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A. Past & Current Operations
"Moore's Family Restaurant" is a restaurant on the edge of the downtown area in a medium-size, eastern city. It is on one corner of a major federal highway and a busy cross-town state highway with easy access to the interstate. The restaurant has a reputation for good "home cooking'" at reasonable prices. It provides an ample but simple "1920's/1930's" sit-down area for eating. Many of its customers have been coming here for years although most of them have moved to the suburbs so fewer stop in as much anymore.
The restaurant was founded in 1916 by Sam Moore who ran it until his son George took over in 1945. George Moore turned the business over to his son, George, Jr. in 1975. For the next 20 years or so George Moore, Jr. ran the business with his brothers and a sister until they lost interest in the business. The last of Mr. Moore's siblings relinquished any ownership in the business to Mr. Moore in 1997.
The restaurant has always served meals prepared from fresh, home-made and local products obtained from farms, provision houses and local merchants. The restaurant has an active alcohol beverage license, but no longer uses it. The restaurant stopped serving alcohol in the '70's when the neighborhood began to change. Furniture, fixtures and equipment are old, but fully serviceable and reasonably efficient for the business volume. Despite its age and use many customers comment on the "charm" of the decor and how the "place never changes." The restaurant has had no difficulty with health authorities, customers or neighbors.
Since the restaurant was founded the downtown area has changed from one thronged with neighborhood residents, shoppers, factory and warehouse workers to one with a dwindling number of office workers, government workers and transient motorists. During this same period the number of family-owned and -operated restaurants has declined steadily, being replaced by chain restaurants and up-scale "white table cloth establishments." From being the only restaurant in the neighborhood Moore's Family Restaurant now has competition: Wendy's, KFC, and Taco Bell are on the other 3 corners of the intersection at which it's located.
As a result of these changes, changes in consumer preference and other reasons, business and profits have been on the decline for several years. In the last 2-3 years this decline has been severe. In 2016 Mr. Moore asked his son, Tom, who is an executive with a local company and a Wilmington University MBA, for a "strategic plan" for the restaurant. Tom, in turn, asked some friends of his, a team of consultants with whom he worked, to "come in and take a look at the business in order to help out my dad."
The consulting team recommended that Mr. Moore take advantage of the "old fashioned" decor and Moore Family Restaurant's reputation to convert it into an upscale "theme" restaurant. They also made these recommendations:
· Re-appraise the value of the land, building and fixtures to reflect current values (increases in the 30+ years since the values on the balance sheet were set). Apply for an "Inner City Renovation Grant" for preferential loan and tax rates for renovated property in the city's core.
· Activate the liquor license, refurbish the restaurant, put in a 1920's "speakeasy" bar, but don't change the "antique" appearance.
· Take out a revolving line of credit (which it could draw upon if needed) of up to $100,000 against the re-appraised value of land and buildings to pay for the improvements. This is costing him 3% per year since interest rates are so low and is expected to remain at 3% during the 10 year draw period. For now he won't have to pay any loan balances off, just interest only payments during the initial draw period.
· Change the source (but not the nature or quality) of food, supplies and services to reduce costs; upgrade and professionalize the labor (cooks and servers); revise pricing and the "business model".
· Continue to accept credit cards (Master Card, Visa, American Express & Discover) for 50% of meals are charge sales. Use 365 as the number of "selling days" per year to coincide with bank practice and calculations.
· Consider opening up a catering business as a new revenue stream to reach out to new Customers.
Mr. Moore followed all the recommendations, which resulted in the financial statements in the excel spreadsheet that accompanies this exam.
Use the data in the excel document accompanying this exam to compute these ratios for 2012 in the Final Exam Test (next item on the Blackboard site). You may find this worksheet helpful to make your calculations and review them before submitting them to the actual test in Blackboard.
B. Potential Retirement
Through good years and not so good, Mr. Moore maintained that he enjoyed the business and wanted to stay in business as long as possible, particularly in order to participate in the current economic boom. But, Mr. Moore is in his 60's. He is concerned about the business' future as well as his own. On the one hand he says he would like to "run the business as always, for as long as I'm able"; on the other hand he has been heard to say "it gets harder all the time. Maybe I should just pack it in."
