Board Of Directors Of Magik Storage Containers Limited
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Name: Zhengrong Wang
Student ID: 3161361
To: Board of directors of Magik Storage Containers Limited
From: Darcy Thompson, CFO
Date: July 4, 20x5
Subject: 20x5 financial results and its effect to the expansion plan and market share growth
After completed the draft financial statements, I noticed that two ratios do not meet the bank’s requirement. These are current ratio and debt to equity ratio. Therefore, $750,000 line of credit will not be proved by the bank. Even though, since these covenants are required for lower MSC’s borrowing rate by 1.5%, the bank will raise this rate again. MSC will spend more on interest costs.
MSC can only issue shares to finance the expansion plan. Actually, using line of credit is not a good choice. Current ratio = current asset/current liability = 11,977/8462=1.42. If adding $750,000 to current liability, the new ratio will be 11,977/ (8,462+750) = 1.3. It is far from the bank’s requirement.
However, if MSC finance the expansion by issuing shares, MSC can at least meet two covenants: debt to equity ratio and working capital of sales which meets requirement already.
Currently, debt to equity = total liability/shareholders equity = 16,027/8,447 = 2.22%. But if adding $3,750,000 to equity, the new ratio will be 16,027/ (8,447+ 3,750) = 1.54 which meets bank’s requirement.
As for current ratio, only 0.3 (bank: 1.45 – MSC: 1.42) difference from the requirement. The company needs to pay off some of its