taken to invest in two new product lines:

- Jerseys for cyclists,

- Female boxers leggings

A quick market survey identifies 5 large customers (3 central purchasing bodies and 2 on-line
platforms) likely to sell significant volumes, confirmed by a contact with their buyers. Eventually,
these accounts could represent 50% of the turnover. Rather than subcontracting to cheap
outsourcing, Mr. Bompard decides to set up a automated production line, which he was able to
appreciate the remarkable performance during the last textile fair in the Milan. This solution will
ensure a rapid ramp up of the new product lines and with a few adaptations, to improve long-term
productivity of the existing lines.

1. Investment‘s cost analysis

The catalogue price of the production line is 15m. Given the good contact between Mr. Bompard and
the sales manager of the Italian manufacturer, you should be able to negotiate a discount of 18%.
The delivery time is estimated to 4 months. Indeed, you have to factor in the transportation delay, a

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few specific modifications that you requested to the manufacturer as well as fifteen days of
production shutdown at your plant. You estimate up to 1.42 m these different additional costs
(including 0.7 m for specific settings) plus 1 m for installation costs and 0.5 m of training expenses.

Having failed to negotiate a discount on these lines, you have nevertheless obtained from the
manufacturer, a credit facility on 24 months equal to 10% of the price paid to the supplier, bullet
payable and of course without interest.

Calculate the cost of this investment corresponding to the gross value of fixed assets that you will
book in the balance sheet in the year N-1. In the case where the order is placed before 31 dec N-2,
what is the net book value of the asset at the end of the year N-1 when using a linear depreciation
over 10 years?

2. Funding the investment

The bank of the company is ready to back the funding of that investment, as the company carries out
a capital increase. M and Ms Bompard have limited financial means but however are not ready to
share the control of the company. They will not be able to bring more 3 m as part of this fundraising.
They therefore offer a cousin, also CEO of his company, to take part in the operation up to 2 m. In
these conditions, the bank is ready to lend a similar amount, at a rate of 5% and over a period of 6
years.

The full payment of the new machine is due at delivery. The supplier’s credit facility is maturing 2
years later.

Analyze the financing of that investment, by breaking down the different sources of funding.
Complete the loan amortization table, knowing that the bank requires the principal to be repaid
linearly by equal monthly terms.

3. Capital increase
In order to respect the rights of shareholders, Mr. Bompard lawyer advises him to make a capital
increase with preferential subscription rights (PSR). Detail the operation, by calculating the value of
the PSR, the amount of the premium as well as the structure of the capital at the end of the
operation based on an issue price considered to be "very careful so attractive" 0.95 x the shareholder
equity i.e. €354 per share.

4. Depreciation of the investment

The charted accountant of Mr. Bompard tells him that it might be interesting to use this investment
to "reduce somewhat the income tax". Mr. Bompard so ask you to perform some simulations
comparing 3 methods of depreciation (declining balance, linear, based on production volumes). In
order to achieve the amortization table, you consider that

- The equipment has an estimated life of 10 years,

- At cruising speed, the new production line will deliver 5 000 000 annual pieces. This level
should be reached in year 3, compared to 50% in the 1st year and 75% in the second. In the
light of the indications provided by the manufacturer, it is likely the increase in the
maintenance to cut this capacity by 15% the last two years.
- Declining balance method respects the rules laid down by the French tax administration.

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Describe the impacts of the different methods.

5. Balance sheet in financial statement

Year N-1 enjoys a strong top line growth (~50%) and conversely a drop of the operating profit,
implied by the costs related to the investment plan/

Anyway profits remain positive and year N Q1 figures still show a strong start (+30% in sales growth),
supporting the management ambitious decision.

In order to get a perfect vision of the performances, M. Bompard asks you to fulfill the N-1 balance
sheet and to build the N-1 financial statement and the cash flow statement.

What are your conclusions?

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Financial statements

P&L

In K€ N-2 N-1

Goods sold 0 0
Production sold 40 307 63 157
Revenue 40 307 63 157
Production stored 2 381 1 592
Production capitalized 0 0
Other products 0 0
Total 42 688 64 749

Purchases of goods 0 0
Change in inventories (goods) 0 0
Raw mat and other purchases 15 287 31 240
Change in inventories (aw mat & other) -822 -1 228
Gross margin 28 223 34 737
as % of revenue 70,0% 55,0%
External charges 2 161 4 651
Taxes 922 1 021
Payroll 20 214 25 267
Depreciations & provisions 1 232 2 229
Total 38 994 63 180

Ebit 3 694 1 569

as % of revenue 9,2% 2,5%

Financial products 5 0
Financial charges 477 1 004
Financial result -472 -1 004

PBT 3 222 565

Exceptional products 81 1 451

Exceptional charges 42 65
Employees benefit 0 0
Income tax 1 207 663

Net profit/loss 2 055 1 288

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BS
in K€ N-2 N-1
Intangibles 328 601
Tangibles 5 002 17 876
Financials 0 0
Total net fixed assets 5 330 18 477

