Challenger Deal Essay
Problem identified
Baldwin Bicycle Company (Baldwin or the Company), a small "mid-market" bicycle manufacturer, had a "private label" opportunity with Hi- Valu Stores, Inc. ( Hi- Valu), which operated discount department chain stores in the Northwest. Baldwin had to make a decision whether to accept the Hi-Valu's Challenger deal or not. To make an informed decision, the company should exam a blending of financial, marketing, and strategic implications of the Challenger deal.
Financial analysis
Current financial situation
With an annual ROA of 3.15% in 1988, Baldwin's current financial situation is not favorable at all (see exhibit 3 for ratio analysis). First of all, the company had poor assets management. The high inventories and accounts …show more content…
For purely profit maximization purpose, the deal is attractive. The return on investment of the Challenger deal is 23.5% (=161,177.03/685,511.03), twice as much as the cost of financing receivables and inventories (11.5%).
Challenger deal cash flow analysis
As analyzed above, to earn the additional $161,177.03 profit from the Challenger contract, the company should invest at least $685,511.03 in working capital to execute the Hi-Valu contract. If the company can't get any current debt or trade payable financing, the operational cash flow will slip more than 500,000. The company's current cash of 342,000 is not enough to cover this and external debt or equity financing is needed to support the new business.
Impact of Challenger deal on ROA and …show more content…
Before investing substantially in this business opportunity, the company will be better off if it invests in market data collection and analysis.
Negotiate a better deal with Hi-Valu
Due to Hi-Valu's relative strength and bargaining power, the Challenger offer seems very one-sided in Hi-Valu's favor. It's fair for Baldwin to negotiate a better deal with either a better price or more favorable terms as to inventory, goods on consignment, and payment of invoice. The latter seems more promising, as Hi-Valu, which is in the discount business sector, could be more sensitive to price.
Arrange external funding
Unless Baldwin can arrange sufficient funding, all the efforts for the new business will be in vain. In light of the company's current financial situation, the best way to arrange funding is to seek short-term financing from Hi-Valu to get the business off the ground. Another solution could be to obtain a better term with Baldwin's supplier. The company's increased demand for material could give it more power to bargain a longer payment period or better
Baldwin Bicycle Company (Baldwin or the Company), a small "mid-market" bicycle manufacturer, had a "private label" opportunity with Hi- Valu Stores, Inc. ( Hi- Valu), which operated discount department chain stores in the Northwest. Baldwin had to make a decision whether to accept the Hi-Valu's Challenger deal or not. To make an informed decision, the company should exam a blending of financial, marketing, and strategic implications of the Challenger deal.
Financial analysis
Current financial situation
With an annual ROA of 3.15% in 1988, Baldwin's current financial situation is not favorable at all (see exhibit 3 for ratio analysis). First of all, the company had poor assets management. The high inventories and accounts …show more content…
For purely profit maximization purpose, the deal is attractive. The return on investment of the Challenger deal is 23.5% (=161,177.03/685,511.03), twice as much as the cost of financing receivables and inventories (11.5%).
Challenger deal cash flow analysis
As analyzed above, to earn the additional $161,177.03 profit from the Challenger contract, the company should invest at least $685,511.03 in working capital to execute the Hi-Valu contract. If the company can't get any current debt or trade payable financing, the operational cash flow will slip more than 500,000. The company's current cash of 342,000 is not enough to cover this and external debt or equity financing is needed to support the new business.
Impact of Challenger deal on ROA and …show more content…
Before investing substantially in this business opportunity, the company will be better off if it invests in market data collection and analysis.
Negotiate a better deal with Hi-Valu
Due to Hi-Valu's relative strength and bargaining power, the Challenger offer seems very one-sided in Hi-Valu's favor. It's fair for Baldwin to negotiate a better deal with either a better price or more favorable terms as to inventory, goods on consignment, and payment of invoice. The latter seems more promising, as Hi-Valu, which is in the discount business sector, could be more sensitive to price.
Arrange external funding
Unless Baldwin can arrange sufficient funding, all the efforts for the new business will be in vain. In light of the company's current financial situation, the best way to arrange funding is to seek short-term financing from Hi-Valu to get the business off the ground. Another solution could be to obtain a better term with Baldwin's supplier. The company's increased demand for material could give it more power to bargain a longer payment period or better