2011 CF forecast for LL requested by bank (Finance)
Our 2011 cash flow forecast assumes that the union will accept LL’s revised offer in June and the strike was only for April, 2010 which will not affect fiscal 2011 since the offer would be retroactive to April 30, 2010. Our forecast also assumes that MRL’s cash flows are excluded.
Our calculations are in APPENDIX. It shows that cash flow for 2011 is forecasted to be $8,646,000. Furthermore, cash flow is expected to decrease steadily in 2012 and beyond. It is doubtful that LL can remain as a going concern.
Our calculations are based on Mark’s assumptions about sales and operating costs reverting back to 2009 levels, as well as our own estimates of non-cash ...view middle of the document...
We will have to find the current value of LL and compare it with the offer to see if it worth accepting the offer and liquidating.
Under the Earnings-Based Approach, we could apply the cash-flow and discounted model by using 20% rate which is the estimated shareholder’s required after-tax return and using the cash flow from 2011 to 2015 (Appendix) which will give us a value of $18,545,503 which is way less than $28 million plus the lands $10 million fair value.
We would recommend selling the tobacco operations on a bulk-purchase basis and liquidate LL because Mark is losing interest in the tobacco business and wants to fulfill his dream of running the hotel business. Since, LL is privately held by Mark and his risk appetite is very high, he could keep the shares of MRL. This would also allow him to focus and get more closely involved in MRL.
MRL’s compliance with debt covenant (CF:interest > 3:1)
Purpose: To perform a cash flow analysis of MRL for 2010 to see if they are incompliance with the debt covenant as it is requested by the Bank.
For Fiscal 2010
CF from operations= $5,103,000 (Appendix)
Debt Covenant = 5103 ÷ 2310 = 2.2
Conclusion: Based on the above analysis, the debt covenant (interest coverage ratio is 2.2) for fiscal 2010, which is less than 3, so MRL is violation of the covenant. The mortgage becomes payable on demand at the bank’s option unless there are prospects of compliance within the following year. So, we should check if MRL would still be in violation for fiscal 2011. If the sales are going to drop due the boycott caused by the travel agencies, chances are high that MRL will breech the 2011 covenant.