Finance for Wine Business

Question 1

Name Porter’s 5 Forces

Answer 1

1. Rivalry Amongst Existing Firms
2. Threat of New Entrants
3. Threat of Substitute Products
4. Bargaining Power of Buyers
5. Bargaining Power of Suppliers

Question 2

Name sub components of Rivalry Amongst Existing Firms

Answer 2

• Industry growth
• Concentration
• Differentiation
• Switching costs
• Economies of Scale vs. Learning Costs
• Fixed and variable costs
• Excess capacity
• Exit barriers

Question 3

Name sub components of Threat of New Entrants

Answer 3

• Economies of scale
• First mover advantage
• Distribution access
• Relationships
• Legal barriers

Question 4

Name sub components of Threat of Substitute Products

Answer 4

• Relative Price and Performance
• Buyer’s willingness to switch

Question 5

Name subcomponents of Bargaining Power of Buyers and Suppliers

Answer 5

• Differentiation
• Switching costs
• Importance of product for cost and quality (buyer’s opinion of product despite cost and quality)
• Volume per buyer

Question 6

Name subcomponents of Bargaining Power of Suppliers

Answer 6

• Differentiation
• Switching costs
• Importance of product for cost and quality
  (Buyer side not supply)
  Suppliers have bargaining power when there are few substitutes and/or few suppliers relative to the number of customers demanding a product or service

Question 7

What is a balance sheet?

Answer 7

A balance sheet, on a given date is a summary of the following:
1. All the assets the company holds
2. The company liabilities

Question 8

How are assets and liabilities broken down on a balance sheet?

Answer 8

1. Assets:
   - Non current assets (long term assets that serve the company more than a year)
   e.g. PPE (property, plant and equipment)
   - Current assets (assets which serve the company less than one year)
   e.g. inventory, receivables, cash and marketable securities
2. Liabilities
   - Equity (long run, assets that serve the company for more than a year)
   - Non current liabilities (long term debt)
   - Current liabilities (short term debt, suppliers, accounts payables)

Question 9

What is an income statement (earnings statement)

Answer 9

• What happened in a year, shows revenues, expenses and profitability over a period of time

Question 10

Key formulas for income statement are:

Answer 10

1. Gross profit = sales - cost of sales
2. Operational profit = Gross profit - operational cost
3. EBT (earnings before taxes) = Operational profit - interest cost
4. EAT (earning after taxes) = EBT - tax

Question 11

What is ROE and what is the ratio?

Answer 11

ROE means return on equity and is a good starting point to systematically analyze firm performance.

ROE = Net Income/Shareholder’s Equity

Question 12

What is an alternative method for calculating ROE?

Answer 12

ROE = ROS (return on sales) x ATO (asset turnover) x LEV (leverage)

Question 13

What is gross profit margin?

Answer 13

Gross profitability. Gross profit margin is the best indicator that people are willing to pay for your production.

Warren Buffet said that if a company has a stable gross profit margin the company has strategic competitive advantage and they know it.

Question 14

What is gross profit margin an indicator of?

Answer 14

1. The price premium that a firm’s product commands in the market
2. The efficiency of a firm’s procurement and/or production process

Question 15

How do you calculate GPM?

Answer 15

Gross Profit Margin = (Sales - Cost of Sales) / Sales

Question 16

What are accounts Receivables?

Answer 16

You are being payed

Question 17

What are accounts payables?

Answer 17

You are paying someone

Question 18

How do you calculate inventories/payables/receivables days?

Answer 18

Sales / Receivables (or inv. or payables.) = xx then to get receivables days 365 / xx = number of days it takes to get paid (receivables)

A good financial position is typically being paid quicker than you have to be paid. Inventory is also key. How quickly are you selling your stuff?

Question 19

What is the difference between solvency and liquidity?

Answer 19

Liquidity is short term
Solvency is long term
(it is possible to be solvent but not liquid)

Question 20

What are the THREE key rations of financial leverage analysis?

Answer 20

1. Liquidity ratio: current assets/ current liabilities AT LEAST 1 as that means company can pay its current liabilities
2. Quick ratio (current assets - inventory)/current liabilities
   Inventory is the liquid assets you have, for this ratio you are effectively removing this
3. Cash ratio (current assets - inventory -receivables ) / current liabilities
   This removes inventory and receivables leaving you with just cash

• If there is a large decrease between 1 and 2 you have inventory issues
• If there is a decrease between 2 and 3 you have receivables issues
• if at 3 you still have something high/close to ratio 1 you have lots of disposable cash. Cash is king!

Question 21

How do you calculate operating cash flow ratio?

Answer 21

operating cash flow ration = cash flow from operations / current liabilities

Question 22

Why is it bad if your liabilities-to-equity ratio is higher than your total liabilities?

Answer 22

Because debt/equity ratio is an important metric that measures the dress to which a company is financing its operations with debt rather than its own resources

Question 23

Why is it better to have 1. higher interest coverage (earning basis) and 2. interest coverage (cash flow basis)?

Answer 23

1. higher is better as it means you have higher net profit
2. higher is better as it means you have higher operational cash flow