The Service and Maintenance Company requires a capital infusion of $200,000. It

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:

Balance Sheet:

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

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

Explanation / Answer

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.

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