Julian Eastheimer & Co

Topics: Debt, Stock, Loan Pages: 6 (1169 words) Published: October 7, 2011
Case 2 - Financing Alternatives - Rationale
1) Boudior's Inc - Leasing Arrangement
- they cannot use their real estate to acquire loan since it is already under mortage
- same with inventory which is already under chattel mortgage
- they can negotiate for a lease-to-own arrangement
These contracts are commonly used where a buyer wants to purchase a home, or building
but due to credit issues would not qualify for a conventional mortgage and
does not wish to, or would not qualify, for other financing.

A lease-to-own purchase (also "rent-to-own purchase" or "lease purchase") is a lease
combined with an option to purchase the property within a specified period,
usually 3 years or less, at an agreed-upon price. The borrower pays an option fee,
1% to 5% of the price, which is credited to the purchase price. The borrower pays rent,
and an additional rent premium that is also credited to the purchase price.
If the purchase option is not exercised, the buyer loses both the
option fee and the rent premium.

2) Timberland Power & Light - Long Term Bonds
$900 m long term debt = 60%
$75 m preferred stock = 5%
$ 525 m common equity = 35%
ttl current asset = $ 1.5b

According to SEC, the holding company can have a long term debt fro 45% to 65%
- adding 37m in debt by issuing long term bonds will result to
$937 m long term debt = 61%
$75 m preferred stock = 5%
$ 525 m common equity = 34%
- still within the acceptable range of SEC

3) Ripe and Fresh Canning Company - Factoring
(Selling of the Firms Accounts Receivable)
- Converting invoices to cash - instead of them having to collect cash after 60-day period,
they can sell it to a factoring company at say 95% of the face value
-Borrowing money, secured by your debt - their bank lends them the money, secured against
outstanding invoices that the business holds
-credit card companies usually are using this one in order to improve cash flow
-instead of putting it in allowances for bad debts, they can recover some percentage Advantages:Disdvantages:

Get money quickly cost (which can vary depending on the nature of the debt/invoices) Avoid the hassle of collecting bad debt the fact that your clients have to deal with the factoring companies Smooth your cash flow your ability to borrow from other sources may be reduced Borrow money, secured by your debt

4) Piper Pickle Company - Preferred Stock (Non Convertible) SCENARIOS:
Piper PickleIndustry
MV stocks = $18 to $22 median at $20P/E = 10
EPS = $1.70g rate = 5%
Dividends = $.64
g rate = 7%
P/E = $20/$1.70 = 11.76
debt ratio = 45%debt ratio = 25%

- while preferred stock is considered as part of long term debt, the company may be able to entice
stock holders into converting it as equity whenever the holders convert it immediately into a
common stock. Stock holders may be enticed to convert especially if the stock price goes up to the
$22 dollar level. If it is converted to common stock, it cannot be converted back to preferred stock
thus the term non-converible. If more stock holders convert to common stock, then the
company's debt ratio will also go down since they will be increasing their equities.

5) Copper Mountain Mining Company - Debt with warrants
Copper MiningIndustry
Market Value Common Stock = $11Market Value Common Stock = $8 to $13
EPS = $1
Current ttl assets = $120m
Debt ratio = 30%Debt ratio = 35%
if they borrow $12M (Debt Ratio = (36+12)/132 = 48/132)
Debt ratio = 36%
then they issue stocks worth $12M (Debt Ratio = (36+12)/(132+12) =...
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