Summary Report for CBI for the Canadian Expansion Recommended Capital Structured Approach and my Recommendation with Justification
As Competition Bikes, Inc. expands, I have been requested to look north towards Canada as a possible investiture of business assets into the Canadian Marketplace for possible expansion. Having done a thorough examination and looking over the numerous options that may allow you to further review the possible expansion into Canada; I have deliberated the resulting tabulations as the ones that may be your most optimal solutions, based on the present economy, our own financial standing and Canadian markets. It is important to remember that the allotment of time is a section of five years. Specifically those are Year 9 to Year 13. This is accompanied with the goal of amassing approximately $600,000 for expansion. Here are 6 possible options that I will offer.
1st Fund Expansion with 100% Issuance of Bonds valued at 9%
2nd Fund Expansion with 60% Issuance of Bonds valued at 9%, with an additional release of 40% of Common Stock.
3rd Fund Expansion with 40% Issuance of Bonds valued at 9%, with an additional release of 60% of Common Stocks.
4th Fund Expansion with 20% Issuance of Bonds, valued at 9%, with an additional release of 80% of Common Stocks.
5th Issue a joint Stock Option of 50% Preferred and 50% Common Stocks.
6th Take a Bank Loan with 6% Interest for 5 Years (Year 9 – 13) with minimal return over the duration of the loan.
Each one of these six suggestions has a positive and a negative. From the get-go, let’s immediately dismiss the 6th suggestion. A Bank Loan with almost no return for five years is a bad idea. We would be required to have a minimum balance, and that money could be much better spent elsewhere, investing it in our company for better productivity. Bank Loans almost always carry with them minimum requirements, or minimum balances; neither of which will benefit our company. As I see it, we have a pair of good options available to us. Choice number 5 and Choice number 4.
Having looked over all of the choices listed, if we take a long-term approach; it would seem that our Choice number 5 would seem the more viable for our growth and expansion. Although Choice number 4 would certainly offer us a nicer short term return across the first fiscal year, Choice number 5 (50/50 option) is the one with the overall best return; offering nice options between our second thru fifth years. If we were to look at the years, as a whole, we could see that our EPS (Earnings per Share) for our suggested options totals .2710 if they’re compared to our next best option which totals .2630 and our final option comes in at .255. All the remaining others are less than that.
Due to the fact that I am recommending Choice Number 5, which is the 50% common 50% preferred stock option, there are several alterations regarding this preference which are notably related to the other options that I’ve offered, which need to be considered:
1. Because you are sidestepping the use of bonds with this option, you are avoiding having to pay interest which occurs in all the other choices presented. Year 9’s payment would be $83,089 per annum. This amount will be dependent upon other options that are being deliberated.
2. Our Preferred Stock Dividends will require payment in the amount of $15,000 per annum. Choice Number 5 is going to be the only selection that would have this disbursement yield.
3. US Federal Income Tax (25%) this Choice will carry the top income tax payment.
When we examine all of these concerns, we can quickly denote that the benefits are going to outweigh any negatives because of the fact that we eliminate the bond interest, and because this selection will offer us the most Earnings before Taxes (EBT). When I went back and looked over the past several years of financial data (Specifically Year 6 thru 8), it became rather apparent that it could be a good time to make my recommendation for the expansion of our company because it is not only solid in its liquidity, but also its debt. If we do a quick review, we can see that we ended Year 8 with $414,038 Cash and Cash Equivalents. We can also see that our Accounts Receivable, Net was a cozy $609,960. Both of these numbers tell me that given our present fiscal position, expansion can and should be supported.
AREAS OF CONCERN WITHIN OUR CAPITAL BUDGET
There are some areas of concern regarding the Capital Budget. Areas such as Current Assets and Land when compared to additional assets in a long-term view. At present, our company; CBI has $100,000 in land (Year 8 est.) compared to having $3.3 Million (Year 8 est.) in other assets such as our Manufacturing Plants, Offices, Furniture, Fixtures, and Equipment. The Equipment alone is five times the value of the land. Of course, it should be noted that real estate property is one of the few areas of any business that is going to bring the best long-term value without major devaluation. As a recommendation, I would note that this is something we should increase, if feasible, when we begin our expansion into Canada.
