Coleco Financial Distress Case Study Summary

Submit your case study executive summary for Coleco, Inc. here.

  1. Assess Coleco’s product-market strategy and financial strategy through 1987.
  2. What went wrong and how did Coleco respond? (It may help to create a sources and uses summary for the growth period of 1980-1985 and the crash period of 1986-1987 and compare them.)
  3. Can you think of a refinancing plan that would alleviate Coleco’s financial difficulties? Are there other strategies you can consider?
  4. We will consider real options later in the semester. However, one way to think about the value of equity is as the value of an option held by an equity-holder to purchase all of the claims on the firm’s assets from the lender by paying the cost of the debt. What is the current status of this option held by Coleco’s shareholders? Is it in the money or out of the money? How would you go about valuing the option? (Assume volatility of assets to be 40% and conduct a sensitivity analysis related to volatility estimates. Note that risk-free rates are provided in exhibit 10.)
  5. What should Meyer do in the face of this financial distress?

Additional information:

The case omits the important piece of information that a total of $21,110,000 was paid in dividends from 1981-1985. This is a USE of funds.

Also, in the balance sheet, the convertible subordinated debentures line is not aligned correctly. The level of this liability was 52,571 in 1984, 75,777 in 1985 and so on.

Finally, the income statement is missing an entry. In 1987, there is a tax credit of $2,888 (i.e. a negative tax). Thus, the net loss in 1987 is (102,463).

These corrections are reflected in the spreadsheet below.

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