Cases in Financial Management Essay

Case SynopsisFounded in 1984 Laurentian Bakeries Inc. ope casts in the industry of manufacturing a broad variety of frozen baked products within their three operating places in Montreal, Winnipeg and Toronto. The operating plants produce items such(prenominal) as frozen pizza pie pie in Winnipeg, MB, pies in Montreal, QC and Cakes in Toronto, ON- with each representing 30%, 30% and 40% of the rack up revenue stream respectively. The buyers for this familiarity include orotund institutional clients such dominos pizza, etc. which have a signifi apprisetly racy level of power whereas the seller of the products consists of several food producers which have a relatively low level of power.With the cost of setting up a plant of this scale being high, substitute products testament as well s realise high in the market causation the overall profit marge to be low. With the teleph mavinrs ongoing effort for continuous proceeds Danielle Knowles (VP of operations) proposed to expand integrity of the operating plants in Winnipeg-which was based on the probability if the attach to expanded into the U.S. market.StatementThe statement of the problem is how Danielle Knowles will pass water a capital project expenditure proposal to expand the communitys frozen pizza plant in Winnipeg which is consistent and in line with the companys capital allocation policy. The proposal should withal satisfy the companys continuous effort for improvement, identification of disoriented opportunities, satisfaction of HR and environmental squeezes and provide sufficient ROI.Situational compendThe strengths of the company be clearly visible through the companys hard-hitting operations and reputable image in the industry. Being ace of the top five in the industry, Laurentian Bakeries has established themselves as a dominant fake in the market however, with a shortage in capacity it hobopotentially overpower the strengths repayable to its negative impact on the com pany. This includes a accrue in sales and potential decreases in retailer support.Nevertheless, with the mention of a capacity shortage and an opportunity to expand and grow in the U.S. market the company seems to be in good standing. Moving out to a different area amongst the competition, all the products are similar which delegate there is heavy competition. The presence of numerous suppliers makes this industry highly competitive, as a result, there is high aggression amongst competitors. This is a leading component part that indicates this is non an attractive business to be in.SWOT ANALYSISStrengths* Danielle Knowles has work through in the food industry for 13 years. This is a great make for the company, because she is able to use her knowledge and experience and apply it for Laurentian Bakeries in redact to improve operations or even avoid errors. This in production evict potentially save the company from incurring additional expenses. * Danielle has her procures in Business Administration which indicates that she is educated and has the credentials to swan her position as the VP of operations. Also, Danielle is able to use that knowledge and apply it to day-after-day operations of the company. * Laurentian has above average consideration for human resource and environmental impacts.This benefits the company to the extent that it creates a public awareness which shows their commitment to the confederacy which in return can potentially be used as a marketing likewisel to attract more sales. * Laurentian company is one of the five large firms that produce frozen foods dominating 21% of the market. This indicates that they are a dominant player in the market and have survived umteen difficulties from various competitions. * Well established and profitable company which indicates that they have survived one full economic cycle and have withstood their competition. * The company has a modify revenue stream with three operating plants locate d in major cities which are not as perily as a exclusive revenue stream. * All three segments are profitable.* Low cost pizza producer which is helping to expand into the US. Market.* Laurentian Bakeries has an integrated workforce such as sales, marketing, etc. for all of their operating plants.Weakness* Shortage of capacity. If this weakness is not dealt with the company can face losses in their sales because of the shortage. This in return lowers the overall profit of the company and can potentially decrease buyers if they cannot meet the demand due to the shortage. * Class 1 products are too risky and by taking such a great risk any wrong doing can have a negative impact on the company.Opportunities* Arrangement to supply large U.S. based grocery train with nonpublic label brand. If the opportunity is taken to its advantage the company can potentially see higher figures in sales and profits. * Since U.S. pizza usage is 3x bigger than the Canadian segment the overall US mar ket is bigger which can potentially lead to a higher market share. * indoors N.A. the economy is recovering modestly and is expected to grow. This indicates that consumer spending on arbitrary items such as food products will stick strong.Threats* Inflation is forecasted to remain between 3-5%. This may cause interest rates to rise causing the cost of capital to annex higher than its current level. Capital projects such as expansion may suffer. * North American growth rate of gross domestic product slowed down which may lower the company sales. * Threat of new entrants will increase competition and is always a factor that makes the sales aggressive. * Health Conscious consumers will potentially require sales due to the products offered by Laurentian Bakeries are considered unhealthy. With on-going health awareness the products offered by Laurentian Bakeries might not meet the changing demand of consumers.Porters Five ForcesBuyers Power* Mixed Power.* There are two types of buye rs large institutional buyers such asdominos pizza & pizza pizza as well as large retailers. Thousands of smaller clients have less power because of their current low patronage base.Supplier Power* Low Power.* Pizza suppliers distribute production to pizza stores, restaurants and grocery chain stores. Since there are numerous suppliers in the market for ingredients such as cheese, flour, vegetables, etc. they have low power.Barriers to Entrant* broad(prenominal)* Due to high capital costs, skilled workforces, environmental regulations, high statistical distribution channels, entry into this industry is high.Threat of Substitute* High* The products offered by Laurentian such as their Pizza can be made at central office or even purchased fresh from fast food restaurants. Also they can easily be substituted for other products such as calzone, sandwiches, tacos, etc. aspiration* High* There is high competition for the items offered by Laurentian Bakers. Competition for their pizza ba ked items can easily be substituted through franchised restaurants such as Pizza Pizza, Boston Pizza, Pizza Hut, etc. also competition is high through other companies offering the kindred goods. In addition, this company is also competing against other food products rather than frozen pizza alone.Financial AnalysisFinancial SummaryLaurentian Bakeries is seeing a hard cash increase from $6.2 trillion in 1993 to almost double its value of $13.1 billion in 1995. At the same era long term debt for the company has increased by $7.23 million which indicated that Laurentian Bakeries is funded by its long term debt and has not utilized itscash and therefore has incurred additional interest expenses. Moving over to the sales figures, Laurentian Bakeries has seen an increase of 11% from 1993-95 however, net income is flat which indicates that their COGS and operating expenses have also move almost at the same pace as sales. This setback has no advantage to the shareholders.Alternatives1 . Continue original plans to continue expansion in Winnipeg.2. physical body a plant in U.S. to cater to that market.3. Buy an existing plant.4. carry the Toronto plant as it is the strongest plant for the company.RecommendationsBy carefully analyzing all the alternatives, we advise alternative one as the best fit solution to this company due to it being most practical at the companys current situation. We strongly believe that continuing original plans to expand in Winnipeg is the beneficial solution for the company as they already produce the same type of products and have the additional land to carry forward the expansion, because this plant is a low cost producer and is ideal to utilize the U.S private label sector. In addition, this alternative is beneficial because it is consistent with the companys overall objectives. Given the discount rate of 18% and a $5.2 million capital investment the NPV of the expected cash flow is positive.Moreover, recommendation one is the best s uited for this company because * There is land readily uncommitted in Winnipeg. This can save the company some money in terms of the expansion because these will incur less of an expense due to Laurentian owning the extra land space. * Building a plant in U.S. will require a lot of capital, additional expenses for hiring, training, etc., and potential change in production, management or other techniques due to different regulations in U.S. * Expanding in Toronto will also require additional capital and additional time to hire and train the workforce to produce the pizza products which arent produced in the Toronto facility.