The $600,000 is needed to consider the growth with $400,000 going towards the facility and an additional $200,000 for backing and other potential operations. When observing the development of the company expansion, our barrier should be about 10 percent. In order to define this, the approximations of both the low and moderate demands are projected as income statements. It is reasonable to assume that this will rise rather gradually and then increase more as time goes on. We are going to have to traverse these financial hurdles, which I consider the least tolerable rate of profit by the 5 year point. We need to look at not just the low but the medium expectation as well so we can make an informed decision as to whether or not it will be best to continue forward.
The reduced sales prospects accept a meager sales growth of only 1% for Year 10 and Year 11, and then a rise to 2% in Year 12 and Year 13. If we start to look at the income statements, while they do appear to suggest that these estimations are attainable, they may not necessarily yield the needed Return of Investment (ROI) to make our possible acquisition of Canadian Biking a wise choice.
It’s my opinion that in reviewing the forecast, to evaluate the Sales and Admin Expenses for Year 13. For the initial investment years, this number decreases in concert with advertising expenses when they are also decreased. Year 5 rises but does not continue being steady. In looking at the cash flows and the current value factors, we end the 5 year evaluation with TPV at $560,719. This is $39,281 short of the initial investment of $600,000. Based on the hurdle rate of 10%, the low expectations option provides an 8.2% rate of return. This does not meet the required return of 10% and would not be a sound investment.
Although this will most likely alter the IRR, I am going to strongly suggest that this be taken into account so that we will be able to achieve all of the moderate goals that we have set with our Forecasted Income. As for the discount rate, typically, it’s used in the Capital Budgeting of a company, which will make the net present value for all the cash flows of a certain project become equal to zero. Investopedia (2011) states NPV compares the value of a dollar today to the value of that same dollar in the future. If the projection is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because the cash flow will also be negative. A good recommendation therefore, would be to select the highest NPV projects, because these are the ones that are going to offer CBI the highest profit.
Also, if we look at our Cash Flow and analyze its current value factors, we can see that the moderate estimate over the 5 year period is positive NPV at $8,447, along with a ROR (Rate of Return) or 10.4%. Based on the present calculations, the estimate would surpass our 10% requirement for a ROR.
Also our moderate expectation growth further indicates growth around 3% for Year 10 and Year 11 followed by an increase to 5% growth YOY for Year 12 and Year 13. These growth prospects are attainable, but they’re going to be a little more aggressive and in all likelihood will require more consideration to realize, then the lower numbers. If we do this, it has the potential for us to make our investment achieve the preferred ROR. Regarding the advertising, I am going to offer a suggestion that our budget for marketing and advertising allocated within the moderate expectations section be enlarged. If we really want to see our goals of both 3% and 5% respectively, then the marketing and advertisement budget is going to be crucial.
At the moment, the budget for advertising is the same on both the low and the moderate sales estimates. In order to attain the moderate return, I am going to recommend once more that our marketing and advertising resources be enlarged. Although it should be understood that this will probably alter our current IRR, this is an action I would endorse taking into account if we wish to achieve our moderate goals that we set in our Forecast Income.
Finally, if we look at our cash flows and present value factors, we can see that our moderate estimates over the 5 years will net a positive NPV with $8,447 along with an ROR of around 10.4%. Using our existing calculations, my estimates suggest that we will exceed 10%, CBI’s present required ROR.
