Harrods case study solution

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Harrod’s Sporting Goods

In January of 2016, Becky, who served as the company’s chief financial officer, walked into Jim’s office and said, “I’ve

had it with the First National Bank of Omaha. It is willing to renew our loan and line of credit, but the bank wants to

charge us 2½ percentage points over prime.” The prime rate is the rate at which banks make loans to their most

creditworthy customers. It was 4.75 percent at the time Becky had visited the bank, so that the total rate on the loan

would be 7.25 percent. It was not so much the total rate that Becky objected to, as the fact that Harrod’s was being

asked to pay 2½ percent over prime. She felt that Harrod’s was a strong enough company that one percent over prime

should be all that the bank required. Her banker told her he would review the firm’s financial statements with her next

week and reconsider the premium Harrod’s was being asked to pay over prime.

While Becky knew the bank “crunched all the numbers,” she decided to do some additional financial analysis on her

own. She had a bachelor’s degree in finance with a 3.3 GPA. She began by examining Figures 1, 2, and 3 below.

Figure 1

Harrod’s Sporting Goods

Income Statement

(2013-2015)

2013 2014 2015

Sales

.............................................................

$4,269,871 $4,483,360 $5,021,643

Cost of goods

sold

.............................................................

2,991,821 2,981,434 3,242,120

Gross

Profit

.............................................................

$1,278,050 $1,501,926 $1,779,523

Selling and administrative

expense

.............................................................

865,450 1,004,846 1,175,100

Operating

profit

.............................................................

$412,600 $497,080 $604,423

Copyright © 2017 by University of Phoenix. All rights reserved. Week 5 Case Study

FIN/486 Version 6 2

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Interest

expense

.............................................................

115,300 122,680 126,241

Extraordinary

loss

.............................................................

__ __ 170,000

Net income before

taxes

.............................................................

297,300 374,400 308,182

Taxes

.............................................................

104,100 131,300 107,864

Net

income

.............................................................

$ 193,200 $ 243,100 $ 200,318

Figure 2

Harrod’s Sporting Goods

Balance Sheet

(2013-2015)

2013 2014 2015

Cash