Forecast the cash flows for 3 years.

You work for Blue Pools in the finance department. Blue is a national pool builder. Jake Swimster was just hired by Blue to help expand the business. He has suggested that Bluehaven should enter a new market and start selling pool supplies. Blue is a construction company and not experienced with sales of goods, either retail or wholesale.

You’ve been asked to develop a 3-year plan and analysis for this proposed business. You are to suggest what the amount of investment should be and whether to borrow the funds. Bluehaven currently has no debt and has an overall cash flow of a positive $100M per year, but does not want to invest more than 10% of its cash flow into the new venture.

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Jake has suggested looking at Pool Corp, a public company that is a pool equipment supplier out of Louisiana.


Sales forecast – you will use wholesalers and try and enter one market, about 1% of the total market. Use Pool Corp CAGR plus 3% of sales growth because this is a new venture and your growth will be calculated on a lower basis.

Costs forecast – materials will be purchased and marked up, so material costs are 70% of sales price. A 20,000 sq. foot warehouse to store the goods at the going rate $13.20 per square foot per year must be rented. Insurance per year will be $100,000. The plan is to hire 10 warehouse personnel at $13 per hour with a benefits adder of 25%. Selling fees at 3.5% of sales. Also 4 people will be hired at $25 per hour to plan and manage the operation. They also have a 25% benefits adder.

Because Blue is in an entirely different business model, Pool Corp will be used to figure the WACC and tax rate. When looking for the market rate, you use S&P. When looking for the cost of debt, use the large corporate bond issue by CVS.

A DCF will be done. A break-even analysis should be done to make sure fixed costs and the investment will be covered. A sensitivity analysis will be done on revenues. Jake believes this venture will be successful when trying to get such a small market share but does admit that it could be harder to grow the sales at such a high rate. He states that maybe all we can do is get .5% share at the beginning (downside). But he is very optimistic that he and his team may get more if the weather cooperates and stays warm longer, about 1.50% market share (upside).

In summary:

Forecast the cash flows for 3 years. Figure out the WACC using Pool Corp. Do a DCF analysis of the company’s maximum investment. Do a break-even analysis. Do a sensitivity analysis, both upside, and downside.

Give an opinion as to whether you think the growth rates of the analysis are sound, recommend how much to invest, and recommend if the company should borrow the funds or just use cash.

Sources: latest investor presentation US Global/Consumer Retail Company Yahoo Finance


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