Description
Particularly need questions questions 1, 2, 3, 4, 6 answered, along with the discussion topics.
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ToysRCash, Inc.
In January 2024, Mr. Lee Woods, President of ToysRCash, Inc. (TRC), was considering his company’s
financing needs for the coming fiscal year. (Fiscal Year-End, December 31st). The company’s production
schedules have been highly seasonal, reflecting a seasonal pattern of sales.
TRC is a regional manufacturer of plastic toys. Products produced through FYE 2023 are: Gobots, Dolls,
Glowworms, Little People, Wheel Whoppers, Cook sets, Plastic riding toys, and a variety of other
miscellaneous items. Exhibit 1 shows the company’s product mix for the years 2019 – 2023.
The manufacture of plastic toys is a highly competitive business with many producers, most of which are not
strongly financed. Capital requirements are not large and technology is relatively simple, so that a number of
new firms enter the business each year. On the other hand, competition is severe with respect to both price
and design, resulting in a relatively high failure rate. There is a significant, temporary advantage in designing
a popular new toy. Margins tend to be high on such an item, until competitors are able to offer a similar
product. For example, the successful introduction by TRC of the Glowworm contributed significantly to profits
in 2022. In 2023, 7 competitors offered a similar item, and its wholesale price was nearly halved.
Although TRC still plans to manufacture their existing lines, a new product line known as “Radar Gun” is being
introduced. This toy is a version of “Paint Ball” where, when hit, the transmitted beam causes a safe paint-like
product to explode from plastic vests worn by participants. “Radar Gun” is more of a high technology toy that
transmits light beams for approximately 100 feet, one activated by a trigger mechanism. In the research and
development phase and subsequent test marketing of the product, buyers became very excited about the
marketability of this product. Due to this high success rate, TRC has purchase orders from major retail stores
representing $1,000,000 in sales for the 2024 season. The company expects that sales in 2024 will double
over 2023 levels, with 60% of sales coming from the new product and the remaining 40% to come from existing
lines. Exhibit 2 shows the company’s projected product mix for the year 2024, with appropriate related sales.
Mr. Lee Woods founded TRC in 2002. Prior to founding TRC Mr. Woods had been employed for 15 years as
a production manager by a large national manufacturer of plastic toys. With his savings and those of his former
assistant, Mr. Andy Hall, Mr. Woods established the company. Originally a partnership, the firm incorporated
in 2003, with Mr. Woods taking 75% of the capital stock and Mr. Hall 25%. The latter serves as production
manager and Mr. Woods, as President, is responsible for overall direction of the company’s affairs. The
company has experienced relatively rapid growth since its founding and has enjoyed profitable operations
each year since 2004. Sales in 2023 were $1,000,000 and by virtue of the new “Radar Gun” are projected to
double in 2024.
Net income reached $152,000 in 2023 after state and federal taxes of 50%. A new Tax Reform Act will result
in a blended effective tax rate of 40% for the fiscal year 2024. Exhibits 3 and 4 present the latest financial
statements of the company. For the year 2022 and 2023 the cost of goods sold averaged 60% of sales and
is expected to maintain approximately that proportion in 2024. With the introduction of the new product, the
company will need to acquire fixed assets costing $250,000. Plans are to acquire the assets in February, and
it will take until May to get the new systems up and operating. Operating expenses will more than double for
2024. Projections indicate that due to raises to key officers and new operating expenses associated with the
new product, operating expense will amount to $240,000, spread evenly throughout each month of the 2024
fiscal year.
Expanding operations has resulted in a somewhat strained working capital position for TRC. The year-end
cash position of $147,000 is only $47,000 greater than what is regarded as the minimum necessary for the
operation of the business. The company currently has a $100,000 unsecured line of credit with your bank,
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Bulldawg Bank & Trust. The high usage in 2023 was $62,000 and there was no outstanding debt at fiscal
year-end 2023.
