Module 1: Rawhide Brewery’s Problem and Intended Solution
While Rawhide Brewery had been doing considerably well in terms of business, its latest decision of expansion had not resulted in the profits and strategic position which the company had hoped for. The current CEO of the company, Andrew Upson was faced with task of deciding what to do about the rising expenses and comparatively lower profits of the company . Since the company was also under debt therefore it did not have any option to indulge in high levels of marketing strategies. Tabby Cat Beer Company, which was a competitor of Rawhide, was facing difficulty in making the production meet the sales requirements of the company.
Therefore, it can be suggested that both the companies could set up a partnership where both the companies create a profitable and sustainable business model on which the companies can function. Currently, it can be observed from Rawhide’s December 2011 balance sheet that that it is operating at a debt to equity ratio of 1.32, which is slightly higher than is actually desired by the company. Therefore as a solution, the company needs to increase its revenues and equity in order to balance the ratio.
Module 2: Rawhide Brewery Proposal Evaluation
While proposal 1 is the simplest form of solution available for both the companies, it does not have any impact on the debt to equity ratio of Rawhide Brewery as only a 5 year contract is being entered into under which Tabby would pay Rawhide Company a specified fee per case. Such a contract would increase the revenues of the company, which would lead it to increase its equity thus, eventually, lowering the high equity to debt ratio. In accounting evaluation terms, this proposal poses very few extra expenses or costs for the company as well. Hence, this seems like the most suitable option for the company.
Evaluation of Proposal 2:
Under the second proposal it can be observed that Rawhide will be able to create a new company called Newco, with the help of Tabby. Under this deal the company’s equity to debt ratio will come within the normal range as the company will be able to transfer all of its expansion related debt to the new entity. However, since the company would receive no payments from Tabby for the next 10 years therefore the banks would have to be provided guarantee under the name of Rawhide. In this instance, both companies would incur the same production cost, and Tabby will face lesser cost then in Proposal 1. In this case however, in terms of accounting evaluation, most of the risk would still fall under the responsibility of Rawhide Brewery, which is not highly desirable.
Evaluation of Proposal 3:
The counter proposal created by Tabby reveals that both the companies, Tabby and Rawhide would share the guarantee. Tabby was granting Rawhide 60% of the shares of Newco, which would increase the risk for the company but reduce the burden of the guarantee for banks. Rawhides, equity to debt ratio will not be completely solved in this respect as the company would own 60% shares of the company, which would mean that 60% of the debt still resides with Rawhide. In terms of accounting evaluation, the company would not be at a highly desirable position either, as the debt and costs of Newco, would mostly reside with it as well.
Decision Model
Under the decision model the company would consider the following questions in order to ensure that it reaches the most appropriate decision:
Thus, conclusively, it can be observed that Rawhide Brewery needs to ensure that it is financially stable and less debt t o equity ratios. It also needs to ensure that less risk is taken on by the company and that the competitor does not profit it completely. The future of the company will also need to be considered while taking such an important decision. It can be suggested that the company strives to pursue the conditions of the first proposal as that one has the simplest terms and conditions for the company, and enables it to gradually solve its debt to equity ratio problem, without any drastic changes or modifications to its operations and business structures. Therefore, Proposal 1 would be the best option for the company.
References
Stewart, M. (2012). Rawhide Brewery. Retrieved from Ivey Cases: https://www.iveycases.com/ProductView.aspx?id=56534