Inventories 5 194 8 052

Receivables 8 561 9 315
Other receivables 130 171

Cash & cash equivalent 74 11

Total current assets 13 959 17 549

Total assets 19 289 36 026

Paid in Capital 1 755

Reserves 2 730
Net result 2 055
Total shareholder equity 6 540

Provisions 181 234

Financial debt 5 517 8 617

Payables 3 156 9 163
fiscal and social debt 2 744 4 012
Miscellaneous 1 151 1 542
Total current liabilities 12 568 23 334

Total liabilities 19 289 36 026

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Appendices

Miscellaneous information 4 258 9 493

Undue discounted bills
9 129 9 637
Gross receivables
Other receivables (details) 77 136
from current operations 53 35
not from current operations

Payables 2 874 7 809

from current operations 282 1 354
Related to fixed assets

Other current liabilities (details) 1 151 1 542

from current operations
not from current operations

Fiscal and social debt (details) 2 744 4 012

social security 0 0
income tax
5 000
Capital increase
750 15 520
capital expenditure 750 15 210
Tangibles 310
intangibles 0 0
disposals

average headcount 780 1 050

dividend paid 370 335

P/O 18% 26%

tax rate 37% 34%

Cost of debt (avge) 6,5% 7,2%

Avge debt 7 331 13 900
VAT 20,0%
Debt term
Less than 1Y 385 187
More than 1Y 5 132 8 430
New loans 5 000
Loans repaid 1 000 1 900

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Part 2: Completing the financial analysis
The end of the year N marks a sharp inflection of trend, especially in terms of volumes, consequence
of an extremely aggressive competition in a context of deteriorating climate that weighs on
household consumption. Total turnover is 10 percent below the initial estimates and the company
shows the first loss in its history. More worrying still, cash flow significantly deteriorated and Mr.
Bompard faces a more pressing position from its main supplier and his banker. Given a situation
completely new for him, Mr. Bompard asks you to realize, from the set of available documents, a
thorough diagnosis of the situation of his company and the reasons for which it is in this critical
situation, to avoid to make the same mistakes in the future.

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BS
in K€ N-2 N-1 N
Intangibles 328 601 573
Tangibles 5 002 17 876 16 468
Financials 0 0 0
Total net fixed assets 5 330 18 477 17 041

Inventories 5 194 8 052 11 603

Receivables 8 561 9 315 12 127
Other receivables 130 171 177

Cash & cash equivalent 74 11 1

Total current assets 13 959 17 549 23 908

Total assets 19 289 36 026 40 949

Paid in Capital 1 755

Reserves 2 730
Net result 2 055
Total shareholder equity 6 540

Provisions 181 234 254

Financial debt 5 517 8 617 9 264

Payables 3 156 9 163 12 657
fiscal and social debt 2 744 4 012 4 985
Miscellaneous 1 151 1 542 1 654
Total current liabilities 12 568 23 334 28 560

Total liabilities 19 289 36 026 40 949

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P&L

In K€ N-2 N-1 N

Goods sold 0 0 0
Production sold 40 307 63 157 78 388
Revenue 40 307 63 157 78 388
Production stored 2 381 1 592 3 154
Production capitalized 0 0 0
Other products 0 0 0
Total 42 688 64 749 81 542

Purchases of goods 0 0 0
Change in inventories (goods) 0 0 0
Raw mat and other purchases 15 287 31 240 41 564
Change in inventories (aw mat & other) -822 -1 228 -1 896
Gross margin 28 223 34 737 41 874
as % of revenue 70,0% 55,0% 53,4%
External charges 2 161 4 651 6 061
Taxes 922 1 021 1 052
Payroll 20 214 25 267 30 321
Depreciations & provisions 1 232 2 229 2 869
Total 38 994 63 180 79 971

Ebit 3 694 1 569 1 571

as % of revenue 9,2% 2,5% 2,0%

Financial products 5 0 0
Financial charges 477 1 004 1 487
Financial result -472 -1 004 -1 487

PBT 3 222 565 83

Exceptional products 81 1 451 24

Exceptional charges 42 65 89
Employees benefit 0 0 0
Income tax 1 207 663 6

Net profit/loss 2 055 1 288 12

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Appendices

Miscellaneous information
Undue discounted bills 4 258 9 493 10 556

Gross receivables 9 129 9 637 12 133

Other receivables (details)
from current operations 77 136 167
not from current operations 53 35 10

Payables
from current operations 2 874 7 809 11 357
Related to fixed assets 282 1 354 1 300

Other current liabilities (details)

from current operations 1 151 1 542 1 654
not from current operations

Fiscal and social debt (details)

social security 2 744 4 012 4 985
income tax 0 0 0

Capital increase 5 000 0

capital expenditure 750 15 520 464

Tangibles 750 15 210 464
intangibles 310
disposals 0 0 0

average headcount 780 1 050 1 300

dividend paid 370 335 0

P/O 18% 26% 0%

tax rate 37% 34% 34%

Cost of debt (avge) 6,5% 7,2% 7,9%

Avge debt 7 331 13 900 18 959
VAT rate 20,0%
Debt term
Less than 1Y 385 187 4 057
More than 1Y 5 132 8 430 5 207
New loans 5 000 4 000
Loans repaid 1 000 1 900 3 353

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