OBTAINING AND MANAGING OUR WORKING CAPITAL
Attaining the needed capital required can be done by using one of the options that I have discussed earlier. That is Choice number 5. I have not, based on all the materials presented, changed my recommendation for this selection, which would be to use Choice 5; 50% of Common Stock and 50% of Preferred Stock. If we compare this to the other choices, we can see that it will allow us the best Earnings Per Share. However, should you feel it necessary to look at any additional options or choices, then perhaps a final recommendation might be to contact the Small Business Association for a loan. The SBA could potentially offer us a good rate, and still allow us to avoid the banking choices. Presently such a choice would allow us a good loan at 6%, however, we would have to keep a 150k balance and it would only garner a 1% return. That is a poor return on investment for us. We could use that 150k on other things and investments and garner a better return instead of a measly 1%. One might as well give it to my daughter’s piggy bank for investment with such demands like 150k balance and a 6% rate.
If you’re going to consider getting an SBA loan, you will need to remember the SBA is not a lender of money, but rather a guarantor of the loan (Cooney, 2009). We would still need to get funding and loans from a reputable financial or commercial banking business. While both choices are going to require us to make an investment with our capital, I still think that there would be better choices then the loan presently being thought about.
Thanks to the debacle with the economy in the US, and the gross incompetence of the banks themselves, we must remind ourselves that getting a loan may be exceptionally difficult, however, considering our fiscal soundness, we should almost certainly be approved for one if you so desire.
In reviewing the economic fallout of the past several years, it is important to note that the US Government is pushing the banks to offer reasonable rates on loans in order to kickstart the economy. Therefore it is possible that we might find some reasonable terms for loans, and this potentially gives CBI the advantage. Although I still consider my initial Choice Number 5 as the best option to use for your capital project; I am still going to suggest that we examine the possibility of using the SBA loans as a measure to lower our Cash Flow and try to negotiate a good loan rate. Having said that, keep in mind that if you were able to fund such a venture without outside assistance, that would be the best course of action. It would be the best so long as it did not adversely affect our Business Ratios out of favorable levels.
While CBI has several possible options, you should also think about the idea of researching other options for financial assistance like: Venture Capitalists and, if you can find one, an Angel Investor. Granted, Competition Bikes might not qualify for some of these (typically they seek out small to midsized companies), there might be the potential possibility to keep CBI apart from the expansion into Canada by making it a separate entity. This could open the opportunity for funding from other sources.
Also; along with getting the necessary funds, it is important that you reflect on the most reasonable way to manage your working capital.
Although your approximations on the modest sales would advocate that this might be a reaqsonable development, you will want to observe these valuations and be ready to make alterations if they are required to assure the best return possible (Gordon, 2011). It’s also recommended that you retain a day-to-day track on the development made as well as to ascertain whether or not you are ahead or behind in your estimates. To achieve this, you’ll need to track all of your dues and any possible recurring costs. You should comprise everything that you’re going to require to operate a company in your estimation sheet along with some added expenditures that you might not have possibly forgotten. Although you’ve probably accounted for most of the expenditures you will also need to make sure to look for anything not added or factored in like additional property or local state taxes or possibly some additional marketing, like I recommended earlier in this brief.
Once you’ve positively located these, you will need to divide the totals by 365.25 to estimate our necessary daily sales in order for the company to achieve financial success. Although it might look to be a bit excessive to keep tabs on the financials on an everyday basis, it would be exceptionally advantageous for us beginning Year 9 so that we will be able to determine and monitor the realization of this extension of our company.
Of course this could act like a fiscal workout that you could do for half of the year, or even just the first quarter of every year. Whichever way you do it is going to help isolate whether or not you are achieving the required financial numbers more quickly than other methods. By recognizing any fiscal outcomes that are lacking, you’ll be able to quickly modify the situation in order to realize success on either our yearly or our 5 year plan.
Now pertaining to ways we might acquire some necessary capital, I would also like to address the possibilities of a lease or purchasing.
