Question

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 Seek out a private investor(s) who would be willing to share ownership

2. Seek out offers for a private buy-out Issue public debt (corporate bonds)

3. 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

Answer 1

Situation 1

If we adopted the first source that is obtaining private debt financing from those who are willing to share ownership the situation can study in two way.

a. treating it as debt without sharing ownership: in such a situation Interest expense will increase that will reduce the net profit and net profit ratio (If gross profit only having a proportionate increase.). but there will not be any dilution of Ownership. Debt component of the company will increase as result Debt equity Ratio will increase. if the company thinks it can generate more gross profit which can cover interest expense and increase the Net profit it is good because the current stockholders will get more EPS.

b.if the company plans to share ownership: if the company plans to share ownership in such a situation Deb to equity ratio will reduce and There will dilution of ownership and if Company can only make proportionate gross in Gross profit using the investment EPS will Reduce.

Situation 2.

If they corporate bonds. f company uses Corporate bonds there will be an increase in the interest expense of the company that reduces the Net profit ratio, and if the company is able to a higher Net income that proportionates it will help the current stockholders to Get more EPS.

Situation 3

. The issue of common stock. As a result, the debt-equity ratio will get reduced If net income not increased more than proportionate to the investment their will a reduction in EPS and dilution of ownership.