Sweet Dreams Case Study Solution

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In short to summarize, Sweet Dreams Inc. (SDI) is a mattress manufacturer that started to experience issues in their business during the recession that began in the early 90 's. They relaxed their credit standards in the hopes to boost sales as they were experiencing difficulties with low sales volume. It also took on long term and short term loans. This in turned caused more issues with lows sales, high inventory and high COGS. Because of issues with high inventories, accounts receivables and insufficient funds to cover their expansion, SDI began delaying payments on their loans to their bank, First International Bank. In regard to the common size balance sheet, it shows that total assets decreased every year while the inventory percentage…show more content…
COGS increased which impacted gross profit and operating profit margin was also negatively impacted. Slow increase of sales also was not enough to support their expansion plans. Their interest expenses increased on their long and short term loans. This caused sweet dreams to have decreased earnings for their common stockholders. This is another indication that the company is not performing well. Looking at the above data on the ratios for Sweet Dreams, they are experiencing a downward trend in almost all aspects. They’re currently have issues paying off the loans they currently have, and offering new financing could be a risky endeavor for the bank. It also shows that they might not ever be able to pay back any of their loans to the bank either. At the moment, looking at all of the data, the bank shouldn’t increase their line of…show more content…
This includes the 5% required cash balance. Sweet Dreams could pay back the loan balance in equal installments so that half of the beginning-of-year balance of $18,055 would be paid off in 1996. Then the balance would be paid at same rate as the previous year so that the remaining balance would be paid by December 31, 1997. Sweet Dreams has several options if the bank decides to withdraw the entire line of credit. One would be to file chapter 11 bankruptcy. The second option for the company would be a merger with another company or have another company buy them out. The last would for them to downsize by curtailing their production and laying off employees in order to cut down on expenses. Industry average ratios might not be an effective bench mark to compare against if the crises has an impact on the industry. Since the industry average all companies in that industry, if the industry as a whole is having a downturn, those rations might not be valid. If the whole industry is experiencing issues and a downward turn, the rations may not be a valid tool to use. The industry average is affected by all the companies a given industry, thus if the whole industry is experiencing a downturn the ratios may not valid. If a company compared itself to the industry it may lead to a false
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