Act_561_Tootsie_Roll

Tootsie Roll Industries, Inc. Loan Package ACC/561 Charles Royes Tootsie Roll Industries, Inc. Tootsie Roll Industries, Inc. has been in business since 1896 and is an established presence in the candy manufacturing industry with net sales in 2007 of $492.7 million. Tootsie Roll is publicly traded on the New York Stock Exchange with a current market capitalization of $1.43 billion. Tootsie Roll is committed to a culture of innovation and creativity and seeks to remain competitive within the industry by expanding its existing product lines through the introduction of Tootsie Roll Bubble Gum. In order for Tootsie Roll Industries, Inc. to expand their growing candy line the organization needs a loan that will increase their liability by 10 percent. Team D has created a loan package detailing how Tootsie Roll will accomplish this. The loan package includes several types of liquidity, solvency, profitability ratios, and an explanation ratio, loan justification, how the company plans to use the loan, and how the loan may affect the company. The Loan Package Reason for the loan Tootsie Roll Industries, Inc. intends to borrow $17.45 million dollars to fund the research, development, marketing, and launch the new line of bubble gum, Tootsie Roll Bubble Gum. Tootsie Roll Bubble Gum will come in the same six flavors as the existing line of Tootsie Roll candies. Tootsie Roll Bubble Gum will be produced in the same facilities alongside Tootsie Roll candy production with separate production lines dedicated to Tootsie Roll Bubble Gum (Tootsie Roll Industries, 2012). Tootsie Roll Industries, Inc. requests a loan of $17.45 million with a repayment term of 10 years. The loan represents a 10 percent increase in total liabilities. Tootsie Roll does not currently have any outstanding bank borrowing and has working capital of $141.8 million. Tootsie Roll Industries cash from operations reached $90.1 million in 2007 and the company currently has $201.4 million in long-term assets available for collateral consideration. The company’s net sales increased 25.5 percent from 2004 through 2007 with projected sales of $540.7 million, net earnings of $57.3 million, and profit margin of 10.5 percent for the coming year. Tootsie Roll Industries, Inc. Plans and affects of the Loan Tootsie Roll Industries will allocate the loan to the Tootsie Roll Bubble Gum brand while planning ahead for unexpected incidentals. Approval of the loan will allow Tootsie Roll to research, develop Tootsie Roll Bubble Gum and market the candy effectively to lead to an effective launch and lifeline. Of the $17.45 million, 10 percent of the funds will be placed into a Tootsie Roll Bubble Gum account in case of incidentals, over thoughts, and unplanned setbacks. Tootsie Roll will allocate 50 percent of the funds toward development and creating the Bubble Gum. The gum will be available in the same six flavors as Tootsie Rolls. Marketing and advertising will receive 20 percent of the funds. Advertising will focus on a web-based marketing plan targeting websites such as Twitter, Facebook, YouTube, Hulu, and other popular websites using pay-per-click ads, banner ads, and commercials. The commercials will also appear on television. Tootsie Roll Bubble Gum will direct 10 percent of the funds to additional equipment and upgrades to outstanding equipment with the final 10 percent of the funds going towards increasing employment to handle the new candy line. The effects of the loan can be positive or negative based on the management of the loan. If there is poor management Tootsie Roll could default on the loan. This would place the organization in debt or lead to loss of assets. This will also affect the organizations credit score. If the loan is managed properly Tootsie Roll should see an increase in revenue and have no trouble repaying the loan. This loan will also increase innovation and creativity. Tootsie Roll will also hire new employees to run the Bubble gum line that will help the economy and local community. In order to prevent a possible default the organization will ahead by allocating funds to an account in case of emergencies or incidentals. Ratio Analysis One of the primary analytical tools of a financial statement analysis is the ratio analysis. These ratios - such as the ratios for liquidity, solvency, and profitability - are for the purpose of evaluating aspects of a company's operations, can be computed from any pair of numbers found on the financial statements, and are usually expressed in percentage or times (Needlesw, Jr. & Powers,  2004). Many of these ratios measure or determine in some way the profitability of a company and the performance of their earnings. These ratios are important to the company to see where they stand in terms of profit. They are also of interest for shareholders because they can see how much profit they are making as well as how much profit the company has made from their investment. Investors are also interested in these profitability ratios for the same reason shareholders are because they want to determine if they invest in this company, will they make a profit from it. Profitability ratios are used over a period to measure how well a company is doing. It measures the company’s success and income. In a ratio analysis, the profitability portion consists of eight ratios. These profitability ratios are earnings per share, price-earnings ratio, gross profit rate, profit margin ratio, return on assets ratio, asset turnover ratio, payout ratio, and return on common stockholders’ equity ratio. Liquidity means having enough money on hand to pay the bills and to take care of unexpected needs requiring cash. Liquidity ratios measure a firm's ability to meet its current obligations with its current assets. A liquid company has less risk of being unable to meet obligations and more financial flexibility to take on new projects (Siegel & Shim, 2000). Solvency is the ability of a company to satisfy its debt obligations when due. Solvency ratios measure the financial soundness of a business or company; determining how well the company is able to meet its debts as well as obligations, both long-term and short-term (Siegel & Shim, 2000).  The following ratio presentation (page 6) includes ratios most often used when evaluating the credit-worthiness of a customer: liquidity, solvency, and profitability. Please see the attached Excel workbook for the full analysis and calculations. Conclusion Tootsie Roll Industries, Inc. is seeking to expand their candy line by introducing Tootsie Roll Bubble Gum. In order to expand their brand Tootsie Roll has reviewed the loan package detail created by Team D. The loan package details an increase in liability by 10 percent. Team D provided ratio analysis based on financial statements, provided justification for the loan, and explained how the loan proceeds will benefit the company. Tootsie Roll is financially stable and will continue to see greater profits with the new line of candy. References B.W. Clifford, Inc. (2012). Candy manufacturing technology and candy manufacturing techniques are fascinating. Retrieved from http://www.bwcliffordcandy.com/candymanufacturing.aspx Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed.). Retrieved from The University of Phoenix eBook Collection. Needlesw, Jr., BelverdE., & Powers, M. (2004). Financial accounting (8th ed.). Boston, NY: Houghton Mifflin Company. Siegel, J. G., & Shim, J. K. (2000). Dictionary of accounting terms (3rd ed.). Hauppauge, NY: Barren's Educational Series, INC.. Tootsie Roll Industries. (2012). Tootsie Roll company and product information. Retrieved from http://www.tootsie.com