The company has the following issued capital: 1

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The company has the following issued capital: 1. Line of credit — First Royal Bank — The line of credit has a maximum amount of $200,000 and is secured by the accounts receivable and inventory. The line of credit bears interest at prime plus 2.5%. Currently, prime is at 3.5%. 2. Long-term debt — First Royal Bank — The long-term debt matures December 31, 20X9, when the full amount of the principal is due. The loan bears interest at 9%, which is payable annually. The loan is secured by the property, plant, and equipment. The long-term debt has a covenant that the long-term debt to total asset ratio cannot exceed 0.70. 3. Eleanor has approached two potential investors for investment in the algae bio-fuel project. The proposals from each party are outlined below: a. Trinity Venture Capitalists (Trinity) — When BFG started operations, Trinity provided some initial funding which has since been paid back. Trinity is now proposing to invest $2,000,000, to be used to commercialize the algae production. BFG will issue 200,000 non-voting, cumulative preferred shares at a price of $10 per share. Cumulative dividends at the rate of 6% will be paid on the preferred shares. These shares are convertible into common shares on a one-to- one basis at the option of Trinity any time after 20X5. Any dividends in arrears must be fully paid prior to redemption or conversion. BFG may redeem these shares any time after 20X9 and prior to conversion. Trinity requires that two representatives be members on the board of directors who will be involved in the day-to-day operating, strategic, and financial decisions. b. Sherry LePage, a private investor and current board member — Sherry recently inherited some cash and is looking to make an investment. She has offered to invest $2,000,000 in the form of a loan. The loan will bear annual interest at 7%, payable monthly. The loan matures in 20 years when the full amount of principal is due. Note: You are not required to recalculate the weighted average cost of capital under each proposal. 4. BFG's corporate income-tax rate is currently 25%. 5. Based on market data, you have determined that the current risk-free rate is 3% and the expected market price of risk is 5%. You have estimated that the industry beta is1.9 ASSUMPTIONS FOR THE CAPITAL BUDGET ANALYSIS The following are the assumptions for the production plant and sale of bio-fuel produced by the algae: • Construction of the building and equipment will cost $1,500,000 and $500,000, respectively. • The building qualifies for Class 1 (4%) and the equipment qualifies for Class 8 (20%) CCA for income-tax purposes. The half-year rule is applied to both classes in the year of addition. • The company currently has vacant land that is being held for capital appreciation. This land will be used for the building. The land was purchased six years ago for $300,000. Today it is worth $400,000. • The company has incurred development costs to date related to this project of $150,000. • An initial working capital investment of $30,000 is needed for inventory and receivables, which remain unchanged throughout the project life. • Annual revenues will be as follows: o 20X3 $1,400,000 o 20X4 $1,800,000 o 20X5 and each year thereafter $2,300,000 • Cost of goods sold will be 30% of revenue and selling and marketing costs will be 10.2% of revenues. • Fixed operating costs will be $575,000 per year. • These annual cash flows will occur for 10 years which is the estimated life of the project. • At the end of the 10 years, the building can be sold for $250,000, the land can be sold for $400,000, and the equipment will have no value. Assume that there are still assets remaining in the CCA classes at this time after the proceeds of disposition. • For this project, the company pays income taxes at 25% and has a discount rate of 17% Question Using the professional Way, describe qualitative factors that should be considered for each of these proposals and make a conclude and recommendation as to which proposal should be accepted in detail and prepare pro and cons related to preferred shares and long term loan