With the sales growth and expected continual growth in Europe, Custom Snowboards, Inc. is considering an expansion into Europe. The company has two options for expansions; to build a new manufacturing facility or to merge/acquire the operations of an already established European manufacturer called European Snow Fun. In order for an acquisition to work, the company would need a loan from the bank for one million dollars.
A1. Looking at the financial aspect of the company, there are a few key points that could affect a bank officer’s decision. The bank officer would need to figure in on how the company would be able to pay the debt back.
The vertical analysis shown in the financial ...view middle of the document...
There was a big decline in year 14 of total assets, which is concerning. In year #12, the value was $1,738,690. In year 13 it increased to $1,780,950, while in year 14 it dropped back down to $1,740,155, almost down to the value it was at in year 12.
We will now take a look at the horizontal analysis to look at key points that indicates significant changes in dollar values. This way we can focus on the profitability of the company. Between years number 12 and 13, the percentage change in net sales was .49%, or $32,200. However, between years 13 and 14, there was a variance of -3.40, or a change of $-225,400. This is important because a bank loan officer would need to take a look at the operating income of the company in order to figure out if the company will have the ability to pay back the debt. From year 12 to 13, the total operating income variance was -23.56%, or $63,500. The variance from year 13 to 14 was even bigger with a -52.91%, or $109,000. With the decreasing net sales from year to year, we see that the variance had also doubled as well. The net earnings from year 12 to 14 had a variance of -30.91%, or a dollar figure of $43,350. From year 13 to 14, the variance was -82.74%, or a dollar figure of $80,175.
There is a key point that occurs between year 12 and year 17 when looking at the percentages given in the trend analysis. In year 12, the trend percentage is 100%, 100.5% in year 13, a decline to 97.1% in year 14, an increase to 103% in year 15, 102% in year 16, and another increase in year 17 of 103.7%.
There is a need for the company to mitigate any kind of risks pointed out by the bank loan officer. Lenders tend to look for any kind of risks in a financial statement to ensure that they raise any concerns. The only thing we need to know is if Custom Snowboards, Inc. is a company that will be capable to repay a loan. Banks are taking a risk when they give out loans, so they will take a strong look at the business plan, financial reports and credit reports to see if there is any profitability. The main concern the bank has to deal with is figuring out how the company will be able to repay the loan in case the business fails. A way to mitigate lender risk is if they see that the financial information shows an indication that repayment is minimal.
With 100% financing for the capital structure to debt ratio, the earnings per common stock shows a percentage of -2.53. It will have an estimated share value of -1.47 and an estimated return of 17.2%. The ratio is positive for the capital structure debt. Using an 80% financing, the EPS is expected to be -.135, with an estimated required rate of return of 14%, and the estimated share value is at -.96. Using 30% financing, the EPS is estimated at -.028, with an estimated required return at 11.8%, and estimated share value of -.23. The capital structure debt to ratio will be able to remain positive if the long term debt yields at least 10% on the estimated required return. ...