Details

MINICASE
George Stamper, a credit analyst with Micro-Encapsulators Corp. (MEC), needed to respond to an urgent
e-mail request from the southeast sales office. The local sales manager reported that she had an
opportunity to clinch an order from Miami Spice (MS) for 50 encapsulators at $10,000 each. She added
that she was particularly keen to secure this order since MS was likely to have a continuing need for 50
encapsulators a year and could therefore prove a very valuable customer. However, orders of this size to
a new customer generally required head office agreement, and it was therefore George’s responsibility to
make a rapid assessment of MS’s creditworthiness and to approve or disapprove the sale.
Mr. Stamper knew that MS was a medium-sized company with a patchy earnings record. After growing
rapidly in the 1980s, MS had encountered strong competition in its principal markets and earnings had
fallen sharply. Mr. Stamper was not sure exactly to what extent this was a bad omen. New management
had been brought in to cut costs, and there were some indications that the worst was over for the
company. Investors appeared to agree with this assessment, for the stock price had risen to $5.80 from
its low of $4.25 the previous year. Mr. Stamper had in front of him MS’s latest financial statements, which
are summarized in Table 20.4. He rapidly calculated a few key financial ratios and the company’s Z score.
TABLE 20.4 Miami Spice: Summary financial statements (figures in millions of dollars)
2012

2011

Cash and marketable securities

5.0

12.2

Accounts receivable

16.2

15.7

Inventories

27.5

32.5

Total current assets

48.7

60.4

Property, plant, and equipment

228.5

228.1

Less accumulated depreciation

129.5

127.6

Net fixed assets

99.0

100.5

Total assets

147.7

160.9

Debt due for repayment

22.8

28.0

Accounts payable

19.0

16.2

Total current liabilities

41.8

44.2

Long-term debt

40.8

42.3

Common stock*

10.0

10.0

Retained earnings

55.1

64.4

Total shareholders’ equity

65.1

74.4

Total liabilities and shareholders’ equity

147.7

160.9

Revenue

149.8

134.4

Cost of goods sold

131.0

124.2

1.7

8.7

Assets
Current assets

Fixed assets

Liabilities and Shareholders’ Equity
Current liabilities

Shareholders’ equity

Income Statement

Other expenses

Depreciation

8.1

8.6

Earnings before interest and taxes

9.0

7.1

Interest expense

5.1

5.6

1.4

4.4

2.5

8.3

Addition to retained earnings

1.5

9.3

Dividends

1.0

1.0

Income taxes
Net income
Allocation of net income
Mr. Stamper also made a number of other checks on MS. The company had a small issue of bonds
outstanding, which were rated B by Moody’s. Inquiries through MEC’s bank indicated that MS had unused
lines of credit totaling $5 million but had entered into discussions with its bank for a renewal of a $15
million bank loan that was due to be repaid at the end of the year. Telephone calls to MS’s other suppliers
suggested that the company had recently been 30 days late in paying its bills.
Mr. Stamper also needed to take into account the profit that the company could make on MS’s order.
Encapsulators were sold on standard terms of 2/30, net 60. So if MS paid promptly, MEC would receive
additional revenues of 50 × $9,800 = $490,000. However, given MS’s cash position, it was more than
likely that it would forgo the cash discount and would not pay until sometime after the 60 days. Since
interest rates were about 8%, any such delays in payment could reduce the present value to MEC of the
revenues. Mr. Stamper also recognized that there were production and transportation costs in filling MS’s
order. These worked out at $475,000, or $9,500 a unit. Corporate profits were taxed at 35%.

QUESTION
How should George Stamper’s decision be affected by the possibility of repeat orders?