The company’s sales are highly seasonal. Over 95% of annual dollar volume usually is sold during MaySeptember. Exhibit 5 shows sales by month for 2023 and Exhibit 5-A shows expected sales percentage based
on the introduction of the “Radar Gun”. Sales are made principally to regional variety store chains and toy
brokers on net 30-day terms. Large variety store chains are becoming increasingly important customers of
TRC, accounting for over 65% of sales for 2023. These customers are requesting longer payments terms (net
90 days) and because of competitive pressures, TRC expects to grant such terms to these customers starting
May 1, 2024. TRC expects these large customers to continue to account for about 65% of 2024 sales.
The company’s production processes are not extremely complex. Plastic molding powder is processed by
injecting molding presses formed into the shape desired. Automatic painting machines next paint the plastic
shapes. The final step in the process is assembly and packaging in cartons or plastic bags. The production of
the “Radar Gun” is somewhat more complex, but the basic molding process is the same. Inserted in the interior
of the toy is a tiny light transmitter and trigger device that when engaged, sends out a tiny light beam. Wiring
of these mechanisms to a battery pack in the handle of the gun completes the interior of the toy. To avoid
excess equipment costs, storage and high inventory levels, typically all production processing is completed in
the same day so there is virtually no work in process at the end of each day. Material Purchases on net 30day terms are made monthly for the estimated production in the current month. Total purchases in 2024 are
forecast at $600,000; labor and production cost are expected to be $600,000 in 2024, which Excludes $24,000
in depreciation.
TRC’s practice is to produce in response to orders and, although there are large orders for the new product,
it will be May before the company will have its capacity expanded from its purchase of additional fixed assets
and renovations to handle the new production.
With the exception of existing purchase orders, the first sizeable orders for holiday sales by retailers are
usually received in early May. Shipments are made whenever possible on the day that an order is produced.
Hence, production and sales amounts in each month tend to be equivalent. A small inventory of representative
finished goods, averaging $31,000 in 2023, is maintained in a nearby public warehouse, owing to lack of
space in the plant. Inventory is expected to remain at these levels during the coming year.
The company has requested that Bulldawg Bank & Trust loan TRC $220,000 for the purchase of additional
fixed assets (renovations and specialized equipment). This loan should provide monthly principal payments
including interest of $10,000. The equipment needs to be purchased and paid for next month (Feb. 2024) to
ensure installation is completed prior to the season’s orders. Term loan interest expense has been projected
through operating expenses and is included in the loan terms above. Mr. Woods does not have a close handle
on what his short- term borrowing needs will be; that’s where you come in. You have just been assigned this
account relationship at Bulldawg Bank & Trust by the EVP of commercial lending. Based upon the information
available to you: (Your assignment for this case study is questions 1-7)
1. Prepare a 12-month Cash Budget reflecting anticipated cash inflows, outflows and short-term
borrowing needs. (Short-term loan rate is 8.00% – Prime – 50 bp % with a floor of 8%)
2. When do you expect the credit need to be the greatest?
3. Would you expect to have a “clean-up” period in the credit? If so, when and why?
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4. What are the strengths and weaknesses of TRC? Should you have a clean- up period and
why? Based on these strengths and weaknesses- how would you structure and price this
relationship?
5. Would your bank book these requests today? Does your Loan Policy cover seasonal lending,
please give detail?
6. How could different Accounts Payable and Accounts Receivable terms change this credit for
better or worse? Provide detail
7. What are general risks behind seasonal lending? How can they be mitigated by structure,
monitoring, pricing, controls?
Additional questions for consideration and discussion:
•
What are the strengths and weaknesses of this credit? Prior to 2024 and during 2024
•
Analyze the information to determine structure, term, amount and other conditions to satisfy TRC
financing needs for the coming year.
•
What kind of information will you ask TRC to provide you to ensure your ability to properly service the
loan during 2024? Why are you requesting such items?
•
How can seasonal loan needs be adequately determined without the use of a cash budget?
•
Visualize your first plant visit. Describe what you expect to find. What do site visits allow you as the banker
to see?
•
If the loan is made, what rate and fees would seem appropriate? If you are pricing for current risks? What
other products or services could you possibly cross-sell to TRC, Mr. Woods, or Mr. Hall?
TRC’s executive management knows the toy business well but has looked to Bulldawg Bank & Trust for
general financial advice. New to the account, you have an opportunity to take a “fresh look” at their operation.