Please see the analysis of my two suggestions which I have delivered in the spreadsheet with emphasis on the relationship of the cash flows. Both of these will offer a 6% rate with a main difference in the two options. The difference is that the acquisition will require an initial down payment of $50,000 and that will not reduce the monthly payments, but from a current assessment of our currency standpoint, that $50,000 would be put to better use producing revenue than using it for some initial payment on an expansion or development project. The option of using a lease does have the buyout option of $50,000, which, of course, would be the identical to the down payment within my purchasing scenario prospect. The main change is the time cost of our on-hand cash as well as our capacity to retain the $50,000 and use to produce income for another 5 years will be an improved opportunity with all things being equivalent.
So if we look and compare the overall expenditures, it would suggest that the option for leasing, along with a pre-determined time for a buyout would be the best way to going forward, with an outflow total of $321,660. That’s when we compare it with a purchase option, which comes to a total of $333,999.
WHICH IS BETTER? MERGER OR ACQUISITION of CANADIAN BIKING, INC.
If we follow on the assumption that you are going to go along with the decision to press ahead with an, there are going to be a pair of final options that will need consideration: a corporate merger or an acquisition.
In considering acquisition, the current price appears to be a littler high. This is based on the spreadsheet figures noted. If you were to acquire today the value would total $211,193 with a fair market price offer of around $286,000. Cash inflow calculated around $296,019 advocates my suggested offer amount would be proper. That said, if we consider the present value, I am not going to recommend this option.
Having looked over the possibility of a merger, I am more comfortable to suggest this route. I will state my reasoning to you. For starters, I am basing this on the 3:1 exchange ratio that was discussed with the present value of CBI shares at $2.25 and Canadian Biking with only $1.35 per share. This 3:1 ratio equates to about $4.05 Canadian Biking stock for $2.25 of CBI. Overall, the result would be an EPS (Earning per Share) of about .076 after merger. This would increase the Earnings per Share for CBI by about .020.
However, if we look past all the numbers, I believe that the merger would be a healthier solution, because of the variances that normally come with any international growth. Far more importantly, since the company would still have its core infrastructrre in place it would allow them to remain in production with all their current processes including the personnel, providers, and even the contracts. Although both of my given suggestions would allow for this, I believe that a merger would be the less daunting or problematic option because it allows for the company to keep growing on its present foundation still intact.
Merging with Canadian Biking will let it remain on its present course gilded with the additional resources that our company has to assist it. Also a merger would be an added motivation for the existing business to produce rather than falter from the financial gails that would be recognized once the acquisition has been finished.
In conclusion: It’s my opinion that expansion will be a positive and doable decision, based upon all the information that has been given to me. To that end, I am going to make the formal recommendation of a Merger, not an Acquisition, and in order to do so, I am making the formal recommendation that we obtain the necessary funds by releasing an Issuance of Stock. 50% Common Stock and 50% Preferred. This will allow us the means to collect the $600,000.000 needed to complete this expansion.
I would review sales to determine whether or not they’re on par with my valuations on a day-to-day basis and would recommend that they be adjusted if amounts are not being seen. I am also going to make the formal recommendation for you to bolster our advertising to create additional prospect for attaining reasonable or above sales marks. I would also make a particular imploring to you that you do not consider this deal until the delivery problems within Canada post have been fixed as this could abolish any chance to attain anticipated outcomes, and these will be beyond our control. If thoughtfulness and reliable tracing can be applied, then I would say that this could potentially be a significant opportunity for us.
Financial Analysis Task 3
1 | Page
Hilton, R. (2009, March ). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Higher Education.
Cooney, A. G. (2009, June). Working Capital – Why do I need it now more than ever. Retrieved from: http://www.agstar.com/articles/Lists/Posts/Post.aspx?ID=13
Terry, M. (2005, April). Working Capital: Financial Options for Small Businesses. Retrieved from: http://ezinearticles.com/?Working-Capital:-Financial-Options-For-Small-Businesses&id=26111
Gordon, A. (2008, July). How to Improve Working Capital Management.
Retrieved from: http://ezinearticles.com/?How-to-Improve-Working-Capital-Management&id=397977
2 | Page