Baldwin Bicycle Case
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Q1. What is the “relevant” cost of manufacturing a Challenger bike?
Q4. Can you estimate the incremental return on investment for the Challenger deal?
It is difficult to estimate the incremental return on investment for the Challenger deal due to insufficient information. It would be difficult to predict return due to the uncertainty of customer retention with the implementation of this deal.
Q5. What are the major cash flow implications of the Challenger deal?
Cash flow is a difficult situation currently for Baldwin. It takes the inventory approximately 125 days to turn and then another 46 days to get paid. This is a very long time. The Challenger deal states that they would pay within 30 days. This would help with the current 46 day AR turnover. The contract also keeps inventory days from going over 120 for the Challenger bikes. Both of these help turn assets into cash faster by at least 21 days (approximately 16 + 5). The problem is they dont currently dont have cash to invest in this project, meaning they would need to finance.
Q6. How would you describe Baldwins financial situation at the end of 1982?
Financially, Baldwin has very high amounts of debt. Most of this is short term debt, which is worse than long term debt.
Comparing the debt to equity we see that there is more debt than there is equity. This is a dangerous position for the firm to be in.
The current ratio indicates they do have enough current assets to pay off current liabilities.
The debt situation may make it difficult to raise the cash needed to invest in the Challenger bikes.
Baldwin currently has about an 8% ROE, which is well below the industry average of 15%. By accepting the offer and using a 50% tax rate the ROE is estimated to be around 13%, which is significantly better but still below the 15% industry average.
Q7. How would you describe Baldwins strategic position at the end of 1982? Is the challenger deal a good strategic fit for Baldwin?
Baldwin has about 1% of the market operating at 75% capacity of one shift. This means that Baldwin has a huge market to go after and some room to expand capacity to do so. To gain more market share Baldwin can either increase capacity with additional plants or multiple shifts. Currently they are offering a mid-range bike and a medium price. They are operating with high levels of debt and a low ROE.
The Challenger deal may help to alleviate some of the problems with the ROE by possibly raising it to 13.4%. The asset