In: Finance
The Service and Maintenance Company requires a capital infusion of $200,000. It is currently a closely held corporation with less than 50 shareholders. Although the shareholders are not all related to each other, they all know each other and they view the business as a family business.
Please refer to the financial statements available here.
A number of alternatives are available to the company. It can:
1. Obtain private debt financing
2. Seek out a private investor(s) who would be willing to share ownership
3. Seek out offers for a private buy-out
4. Issue public debt (corporate bonds)
5. Issue public common stock
- Please discuss the impact and implications of each alternative?
- Considering the size of the investment ($200,000) how does this impact the financial statements?
- Please provide a discussion of the impact of each alternative which would include issues of structure and cost of capital?
- Make a narrative about the impact of an infusion of capital of $200,000 on the financial statements?
Income statement:
2014 | 2013 | ||||
Service Contract Revenues | 9,700,000 | 6,295,400 | |||
Service Contract Costs | (7,503,100) | (4,957,800) | |||
Gross Profit | 2,196,900 | 1,337,600 | |||
General and Administrative Expenses | (896,000) | (756,000) | |||
Operating Income | 1,300,900 | 518,600 | |||
Gain on sale of equipment | 59,900 | 7,700 | |||
Interest expense | (69,500) | (70,800) | |||
Other expense | (9,600) | (63,100) | |||
Income before taxes | 1,281,700 | 455,400 | |||
Taxes | (451,700) | (300,900) | |||
Net Income | 830,000 | 154,500 | |||
Retained Earnings, Beginning Balance | 1,057,500 | 1,053,000 | |||
1,887,500 | 1,207,500 | ||||
Less: Dividends paid | 0 | (150,000) | |||
Retained Earnings, Ending Balance | 1,887,500 | 1,057,500 |
Balance Sheet:
ASSETS | 2014 | 2013 | |||
CURRENT ASSETS | |||||
Cash | 456,500 | 222,400 | 105% | ||
Receivables | 3,936,400 | 3,320,000 | 18% | ||
Inventory | 89,800 | 100,200 | -10% | ||
Other assets | 119,500 | 84,300 | 41% | ||
Total current assets | 4,602,200 | 3,726,900 | 23% | ||
LONG TERM ASSETS | |||||
Note Receivable | 380,600 | 280,700 | 35% | ||
Equipment (net of depreciation) | 975,000 | 1,017,800 | -4% | ||
Total long term assets | 1,355,600 | 1,298,500 | 4% | ||
TOTAL ASSETS | 5,957,800 | 5,025,400 | 18% | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
CURRENT LIABILITIES | |||||
Accounts payable | 2,783,100 | 2,805,700 | -0.80% | ||
Note payable (current maturities) | 177,550 | 172,550 | 2% | ||
Other accrued liabilities | 165,300 | 114,600 | 44% | ||
Total current liabilities | 3,125,950 | 3,092,850 | 1% | ||
LONG TERM LIABILITIES | |||||
Notes payable (long term) | 354,800 | 354,800 | 0 | ||
Long term accrued liabilities | 289,550 | 220,250 | 31% | ||
Total long term liabilities | 644,350 | 575,050 | 12% | ||
TOTAL LIABILITIES | 3,770,300 | 3,667,900 | 2% | ||
STOCKHOLDERS' EQUITY | |||||
Common stock | 300,000 | 300,000 | 0 | ||
Retained Earnings | 1,887,500 | 1,057,500 | 78% | ||
Total stockholders' equity | 2,187,500 | 1,357,500 | 61% | ||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY | 5,957,800 | 5,025,400 | 18% |
Financial ratio |
Great Service 2014 |
Great Service 2013 |
Gross profit margin= (Gross profit / Net sale) x100 |
22.6 % |
21.2% |
Financial ratio |
Great Service 2014 |
Great Service 2013 |
Current ratio= current assets/ current liabilities |
1.47 to 1 |
1.2 to 1 |
Financial ratio |
Great Service 2014 |
Great Service 2013 |
Debt to assets ratio= total liability/ total assets |
0.63 to 1 |
0.72 to 1 |
Financial Ratio |
Great Service 2014 |
Great Service 2013 |
Working capital= Current assets – Current liabilities |
1,476,250 |
634,050 |
Hi,
In the given case study we need to evaluate the alternatives available with the company for Capital Infusion. This will hve an Impact on the Company's financial statement which has been discussed below,
2. SEEK PRIVATE INVESTOR WILLING TO SHARE OWNERSHIP : In this case the company wands to expand the share capital by issuing certain shares to a private investor. In other words the capital is raised through an existing share holder. So total shareholders shall remain to be 50 in number. So in this case there is a increase in the share capital by $ 200,000. When this happens the following impacts can be observed,
3. SEEKS AN OFFER FOR PRIVATE BUYOUT : In this situation the Public company's shares are purchased by a private company. So The company is going to reduce its share capital by selling it out to a private company. So the existing shareholders are sharing their ownership with a private company. In such the following impacts can be seen,
4. ISSUE OF PUBLIC DEBT : In this case the company is issuing new securities in the form of Public Debt securities. This is as similar as taking a loan but since this is in the form of securities which can be traded in the market. These can be sold at a premium rate or for a value lower than the par. These sequrities hall carry a copoun rate at which periodic interest payments need to be made to the holders of the securities. The impacts in this case are as follows,
5. ISSUE PUBLIC COMMON STOCK : In this case the Company is issuing public common stock. This will result into increase in the number of share holders. Simultaniously the sharecapital is also increased by $200,000. Under this alternative the following impact can be seen,