Toshoret Ltd is a private company that supplies large scale printing services to big publishers as well as display box manufacturers

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Toshoret Ltd is a private company that supplies large scale printing services to big publishers as well as display box manufacturers. The Board of Directors is currently reviewing their strategic plan for the next few years, and they have commissioned you as a business consultant to analyse their financial position and help them with some questions they have regarding the business and the strategy of the company.

You will be meeting with the Board of Directors in one week’s time. They have four specific questions for you and would like your advice on these matters. The Board of Directors is especially keen to have answers that are supported by the information provided within the financial information of the company.

It is therefore expected that you will complete an analysis of the viability, liquidity, and

solvency of the company prior to the meeting, as well as prepare some information for their

Capital Expenditure Budget.

The more preparation you do before the meeting with the Board of Directors, the better you

will be able to answer their questions.

Current strategic plan

At the beginning of 2022, Toshoret held a market share of 30%. The company had been unable

to increase its market share over the previous few years and had in fact, lost some market

share to some emerging start-ups.

The graphic below shows the market share of the printing industry.

Toshoret has two major competitors in the market, Dellingo and BSC Industries, both

specialising in printing services.

In order to increase their market share, Toshoret decided to differentiate themselves in the

marketplace by increasing their offerings from not just printing services but also to include

campaign design services. This would make them the only company in the market offering

both campaign design and print services to clients. The idea was that clients would tend to

use Toshoret as they would then only have to deal with one company for their design and its

printing.

At the beginning of 2022, Toshoret invested heavily in equipment for the campaign design

division and funded this almost entirely with debt. This is clear on the company balance sheet.

Toshoret’s marketing team recently conducted branding surveys with their customers and

discovered that clients were now confused about what services do Toshoret actually delivers?

There was a clear sentiment that customers were likely to go with one of the two main

competitors as it was clear that they were printing specialists.

The Board of Directors, however, believes that the strategy of continuing to supply both

campaign design and print services is the best strategy and will be backed up by the financial

analysis of the business.

The Board is, however, also looking at the possibility of selling the campaign design division

and purchasing BSC Industries printing business to increase their market share that way.

33%

19% 17%

31%

Marketshare

Toshoret Dellingo BSC Industries Others

Financial Statements

Toshoret Ltd Profit and Loss report for the year 2021 (values in USD millions)

Revenue 337.92

Cost of Goods Sold 96.70

Gross Profit 241.22

Operating Expenses 228.20

EBIT 13.02

Interest Expense 8.56

Profit before tax 4.46

Tax Expense 1.34

Net Profit 3.12

Toshoret Ltd Balance Sheet as of 31st December 2022 (values in USD millions)

2022 2021

Assets

 Current Assets

 Cash 11.14 11.20

 Cash Equivalents 4.45 4.90

 Marketable Securities 2.64 3.08

 Accounts Receivable 1.82 3.15

 Inventory 15.89 22.77

 Total Current Assets 35.94 45.10

 Non-Current Assets

 Plant and Equipment 271.60 77.60

 Accumulated Depreciation (67.90) (28.16)

 Intangible Assets 5.42 5.21

 Total Non-Current Assets 209.12 54.65

Total Assets 245.06 99.75

Liabilities

 Current Liabilities

 Accounts Payable 19.22 16.14

 Short-term debts 58.09 28.97

 Total Current Liabilities 77.31 45.11

 Non-Current Liabilities

 Long-term debts 128.14 16.45

 Total Non-Current Liabilities 128.14 16.45

Total Liabilities 205.45 61.56

Shareholders’ Equity

 Common stock 26.51 28.21

 Retained earnings 13.10 9.98

Total Equity 39.61 38.19

Notes on the financial statements

1. The short-term debt is a line of credit at 10% interest rate

2. The long-term debt is a secured bank loan at 4.6% interest rate

3. In 2022 the company engaged in an aggressive growth strategy investing in new

equipment that would help them set up the campaign design division. This accounts

for the increase in Non-Current Assets and Long-term debts

4. The short-term debts were increased to cover additional wage costs to cover the

expected increase in production

Viability

The company has broken down its viability by division. Therefore, there is viability

information for the new campaign design division as well as the original printing division.

