A 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 following financial statements:
- ASSETS 2014 - 2013
CURRENT ASSETS
Cash 456,500 - 222,400
Receivables 3,936,400 - 3,320,000
Inventory 89,800 - 100,200
Other assets 119,500 - 84,300
Total current assets 4,602,200 - 3,726,900
LONG TERM ASSETS
Note Receivable 380,600 - 280,700
Equipment (net of depreciation) 975,000 - 1,017,800
Total long term assets 1,355,600 - 1,298,500
TOTAL ASSETS 5,957,800 - 5,025,400
- LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,783,100 - 2,805,700
Note payable (current maturities) 177,550 - 172,550
Other accrued liabilities 165,300 - 114,600
Total current liabilities 3,125,950 - 3,092,850
LONG TERM LIABILITIES
Notes payable (long term) 354,800 - 354,800
Long term accrued liabilities 289,550 - 220,250
Total long term liabilities 644,350 - 575,050
TOTAL LIABILITIES 3,770,300 - 3,667,900
- STOCKHOLDERS' EQUITY
Common stock 300,000 - 300,000
Retained Earnings 1,887,500 - 1,057,500
Total stockholders' equity 2,187,500 - 1,357,500
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 5,957,800 - 5,025,400
Income Statement 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
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
From the cost of capital and capital structure point of view, what’s the impact and implications of each alternative? Considering the size of the investment ($200,000) how does this impact of this infusion of capital on the financial statements?