Upstate Canning Case
A. Conclusion/Statement of Case Situation:
Based on my results Mr. Shields’ should accept Mr. Fordham’s proposal for the acquisition of Upstate Canning Company. The $35,000 comes from Mr. Fordham’s savings and the $65,000 additional investment from associates. The $300,000 loan allows for Mr. Shields to have time to pay Mr. Fordham in full. The Bond repayment schedule offered by Mr. Fordham to Shields is additionally an excellent discount for Mr. Shields to choose should he wish to prioritize the ownership goal over the income increasing goal for 5 years, benefitting him in the long run (this depends largely on his personal discount rate).
In turn the repurchasing incentive benefits Mr. Fordham who wishes to see his company sold and see his money quicker rather than later. The investors are simply looking for a good return given the 12 percent typical market rate and the additional risk in this specific venture.
The model I have come up with shows that it is very possible within these bounds for Mr. Shields, Fordham, and the investors all to achieve their objectives.
B. Pro Formas First Year Monthly:
1-YEAR INCOME STATEMENT (MONTHLY):
Sales of $850,000 are distributed throughout the year with 50 percent in July-October, 20% November-December, 30% January – June
Cost of Goods Sold like in 1956 equal to 74% of sales, of which
Variable Costs 89%
Fixed Overhead 11%
Gross Profit sales-COGS
Selling & Delivery equal to 8 percent of sales each month like in 1956
Administrative & General equals 56k – 20k Fordham salary, distributed evenly
Shield’s Salary 15k split evenly
Total SG&A Expenses equal selling & delivery + administrative & general + Shield’s salary
Bond interest equals of 3% current long term debt plus 3% of long term debt, split monthly and not annually
Note interest 6% interest on the notes payable account; notes payable * (6%/12months).
Interest Expense equal to bond interest plus note interest
Gain on repurchase Discount gained after repurchase of more than the minimum quantity of bonds. May, $50000 bonds repurchased so $10k gain on early buyback.
EBBT equals gross profit – total SG&A expenses – interest expense
Bonus equals 5% EBBT for Mr Shield’s bonus.
EBT EBBT – Bonus
Tax average 46% which is used throughout year, originally calculated as excess of 25,000 taxed at 52% with first 25,000 at 30%.
EATBA EBT – tax
Amortization is 10 percent of goodwill fixed to be monthly
Net income EATBA – Amortization
1-YEAR BALANCE SHEET (MONTHLY):
Cash begins at $100,000, then an if statement reflecting minimum $15,000 balance to be kept, otherwise balancing liabilities without notes payable and other assets
Accounts receivable equal to the month’s sales, nothing to start with
Inventory: Take cost of goods manufactured minus cost of goods sold to adjust inventory. Production based on 1/6 July, 1/3 August, 1/3 September, 1/6 in October
Total Current Assets is Cash + A/r + Inventory
PP&E Yearly 12% depreciation on 200k of equipment, 1% per month
Goodwill: Initially 50,000 for intangible assets like brand; equals total assets minus total liabilities at the beginning. Don’t amortize goodwill over time.
Total assets: equal to goodwill +ppe +Current assets
Accounts Payable deciding to remain within the 30-day schedule; includes cans and other ingredients, as labor is paid weekly and fruit is paid cash. Using year 1956 guide, 148/630 = 23.5% of cost of goods manufactured, adjusted according to production schedule for the four producing months.
Bond Interest Payable is equal to 3% per year cost long term debt, plus previous month’s balance. Paid in June and December.
Note Interest Payable: Equal to 6%/12 monthly interest on the note value each...
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