Viability Campaign Design Division

The break-even sales for the Campaign Design division are 6500 design units sold.

The table below shows the sales units for 2022 and the expected sales units for 2023 –

2024.

Year 2022 2023 2024

Unit sales 4030 4500 5000

65 65

0

50

115

150

0

20

40

60

80

100

120

140

160

0 10000

Campaign Design Division CVP Graph

Fixed Costs Variable Costs Total Costs Revenue

Viability Printing Division

The break-even sales for the printing division are 380 printing units sold.

The table below shows the sales units for 2022 and the expected sales units for 2023 –

2024.

Year 2022 2023 2024

Unit sales 908 940 945

57 57

0

50

107

200

0

50

100

150

200

250

0 1000

Printing Division CVP Graph

Fixed Costs Variable Costs Total Costs Revenue

Capital Structure

The following table shows how their cost of equity and effective cost of debt is affected by

the percentage of debt. The Board of Directors does not have the information on the WACC

column. You will need to calculate this yourself.

Proportion

of Debt Debt-to-Equity Cost of

Equity

Effective Cost

of Debt

Cost of

Financial

Distress

WACC

0% 0 9% 4.60%

10% 0.11 10% 4.60%

20% 0.25 11% 4.60%

30% 0.43 12% 4.60%

40% 0.67 13% 4.60%

50% 1 14% 4.60%

60% 1.5 15% 4.60%

70% 2.3 16% 4.80% 1%

80% 4 17% 5.20% 3%

90% 9 18% 6.10% 9%

100% 7.00% 14%

Future Cash Flows

Campaign design division

When Toshoret originally purchased the equipment for the campaign design business division

in 2022, they bought machinery and have now realised that the quality of work they are doing

is substandard. In order to continue running this division, the company would need to reinvest

in bettering the equipment in order to achieve higher quality results. The equipment has a

lifetime of 5 years before it will need to be replaced.

The table below shows the predicted revenue and expenses for the campaign design division

over the next five years.

Amounts in the table are in USD millions.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Equipment

Investment 50

Predicted

revenue

72 87 106 122 140

Predicted

operating

expenses

81 81 81 81 81

You will need to use the WACC that you calculated in the previous table based on the

company’s current proportion of debt to determining the Net Present Value.

Acquiring BSC Industries

One of the potential options the Toshoret board is investigating is what would be the outcome

if they sold the campaign design unit and instead purchased their nearest competitor BSC

Industries.

The business would be purchased for USD63 million. The expected net cash inflows from this

project are provided for the next five years in order to determine the Net Present Value of

this purchase.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Investment 63

Predicted

cash

inflows

18 28 29 31 34

For this investment, utilise the optimal WACC based on the table from earlier.

Question for answers.

Prior to the board meeting, you should take a look at and prepare the following financial

information:

Questions for which answer is required with detailed calculation sheet.

1. What is the break even point with break even analysis of both companies

2. What is the Current Ratio (CR) of the companies

3. What is the Quick Ratio (QR) of the companies

4. What is the Operating Cash Cycle of the companies (DIO – Days Inventory

Outstanding, DSO – Days Sales Outstanding, DPO – Days Payable Outstanding

5. Debt to Equity Ratio

6. Debt to Asset Ratio

7. Interest Coverage Ratio

8. What is the Cash Budget of the companies

9. Days to recover the investment of both business

10. Provide a detailed financial report on the current condition of the company

11. What is the liquidity ratios of both companies with the Analysis of the liquidity ratios

12. What is the solvency ratios of both companies with the Analysis of the solvency

ratios

13. Review the viability position of the two business divisions

14. Determine the current WACC and optimal WACC for the business

15. Determine the NPV for the two projects

16. Based on the NPV what's the best approach to move forward

Also financial proof as to support your answer hence calculations required,