Reference no: EM132202739

Case Study Assignment -

In this case assignment, your work is expected to show critical, analytical and justification skills of the subject, rather than being purely descriptive. You are expected to present a well-structured and organized piece of work that demonstrates your knowledge and understanding of the analytical concepts and tools to assess the credit worthiness of this particular company. In addition, you should be able to recognize how the strategic choices made by organizations are influenced by the available or forecasted financial data.

Case Study - Water Solutions Corporation

Water Solutions Corporation (WSC) was founded in 1993 to produce hydraulic pump systems. The founders, Mr. Davies and Mr. Richard, WSC's vice president of engineering, had held executive positions with Meteorite Corporation (MC), a major competitor, until they resigned in 2003. Noticing a weakness in the service organization of the industry leaders, Messrs. Davies and Richard formulated an innovative marketing strategy emphasizing service delivery and technical assistance to customers. A growing number of company operated sales offices were established to implement the strategy and to penetrate regional, national and international markets. Expanding the network with independent distributors, was reflected in the 37% compound sales growth rate WSC had experienced since 2010. WSC currently holds a 5% market share. It expected to increase its market share due to international expansion and continued product innovation. The Management of WSC is thoroughly familiar with industry and their core strengths lie in marketing and engineering.

Product innovation has been crucial to the Company's success, resulting in the development of pumps that have considerably reduced downtime and maintenance costs. In addition to its increased reliability, the new pumps can be installed at lower cost because of smaller size and weight reduction. The Company successfully filed for a 20-year patent for its new compression technology.

WSC's competitors acknowledge the benefits of compression technology but continue to concentrate on earlier designs as any changes in production process will require substantial investment to change their production facilities.

The Company's 250 production workers enjoy generous fringe benefits - their contentment with WSC's work environment is reflected in minimal employee turnover.

WSC's sales forecast a 17% annual sales growth rate for the coming 4 years and an expanding market share. As in prior years, the Company will not be paying dividends to shareholders as it is the policy to retain future earnings to finance business expansion. WSC is a closely held company with 52% of the outstanding shares owned by 30 high net worth individuals including members of the Management. Its high net worth shareholders have been crucial contributors to WSC year-on-year capital increase. Management collectively owns 45% of the Company's outstanding common stock and is likely to receive another 8,000 shares under the stock bonus plan. The Federal Government has reduced Corporate tax rate to 37.5%, effective this year; this move has been welcomed by the corporate sector due to expectations of increasing interest rate environment over the coming years.

As an analyst with WSC's lead bank, you are required to:

1) Analyse WSC's financial statements. Your analysis should include preparation of common size financial statements, key financial ratios with trend comparisons and an evaluation of short term solvency, operating efficiency, capital structure, long term solvency, profitability and market measures.

2) Asses its solvency using other evaluation tools such as Altman's Z-score, 5C's and any other relevant tools.

3) List reasons for and against the new loan facility to WSC.

4) Using your analysis, how much would you be willing to lend to WSC? What are the terms of you loan recommendation, i.e. short or long term? Any additional covenants and/or security recommended? Any changes recommended to the Company's capital structure? WSC will have to continue complying with covenants on outstanding debt which stipulate a current ratio of 2:1 and maximum debt/equity ratio of 45%.

Attachment:- Case Study.rar