Reference no: EM133284343

Finance Management

Background

You have now been asked to continue with the financing plans around POPLAR Ltd.'s.'s "Growth Plans".

You had been waiting for some additional information from a fellow worker before proceeding with your financial decisions around a new investments. You have also been advised that the maximum amount of new investment funds - a combination of debt and equity is a total of $18,000,000.

Business conditions are expected to weaken slightly over the next year with higher interest rates and tax rates expected to increase over the next two to three years. Market opportunities are expected to remain for next three to five years with competitor mergers expected to increase to maintain market share.

Overall, the team continues to believe the time is right for growing the business and positioning it for sale or maybe even considering going public in the future.

To complete the financial analysis, started by a junior member of the firm who abruptly quit you are to do:

STEPS TO DO
A) Locate the Following Project Files:

Project Financials - 2B
- contains worksheets for Pro forma Balance Sheet
- Contains worksheets for Pro forma Income Statement
- contains worksheets to calculate WACC
- contains worksheets to calculate key ratios

B) Using the information provided and the sequence of steps outlined below, develop a proposal which is financially responsible for the company and for your firm where the $18,000,000 is invested in some combination of debt and/or equity.

NOTE:
As you are picking up someone else's work, you have color coded the steps to match to the areas within the file
you need to work on.

C STEPS:
1 Opening Financial Information
Using Board approved financial results for Year 1, add the Balance Sheet amounts and Income Statement amounts in the correct accounts - they are color coded:

To address the bank account overdraft a $3,000,000 share capital injection was made by the investment firm.

2 Project Financials - this file
a Develop Combined Results - Pro from a Balance Sheet

Using the appropriate column on Financing Balance Sheet spreadsheet add relevant accounting figures from the accepted Project Equipment and Project Acquisition Tabs. As an example the capital equipment tab indicates that additional investments in Accounts Receivable will occur. Place that value in the column for Equipment Project on the Accounts Receivable line.

To balance - assume the net purchase amounts are addressed through the Venture Short Term loan.
The Mortgage assumed in the acquisition will just be added to the existing mortgage line with the same remaining term Ensure that your Balance Sheet is Balanced - Total Assets = Total Liabilities and Equity

Develop Combined Results - Pro from a Income Statement
b Using the appropriate column on Financing Income Statement spreadsheet add relevant accounting figures from the Project Equipment and Project Acquisition Tabs from Phase 2A. As an example the capital equipment tab indicates that additional operating savings have been generated - reduce administrative expenses.

Unexpectedly a one time restructuring cost was incurred - $900,000 - impacts Administrative costs for business acquisition

For WACC - and future years tax rate is now 25% due to tax planning efforts

DO NOT change interest or income tax figures in file.

c Next, the three of you have met to decide what roles each of you will play in the new organization.

The positions have been set - but now you need to address compensation. You have two options to consider-
Cash compensation (Salary + bonus+ perks) and share issuance. Determine the compensation package for each positon - the share price is the current market value - determined below - post split decision

TOTAL COMPENSATION should not exceed $870,000

d Share Price Review - Business and Competitive Conditions impact Multiple

Management decides to complete a stock split to reduce price per share to $4.17 and venture of $3.00

Weighted Average Cost of Capital - TAB

1) Review the weighted average cost of capital calculations for the Pro-forma position

Your objective is to refinance keeping long term target WACC as a goal - while balancing other objectives.

The WACC has been set up to calculate automatically - you need to verify if calculating correctly.

Refinancing Options

2) You are now prepared to consider your refinancing options to select one that works best for you
The infusion uses your decisions above and must total

Refinancing Debt
Non-cash Executive Stock compensation
Share Capital
Total investment = $15,000,000

Your task is to now allocate the $15,000,000 betweem the loans to address WACC and debt as a % of total assets. Using the financing ratios tab - you can find the allowable maximums of the various loans and increase balances of lowest debt first and paydown lower debt.

Application of investment - loan changes
Venture loan (repay by negative figure)
Mortgage (repay negative - add - positive)
Term loan (repay negative - add - positive)
Refinance term loan (repay negative - add postiive)
Cash (positive figure)
Application = $15,000,000

6) Balancing Figure
Once you have determined your optimal mix above, you will need to adjust cash to complete the Balance Sheet
The required balancing figure will be in cell F56
First - enter the remaining balance of the short term venture loan by entering up to the balance outstanding
Second - if still a balance in cell F56 and ventru loan = 0 - apply difference to Cash (reverse sign)
To complete - check the figure showing at the bottom of the Earnings Impact "Out of Balance" = $0
If ratios above all yes - you are complete and move on to Memorandum

7) Memorandum
Prepare a Memorandum which shows the following:
Investment Mix of $18,000,000 - debt, stock compensation, share issuance
Stock split decision
New shares issued and total proposed issued and outstanding by source
Founders ownership position and percentage of ownership compared against minimum percentage
Total long term debt outstanding versus limit by loan type and total unsued capacity of debt
Debt as a percentage of total assets and comparison against target and maximum percentage
Current Ratio and comparison against benchmark
Return on Asset
Return on Equity
Net income as a % of Revenue
WACC versus target
Recommendation on operational focus based on Turnover Ratios
Recommendation to proceed or not based on key criteria above
Concerns about future issue of shares
If you needed an additional $10 million what would you forecast as coming from earnings / debt / shares?

Attachment:- Student Template.rar