Instructions Merrill Electronics case

1. Read the case carefully in every detail.

2. Carry out a Financial Statement Analysis for Merrill Electronics.
What is the key/core problem of Merrill? Conclude by a maximum of two sentences.
3. Map the liquidity problem of Merrill by a cash budget forecast: forecast for each
month in the annual period July 1991 June 1992 a cash flow statement WITHOUT any
additional external financing. Use Excel software.
4. Derive the extra financing need from the forecasted cash flow statement
5. Set the financing policy how to finance the extra financing need (E, LT debt, and/or ST
debt). Forecast for each month in the annual period July 1991 June 1992 the balance
sheet to explain the financing policy.
6. Discuss possible options for improvement to solve the financing problem with the
bank.
Limit the report to max 2 A4 pages text and 3 4 A4 pages with tables and graphs.

Major problem, in the first place, was the declining sale and mostly margin. Net sale
declined in H191 by more than 10% from H290. Management were able to bring down
direct costs but increase in after sale service (2.9% to 3.5%) and general administration
costs (3.1% to 3.7%) limit EBIT gain in the end. High after sale service was mainly due
to the problem with monitor and general administration cost due to the strategic changes
as they were trying to accommodate different business model with additional staffs.
From balance sheet analysis, we see that total asset is growing (64% year on year and
16% compared to last half i.e. H290) mainly due to hike in inventories (41% and 22%
resp). These percentage increases stated here are additive to the total asset increase
percentages. At the same time debt is also increasing due to bank loan and foreign
payables. One particular solution to the problem is injecting owners equity to the
business to bring down debt which would eventually strengthen balance sheet and the
business could end up either finding a buyer or taking new strategic initiatives for long

term. Another solution might be managing inventories to bring down the increase.
Potentially effective solution seems to be the combination of these two.
H1 '90

H2 '90

H1 '91

58,900
2,841,100
2,895,200

38,850
4,826,600
3,534,120

35,220
4,166,180
5,591,470

0%
20%
41%

0%
-7%
22%

29,700

41,450

65,980

1%

0%

5,824,900

8,441,020

9,858,850

62%

15%

632,900

718,200

789,750

2%

1%

100,000
732,900

100,000
818,200

0%
2%

0%
1%

6,557,800

9,259,220

100,000
889,750
10,748,60
0

64%

16%

455,000

2,050,000

2,985,000

39%

10%

80,000

80,000

80,000

0%

0%

1,155,700

1,819,130

1,705,110

8%

-1%

241,200

391,250

895,620

10%

5%

171,980

217,370

251,720

1%

0%

2,103,880

4,557,750

5,917,450

58%

15%

560,000

520,000

480,000

-1%

0%

Capital stock
Retained earnings
Owners' equity

1,000,000
2,893,920
3,893,920

1,000,000
3,181,470
4,181,470

0%
7%
7%

0%
2%
2%

Total

6,557,800

9,259,220

1,000,000
3,351,150
4,351,150
10,748,60
0

64%

16%

Assets
Current assets:
Cash & bank
A/C receivable
Inventories
Other current
assets
Total current assets
Fixed assets
Buildings &
equipments
Goodwill
Total
Total assets
Capital & liabilities
Current liabilities
Short-term bank
loans
L T debt due in one
year
A/C payable
(domestic)
A/C payable
(foreign)
Accrued expenses
Total current
liabilities
Long term debt

Delta