A. Conclusion and Statement of Case Situation
Mr. Shields’ should accept Mr. Fordham’s proposal in relation to the acquisition of Upstate Canning Company, Inc. In this case, Mr. Shields attempts to conclude if he should acquire the company from its owner, Mr. Fordham, using his personal savings of $35,000 in addition to an investment of $65,000 from his associates. Moreover, Mr. Fordham proposes that he will loan Mr. Shields’ $300,000 worth of income bonds, to be repaid in up to 10 years. Mr. Fordham provides Mr. Shields’ with a bond repayment schedule which allows Mr. Shields’ to repay the bonds at a discount if he meets the wishes to repay the bonds back early. Mr. Shields’ faces a tough decision, as his goal is to run a profitable and efficient company, as well as to attain majority ownership of Upstate Canning within 5 years, while increasing his personal income considerably. The third requirement of this case is that the outside investor, who makes the original $65,000 investment, has his concerns about capital appreciation answered.
Thus, given these three requirements that need to be satisfied simultaneously, I have devised a model that attempts to meet these goals. The explanation and the model itself follow this introduction, and by the end of this statement, you will understand why I believe why all three parties involved will be content as their goals are met by the end of 1962.
B. Explanation and Presentation of Pro Formas (Monthly)
i) Cash – The beginning cash balance of $100,000 was determined by Mr. Fordham in his capital structure proposal. According to his proposal, $100,000 of common stock would be issued at $1 par to Mr. Shields and his investors, thus the beginning cash balance of $100,000 on Upstate Canning’s balance sheet during the beginning of the 1957-58 fiscal year. During the following months, the cash line is used to balance total assets and total liabilities and equities. Based on estimated costs of daily activities, I determined that the minimum cash balance would be of $17,500. Thus, the cash balance can never go below $17,500. The cash line was determined based on the difference between “Total Assets minus Cash” (TA) and “Total Liabilities and Equity without Notes Payable” (TL&E). By using the proper functions on Excel, I was able to establish a condition that if TA was greater than TL&E, the cash balance would simply equal the difference between the two accounts. However, if TL&E was great than TA, the cash balance would not go below the minimum cash balance of $17,500. This capital would be withdrawn out of the Notes Payable account, which was used as a “flex account” throughout this model. (Note: the Notes Payable account is explained below)
ii) Accounts Receivable- Another one of the conditions in Mr. Fordham’s proposal stated that “current assets (except for the $100,000 in cash and inventory) and current liabilities would not pass to the new company”. Thus, the beginning balance of A/R is zero. Mr. Shields was “informed by Mr. Fordham that collections on accounts receivable caused little trouble in this business: bad-debt losses were rare, and accounts were normally collected within 30 days”. Thus, since this Pro Forma Balance sheet illustrates the monthly activity of the account, the A/R balance is equal to the sales for that period.
iii) Inventory- As mentioned above, finished goods inventory is one of the few current assets passed on to the new company. Thus, the initial balance of inventories is $50,000. For the balance of the other months, the following calculation was used: Beginning Inventory + Cost of Goods Manufactured – Cost of Good Sold = Ending Inventory. The end of the month balance was then transferred over as the next month’s beginning inventory balance.
iv) Total Current Assets- The sum of all current assets,...