question archive The Great Service Cleaning and Maintenance Company requires a capital infusion of $200,000
The Great Service Cleaning and Maintenance Company requires a capital infusion of $200,000
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The Great Service Cleaning 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.
| 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 |
The financial statements should be familiar to you because you performed a basic financial analysis of the company in Unit 1 of this course. A number of alternatives are available to the company. It can: Obtain private debt financing Seek out a private investor(s) who would be willing to share ownership Seek out offers for a private buy-out Issue public debt (corporate bonds) Issue public common stock In this paper, discuss the impact and implications of each alternative. It would be appropriate to include the topics and areas of discussion you covered in the case study in Unit 6 so long as it is applied to this specific case. Considering the size of the investment ($200,000) how does this impact the financial statements reviewed in Unit 1? Superior papers will explain the following elements when responding to the assignment question: Provide a narrative about private debt, private transfer of partial ownership, private transfer of entire ownership, public debt issuance, and public equity offering. Provide a discussion of the impact of each alternative which would include issues of structure and cost of capital. The narrative will discuss the impact of an infusion of capital of $200,000 on the financial statements.
The first assignment table is here:
| 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 |
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Answer:
Private debt - Private debt is the debt accumulated by individuals or private businesses. Private debt can take numerous forms; a personal loan, credit card, corporate bond or business loan for instance.
if we go with this way for infusion of $200,000 then balance sheet will have more liabilities in terms of debt and interest expense will also increase, however the good thing is that this loan can be available easily with the help of friends and relatives and secondly company can take advantage of tax shield where company can save on taxes by paying less tax as company need to give interest to the debt lenders and tax will be calculated after deducting interest from the profit. Here company can also save on interest as relative or friends will charge less interest as compared to public debt.
Private debt comes with numerous pitfalls and risks for the applicant. When a loan is provided by family or friends, missed repayments can cause tension and even result in the end ofrelationship. Debt incurred with a credit provider may result in high levels of interest, charges for missed payments or demands for security.
Private transfer of Partial and Entire ownership - Transfer of shares refers to the transfer of ownership. Shares of a company are movable property and thus can be transferred like any other property. In other words, when an existing shareholder transfers the issued shares to the other person who is registered as the holder of those shares, the process can be termed as a transfer of shares. A public company can freely transfer its shares but there are some restrictions on the transfer of shares by a private company. The restrictions are imposed in order to protect the rights of investors and shareholders.
When private company shareholders transfer entire ownership it means they are not the owner of the company anymore, whereas partial transfer refers to the transfer of a percentage of total ownership which gives away only partial ownership from the existing shareholders and make partial shareholders to the new shareholders.
public debt issuance - A debt issue is a fixed corporate or government obligation, such as a bond or debenture. A debt issue is a financial obligation that allows the issuer to raise funds by promising to repay the lender at a certain point in the future and in accordance with the terms of the contract. cost of this debt is paid in the form of interest which is a percentage of total Face value of bond.
if we go with this way for infusion of $200,000 then balance sheet will have more liabilities in terms of debt and interest expense will also increase, however the good thing is that this loan can be available easily with the help of friends and relatives and secondly company can take advantage of tax shield where company can save on taxes by paying less tax as company need to give interest to the debt lenders and tax will be calculated after deducting interest from the profit. Public debt usually comes with higher interest rates and also brings risk as company has to to repay it's debt before giving any kind of dividend to shareholders.
public equity offering - A public offering is the sale of equity shares or other financial instruments by an organization to the public in order to raise funds for business expansion and investment. Public offerings of corporate securities in the U.S. must be registered with and approved by the SEC and are normally conducted by an investment underwriter.
THis option is good as company does not become liable to pay any kind of interest or repay the amount, as their returns are dependent upon the company's profitability higher the earnings higher would be the returns but the bad part is it dilutes the shareholders ownership.
