Task: Obtaining Debt Capital Mini-Case
After graduation from the MBA program, you took a job at a small consulting firm specializing in providing management assistance to entrepreneurial ventures. One of your clients is Whiz-Bang Industries, a three-year-old firm that manufactures components for computer networks. The firm has been quite successful, and is growing at the rate of about 40 percent per year. As a result, the firm is in need of additional debt capital.
Two hours from now you have a meeting with the CEO and CFO of this firm. To review for this meeting, you need to answer the following questions. You begin by examining the balance sheet of Whiz-Bang Industries.
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Assets (in thousands)
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Cash
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50
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Accounts Receivable
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200
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Inventory
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300
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Equipment
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600
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Plant
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1000
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Total Assets
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2150
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Liabilities
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Accounts Payable
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250
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Notes Payable
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200
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Taxes Payable
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50
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Long-Term Debt
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1200
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Equity
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Common Equity
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450
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Total Liabilities & Equity
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2150
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Question 1. What sources of debt capital are likely to be available to Whiz-Bang Industries?
Question 2. Given Whiz-Bang’s balance sheet, how much money can they expect to borrow?
Question 3. To what degree are the following financing sources likely to be available to Whiz-Bang Industries? What advantages and disadvantages do these financing sources have?
- Trade Credit
- Commercial Bank Financing
- Lines of Credit
- Accounts Receivable Financing
- Time-Sales Finance
- Unsecured Term Loans
- Chattel Mortgages and Equipment Loans
- Conditional Sales Contracts
- Plant Improvement Loans
- Commercial Finance Companies
- Factoring
- Leasing Companies
Question 4. What advice can you provide Whiz-Bang on how to manage their banking relationship? How should Whiz-Bang choose a banker?
Question 5. If Whiz-Bang is planning on obtaining a loan, what key steps will they have to go through?
Question 6. What types of restrictions and covenants should Whiz-Bang watch out for?
Question 7. What advice would you give Whiz-Bang if the bank denies its loan application?
Question 8. What “tar pits” should Whiz-Bang beware of?