Problem -
You, CPA, work for Conrad Ltd. It is now May 12, 2015, and your boss, Marion Conrad, has just returned from meeting with a client and calls you into her office to review the work they require. "I have just met with George and Kelly of Modern Industries Ltd. (MIL)," Marion starts. "MIL manufactures and retails wooden picture frames. The company was incorporated in 1997 by George and was joined in 2007 by his daughter Kelly. George currently owns 70% of the company and Kelly owns 30%. George is looking forward to retiring soon and together he and Kelly have been formulating a plan for the redemption of his shares. George's shares are worth $4 million and he would like to redeem 50% of these within the next year, with the remainder redeemed in 3-5 years' time, depending on the company's cash flows." The draft financial statements of MIL are provided in Appendices I and II. "George has been looking at ways to finance the redemption. He has been in discussions with the bank as the company's line of credit is currently up for renewal. The bank has not yet seen the 2015 draft statements, but has been asking for them. Provided their financials are still in line with the industry, the bank has offered to renew the existing line of credit (with the same terms and conditions) or offer two new types of loans to replace the current line of credit facility. The line of credit does have a large amount of available credit, however, George dislikes the personal guarantees and is wondering about the value in the property, that is not reflected in the financial statements, being used as collateral in place of personal guarantees. The bank proposals, as well as an additional option George has provided information on, are included in Appendix III. "I have also reviewed the financial statements and gathered information on industry standards (Appendix IV)," Marion continues.
"As the bank will be looking to analyze MIL's financial situation, particularly in comparison to competitors, please prepare a vertical analysis and relevant ratio analysis for 2014 and 2015. You should include in your memo explanations and recommendations based on these analyses, supported by dollar values where possible. Additionally, if there are ways that MIL can improve their working capital management and their financial statements in general in order to improve their financing potential, this would be advantageous.
"Finally, I would also like you to analyze the current financing proposals. Be sure to consider the impact of each of these proposals on the financial statements and make a recommendation on which proposal to accept.
Please prepare a draft memo to the Modern with the results of your analysis."
Your response, not including Excel (if applicable), should not exceed 1,800 words.
Attachment:- Appendixes.rar