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Chemalite, Inc. (B) Case Background

Chemalite, Inc. is facing liquidity issues as it expands production. It purchased land and buildings for $850,000, paying $250,000 upfront and owing $600,000. However, rent only decreased by $25,000, indicating the purchase has not improved cash flow. The company is profitable but cash levels are unhealthy. Taking on short-term debt of $2 million is recommended to address the short-term cash crunch and allow expansion, as long-term gains outweigh short-term costs.

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2K views2 pages

Chemalite, Inc. (B) Case Background

Chemalite, Inc. is facing liquidity issues as it expands production. It purchased land and buildings for $850,000, paying $250,000 upfront and owing $600,000. However, rent only decreased by $25,000, indicating the purchase has not improved cash flow. The company is profitable but cash levels are unhealthy. Taking on short-term debt of $2 million is recommended to address the short-term cash crunch and allow expansion, as long-term gains outweigh short-term costs.

Uploaded by

Anurag
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chemalite, Inc.

(B)

Case Background
Chemalite, Inc was founded by Bennett Alexander in 2002. He was a chemical engineer and was set to sell his latest
patent invention – the Chemalite. At the end of 2004, the company declared a dividend of $10,000 after a year of
operation. After a meeting among the shareholders in January 2005, it was decided to move the production to a larger
production facility as well as expanding its product line including new colours. A review of the performance of the
company was scheduled to be held later in March.

Current Issues faced:



 Liquidity crunch
 Higher payback time of wholesalers
 Land and building bought for $850,000 and paid $250,000 in cash and $600,000 liable to pay in 3
instalments yet rent only decreased by $25,000.
 company is generating lot of net profit but the cash position of the company is not healthy so the
expansion can be very problematic if the company is not able to improve its cash position.

CHEMALITE INC.
Cash Flow Statement (Pro forma for 2005)
Particulars Amount ($)
Cash Flow from Operating Activities
Net Income 1,18,995
Depreciation 61,625
Amortisation of Patent 25,000
Gain on sale of Equipment (non-operational profit) (24,250)
Cash flow before WC changes 1,81,370

Increase in Accounts Receivables (70,030)


Increase in Raw material Inventories (20,450)
Increase in Finished Goods inventories (99,680)
Expenses prepaid (65,000)
Decrease in Taxes payable 25,780
A (48,010)

Cash Flow from Investing Activities


Purchase of Land (only cash part) (1,25,000)
Purchase of building (only cash part) (3,00,000)
Machinery sold 2,15,500
Machinery purchased (5,20,000)
B (7,29,500)

Cash Flow from Financing Activities


Stock bought back (26,000)
Long term debt (10%) 5,10,000
Short term debt 2,00,000
Dividend paid for last year (10,000)
C 6,74,000

Opening cash as on Jan 1, 2005 1,13,000


Net Cash Flow generated during year 2005 (A+B+C) (1,03,510)
Closing cash as on Dec 31, 2005 9,490
Recommendation

A large sum of money is invested in fixed assets because of which cash is getting blocked. To carry out the day to
day expenses, company has to find alternative ways to increase its liquidity.

Conclusion

We group 4 are of the opinion that the company should take on the short-term debt as it would be helpful in the long
run as the long term, gains overweigh the short-term cash crunch.

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