Vega Case

Satisfactory Essays
The purpose of this memo is to analyze the expansion plans and assess the financing options. Expansion plans - Net present value analysis shows a positive total NPV which indicates that Vega should move forward with the expansion. (See attached for excel backup) - The restaurants are expected to provide a net profit margin of 20% and yield positive cash flow. - It is recommended that Vega move forward with the expansion. Financing options - Option 1: Bank financing o Debt to equity ratio = [((600,000 + 3,000,000)*75%*7) + 21,210,000 + 233,000,000 + 3,000,000] / $115,000,000 = 2.40 o Based on a debt to equity ratio of 2.40, Vega should be able to meet its loan covenants. o The debt from refinanced mortgages will cost Vega 3.5% which must be renegotiated after five years. -…show more content…
The remaining $4.1 million can be draw from Vega’s LOC. o The only covenant is that RSL has to be given a board seat while the shares are outstanding. Louis remains in control of the company and can choose to redeem the preferred shares for the original amount at any time. o The 1% cumulative dividend must be paid before the preferred shares can be redeemed. Also, if Vega cannot pay the cumulative dividend when it is due, it is still responsible for paying it in the future and it must fulfill this obligation before it can award dividends to common shareholders. o Cumulative preferred shares are non-voting. - It is recommended that Vega use the equity financing option to fund its expansion because the cost of capital is cheaper for the company and it can choose to defer cumulative dividends if they should be in a tight cash flow situation. Ultimately, this option leaves them in control where the debt can be recalled at the banks will should covenants be
Get Access