At the end of 2016 Mr. Moore asked if he would be able to retire at that time. The consulting team evaluated selling the business for its book value (Owner Equity). The team would use the Owner Equity in the business realized from a sale in order to buy an investment that would pay Mr. Moore 3% per year (paid annually in one payment). At the end of 2016 Mr. Moore was 61 years old. It was suggested that he plan to live until he is 100 to make sure his money lasts, thus the money would be invested for 40 years. Mr. Moore said he'd consider retiring if the investment could produce $100,000 per year for his retirement so he can indulge in his passions - badminton, bocce and butterflies.
C. Ongoing Operations
Use data below for questions 17-23 in this section and the data in the MS Excel attachment to calculate a budget for 2019. Hint: You may find it helpful to have a "standard" P&L which states all data as a percent of sales. Some "planning" questions will provide all needed data in the questions themselves.
Mr. Moore believes that roughly 8% more meals can be served in 2019 (due to the new strategy kicking into high gear) so he plans to serve 272,514 meals in 2019. He also plans to adjust prices so an average meal will be $7.35 per meal. Hint: "Sales" have been calculated as number of meals served x average price per meal.
The consulting team believes that the cost of product (calculated as a percent of sales) can be 35% of sales in 2019. Mr. Moore wants to keep the good staff he hires and so is planning to give "cost of living raises" of 2.5% over 2018 in the next year. Benefits will remain at the current 35% of the labor cost next year. The utility companies have advised all business customers that rates will increase by 15% next year.
According to the loan agreement, there will be no repayment of principle on the revolving line of credit (since we are currently in the draw period). Hence payments being made are just interest payments which are expected to be $3,000 total in 2019.* Because of agreements with the city and the insurance company (from whom he received his loan) taxes and insurance will remain the same in 2019.* Likewise depreciation expense will remain the same as in 2014.*
Service costs are expected to grow by 15% next year plus an added $55,000 is to be budgeted for extra accounting services. Other Expenses (GSA, advertising and promotion and other) are expected to increase by 10% from 2018. The heavy advertising of the new restaurant should not be necessary and there's been time to plan for some other efficiencies. The income tax rate is expected to be 28% of DEBIT which is reduced for interest and depreciation, the same percent of DEBIT as in 2018.
D. Retirement Revisited (Questions 24 and 25)
Assume Mr. Moore operates the "Re engineered Business" until the end of your budget period (2019). At that time he would sell the business for its book value (Owner Equity). It is estimated that the Owners Equity would grow to at least $1,825,684. Mr. Moore would use this amount to buy an investment that would pay him 6% per year (paid annually in one payment). At the end of 2019 Mr. Moore will be eligible for Social Security payment of $14,500 per year at that time.
It was suggested that he plan to live until he is 100 to make sure his money lasts, thus the money would be invested for 40 years. Mr. Moore said he'd consider retiring if the investment and Social Security produced a total of $150,000 per year for his retirement.
* These values have been entered on the worksheet; there is no need to calculate these amounts. Calculate and enter only those amounts on the exam with question numbers' shown.
1. The total adjustments to net income to determine cash flows from operating activities are......(Hint: be sure to add up changes in current assets and current liabilities as noted on the balance sheet going from year 2017 to year 2018) to get the answer.
2. Net cash flows from operating activities are....(hint: don't forget about net income).
3. Cash flows from investing activities are.....
4. Net Cash flows from investing activities are....
5. Cash flows from financing activities are...(hint: since this is a partnership common and preferred stocks and bond financing does not exist).
6. Net increase/decrease in cash flows is....
7. What is to be the Sales budget for 2019?
8. What is to be the Cost of Product for 2019?
9. What is to be the Labor budget for 2019?
10. What is to be the Benefits budget for 2019?
11. What is to be the Cost of Services for 2019?
12. What are Total Costs to be budgeted for 2019?
13. What are Earnings before Interest, Taxes and Depreciation (DEBIT) to be for 2019?
14. Mr. Moore is considering selling the business at the end of 2019 for his Owners Equity (projected to be at least $1,825,684) and using that amount to buy an investment that would pay him 6% per year (paid annually in one payment) for 40 years. What would the annual payment from such an investment be?
15. Will the combination of investment return and Social Security payments described in the text of the case meet Mr. Moore's minimum retirement goals?
1) No, it will fall short of his goal by approximately $14,160
2) Yes, it exceeds his goal by approximately $14,160
3) Yes. It exceeds his goal by well over $40,000.
4) Not enough information to tell.
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