I need help with the transactions for this problem.

I need help with the transactions for this problem.

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Magnusson Electrics had been a distributor of electrical goods for almost 70 years, supplying various
industries including the auto industry in Michigan.
The Magnusson family had run the business for 70
years, beginning with the founder Mike “Electric” Magnusson an MIT engineer and pioneering
entrepreneur.
For various reasons including family feuding, foreign competition, and poor management not
modernizing its distribution and logistics methods the firm lost its edge and the quality of its products and
services became uncertain.
It gradually became unprofitable, started to have cash flow problems, and by
2011, the firm was forced to declare bankruptcy.
The firm had five distribution facilities but the EPA declared one of its facilities to be contaminated.
Forced to pay a large amount of money into a clean up fund the company had to face reality that it was no
longer capable of operating without fresh infusions of capital and management.
The Magnusson family hired a search firm to find a buyer for the firm and after a six month search a
potential buyer materialized.
The firm of Fairfield General Holdings (FGH), a holding company in the
distribution and logistics industry asked to see Magnusson’s balance sheet.
MAGNUSSON’S CURRENT FINANCIAL CONDITION
Here are the current book and market values of Magnusson’s assets and liabilities.
The only assets of
interest to buyers are its tangible (physical assets) which are listed below. The value of the contaminated
facility and the land it was built on is zero and it is not included in the assets below.
There is no cash or
accounts receivable because these were used by the bankruptcy court to pay off part of the claims of
Magnusson’s creditors (mostly taxes, employee wages and pension arrears, and some suppliers). Against
these assets are the claims of suppliers and a bank loan used to finance a portion of the inventory.
FGH hired a valuation consultant for Magnusson’s tangible assets and liabilities. Here are the consultant’s
conclusions.
Assets & Liabilities
Current estimated Market Value
Inventory
1,000,000
Equipment
850,000
Buildings
2,100,000
Land
400,000
Total assets
4,350,000
Accounts payable
375,000
Notes payable
1,200,000
Net assets
2,775,000
FGH’s business analysts calculated a value of $$3,025,000 for Magnusson’s net assets including
$250,000 of goodwill and accordingly, on June 1st, 2011 FGH made an offer which was accepted.
Summer 2012 GWU MBAD 6211.DE Case: FAIRFIELD-MAGNUSSON CORPORATION
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FGH’S BUSINESS PLAN
FGH’s plan is to inject cash and business expertise into the firm: upgrading buildings, using robots in its
facilities, outsourcing the transportation function to a specialist transportation company, seek a larger
number of products to distribute both in the USA and abroad, and introducing modern methods of
distribution and supplier management.
FGH estimates that after all the upgrades are completed, the firm will have total assets of $12,000,000,
that it will be able to carry 10 times the inventory it carries at present, and be able to achieve inventory
turnover ratios of 6 at gross profit margins of 50%.
So average inventory carried cost can be estimated as $1,000,000 x 10 = $10,000,000. Future annual cost
of goods sold can be estimated as $1,000,000 x 10 x 6 = $60,000,000 and the future annual sales can be
calculated as $1,000,000 x 10 x 6 x 2 = $120,000,000.
An estimated NPM of 10% results in projected net
income of $12,000,000.
Summer 2012 GWU MBAD 6211.DE Case: FAIRFIELD-MAGNUSSON CORPORATION
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