Financial Analysis Task 3 Essay Example

Capital Structure Since Competition wants to expand into Canada, it is essential that a capital structure be in place to ensure adequate funding for the expansion and future stability for the business. With all capital financing there are risks. Bonds put the onus on the company to ensure dividends and, at 9%, if projections are not met it could have a severe negative impact on shareholder earnings. Likewise, if moderate projections are met than issuing shares to cover the cost of expansion will have an adverse effect on dividends due to ‘watering’ down the profits among a larger number of shares. Recommendation The structure that I would recommend is to raise the $600,000 is 50% preferred stock issued (with 5% dividend interest and $50 par) and 50% common stock. The reason for this allows stability to the company and maximizes their earnings per share based on the low and moderate estimates provided. For instance, if the low is hit (approx. $75,000) then the earnings per share for investors is $.032 per share, only very slightly ($.001) than offering 20% bonds paying 9% and 80% common stock. If the entire amount is issues in bonds that pay 9% shareholders are put at a serious disadvantage if the company hits the low estimate ($.016 vs $.032 earnings per share or exactly half). Likewise, if the amount of sales is at the moderate level ($109,000) then the earnings per share is $.052 versus $.051 for the and $.042 for issuance of all bonds. The issue that I have with the 60% of the capital raised at 9% bonds and the rest in common stock is that at either the low or moderate projections, the short-term earnings per share is less than with the common and preferred mix recommended. Capital Budget It is very difficult to project costs and expenses for future projections because of the rapid economic changes that can happen. I am assuming that the reason that selling and admin costs are higher in the first year is to be able to set up the Canadian operation and launch