Explaining, some of the issues of Financing and expansion and its impact on the Magik Storage containers limited MSC. As the MSC, obtaining a new manufacturing facility, which is critical to the ongoing viability of MSC’s current operations. Moreover, given the present industry growth, the MSC needs an expansion in order to increase its market share and growth with the same pace as the industry has. The proposed plan:- As the BOD approved the expansion plan, needs the capital $3.75M, and for which company is issuing the new shares, financed primarily through a stock-offering of $3,000,000, remainder from MSC’s line-of-credit. NPV calculations:- The NPV-analysis factored with-the closure of existing plant for the six-month construction …show more content…
The 12% discounted factor is used, only reflects the cost-of-capital and not the interest factor of the bank. Even the NPV is positive, but it needs to revise which should consider these factors i.e. the open of one side of the plant or both. As the company is running at full capacity and the production-processes of two facilities are same so they have a high demand of their products so if they close it for six months they can’t produce the six months inventory in advance, as already they have an issues of backorders and delayed orders. And by doing this the MSC can’t maintain its ratios as it is required by the bank, i.e. working capital and current ratio will be decrease as there will be no business activity and difficult to pay the other fixed costs. Losing the employee and re-recruit them within six months is not possible. Financing options:- Shares Issuance:- Due to the economy recession it is anticipated that the price of the shares will be decrease in the future so resulting in issuance of more share in order to get the $3M, furthermore if we close our production, ultimately the share price will be decrease and our cost of capital will be increase. MSC can issue equity comprised of either preferred or common shares. Release information regarding the expansion and possibility for future-growth and give a disclosure in financial statements. CCL can make financial side of expansion planning into two separate considerations. (1) Expansions that needs a
Issuing additional debt to finance the company expansion would worsen the company’s debt ratio as it is already more than average. The company envisions to be profitable by raising capital from existing stockholders by issuing common stock through rights offering.
This step involves short and long term debt equity analysis. The proportion of equity capital depends on the possessing and additional funds will be raised. The choice of the source of funds the company has are the issue of shares and debentures, loans to be taken from banks and financial institutions and public deposits to be drawn in form of bonds. The choice will depend on relative merits and demerits of each source and period of financing. The management of the investment funds is key in allocating that the funds are going in the correct place. The profits that are made can be down in two ways dividend declaration which includes identifying the rate of dividends and retained profits in which the volume has to be decided which will depend upon expansion and diversification of the company. The management of cash is another important function. Cash is needed for all different aspects of the company such as payment of salaries, overhead and bills. All of these are important in a company and how successful the financial aspect is going to be.The financial management practices include capital structure decision, investment appraisal techniques, dividend policy, working capital management and financial performance assessment. A company needs to have well financial in order to be successful. “A company that sells well but has poor financial management can fail.” (Johnston)
* Finance: To build the new plant, the company needs to invest a large amount of capital, thus it should identify whether its current finance is enough for investing or it needs to attract more money. If not, the company may choose some kind of financing such as issuing bond, borrowing money or offering IPOs.
Based on the Exhibit 9A in the case, we can calculate the Source and Use of Funds. As Exhibit 1 suggests, the company require about $4.8 billion during 1984 and 1990. This is basically due to the required new capex during the same period, which will be accumulated to $10.2 billion, and the increase of cash holding, $2.0 billion, as a use of funds and the company can generate funds from operation, only $7.8 billion. Therefore, the company needs to fill the gap by sourcing external finance of about $4.8 billion. This amount will vary depending primarily on two factors; 1) whether MCI can expand market share as forecasted amid the increasing
After carefully reviewing the income statement, balances sheet and cash flow it seems that the company has a negative cash flow for 1998, so even before thinking about obtaining internal and external resources for long term investment, the company must assure resources for their own working capital.
* A new project idea which requires an investment of $2 mm and will generate total cash flows (including any salvage or terminal value) next year of either $4mm (recession) or $8mm (boom). The firm has not yet raised the cash to make this investment, but the market is aware of the investment opportunity.
As shown in the ratios chart, working capital has increased by $13M. Maturities of short-term investments and cash flow from operations are projected to be sufficient to sustain the company’s overall financing needs, including capital expenditures. The following corporate strategic plan identifies a project that needs financial backing.
The investment requested is £12 million. Strategic and operating benefits were summarized in our previous memo to you. We have made, however, some changes to our investment analyses, which appear below.
This is beyond the company cost limit set of $16 million capital and $2.6 million yearly payment for improvement. The company is committed to keep the plant but at the basis on the cost limit set.
The required interest rate which would return an NPV of zero is 9.22%. This is less than the cost of capital of 10%.
There are two ways of increasing capital, (1) using debt and (2) issuing new shares. For profitable companies sometimes it is cheaper to use debt instead of issuing new shares since cost of debt is tax shielded. In this case company didn’t have any debt in past which means less default risk, it will affect total value in a positive way. It will decrease the taxes paid and increase net income, accordingly share values.
Given our recommendation to accept the new investment opportunity, this project will impact the forecasted financial statements from 2010 onwards. Please refer to Exhibits 6 and 7 for the revised projections.
The Winsome Manufacturing Company is about to embark upon an exciting new venture: the creation of a room-sized plastic storage unit suitable for homeowners to place outside of the home. The project stakeholders for this proposed endeavor will draw upon ever facet of the company's resources, including the design, production, purchasing, shipping, sales, and marketing departments; the suppliers of the raw input goods; company shareholders, the company that is responsible for the delivery of the product to consumers; organizers of home sales events where we sell our products and above all our loyal consumers.
To support their growth and offset portfolio losses by their venture capital investors, management was ready to raise additional capital through a public equity offering.