Are there any matters you have noted during your review of the company that you will want to discuss with
Mr. Woods and Mr. Hall?
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EXHIBIT 1
ToysRCash, Inc.
Sales by Products, 2019 – 2023
2019
2020
2021
2022
2023
Dolls
18%
15%
15%
14%
15%
Little People
—-
3%
15%
8%
2%
Cook Sets
10%
9%
8%
12%
7%
Riding Sets
44%
49%
50%
43%
44%
Gobots
—-
—-
—-
—-
11%
Wheel Whoppers
—-
—-
2%
6%
7%
Cars & Trucks
16%
12%
2%
1%
3%
Glowworms
—-
—-
—-
9%
1%
Miscellaneous
12%
12%
8%
7%
10%
TOTAL
100%
100%
100%
100%
100%
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EXHIBIT 2
ToysRCash, Inc.
FYE 2024 – Projected Sales
(000)
2024 Projected %
2024 Projected Sales $
Radar Gun
60%
$1,200
Dolls
7%
140
Little People
1%
20
Cook Sets
3%
60
Riding Toys
15%
300
Gobots
4%
80
Wheel Whoppers
3%
60
Cars & Trucks
1%
20
Glowworms
1%
20
Miscellaneous
5%
100
100%
$2,000
TOTALS
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EXHIBIT 3
ToysRCash, Inc.
Condensed Balance Sheet, December 31, 2023
(000)
ASSETS
Cash
Accounts Receivable
Inventory at Cost
Total Current Assets
$147
30
31
$208
Plant & Equipment, Net
Prepaid Items
Total Assets
186
78
$472
LIABILITIES
Accounts Payable
Notes Payable – Bank
Current Maturities Long Term Debt
Accrued Income Taxes*
Total Current Liabilities
$4
0
0
(4)
$0
Long Term Debt
0
Total Liabilities
Capital Stock (1,000 shares)
Retained Earnings
Total Capital
Total Liabilities and Capital
$0
100
372
$472
$472
*Quarterly tax payments for estimated tax on 2024 income are due on April 15, July 15, October 15,
2024 and January 2025. The debit balance represents overpayment of taxes due for the year ending
December 31, 2023 and will be credited to the first estimated payment in 2024.
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EXHIBIT 4
ToysRCash, Inc.
Condensed Income Statement, 2021 – 2023
(000)
FYE December 31
(Proforma)
2024
2021
2022
2023
Net Sales
$710
$840
$1,000
$
Cost of Goods Sold
400
504
600
____
Gross Profit
$310
$336
$400
Operating Expense
74
82
96
Income Before Taxes
$236
$254
$304
Federal Income Taxes
105
127
152
Net Income
$131
$127
$152
____
____
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EXHIBIT 5
ToysRCash, Inc.
Monthly Sales 2023
(000)
Amount Percent
Amount Percent
January
$10
1.0%
July
$218
21.8%
February
11
1.1%
August
239
23.9%
March
13
1.3%
September
114
11.4%
April
11
1.1%
October
14
1.4%
May
157
15.7%
November
13
1.3%
June
187
18.7%
December
13
1.3%
$1,000
100%
TOTAL
EXHIBIT 5A
Pro Forma Monthly Sales – 2024
(000)
Amount Percent
Amount Percent
January
$10
.50%
July
$450
22.50%
February
11
.55%
August
500
25.0%
March
13
.65%
September
365
18.25%
April
11
.55%
October
14
.70%
May
250
12.50%
November
13
.65%
June
350
17.50%
December
13
.65%
$2,000
100%
TOTAL
8
2024 Cash Budget
Cash Budget Worksheet
(in thousands)
January
February
March
April
May
June
July
August September October
November December
Cash on Hand/Beginning cash
Cash Inflows:
Collections-30 &90 days
Loan Proceeds
Cash Available
Cash Outflows:
COGS-material & labor
Operating Expenses
Fixed Asset Purchase
Principal Payments
Interest on Short Term Debt
Tax Payments
Total Cash Paid Out
Cash Position/ending cash
Minimum Ending Cash
Over (Short)
Cummulative Short Term Loan
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