Question: 1. Assume you started a new business last year with $50,000 of your own money that was used to purchase equipment. Now you are seeking a $25,000 loan to finance the inventory needed to reach this year's sales target. You have agreed to pledge your venture's delivery truck and your personal automobile as support for the loan. Your sister also has agreed to cosign the loan. During your initial year of operation, you paid your suppliers in a timely fashion.
1A. Analyze the loan request from the viewpoint of a lender who uses the "five Cs" of credit analysis as an aid in deciding whether to make loans.
1B. Assume you are currently carrying an accounts receivable balance of $10,000. How might you use accounts receivables to obtain an additional bank loan?
1C. Assume at the end of next year, you will have an accounts receivable balance of $15,000 and an inventories balance of $30,000. If a bank normally lends an amount equal to 80 percent of accounts receivable and 50 percent of inventories pledged as collateral, what would be the amount of a bank loan a year from now?
2. The BETA firm is proposing to acquire the ACE Products venture described in Problem 1. BETA estimates that ACE's free cash flow for next year could be improved to $5.5 million because of synergistic benefits in the form of operating or distribution economies. The potential acquirer also believes that ACE's perpetuity growth rate could be increased to 7 percent annually. However, the riskiness of the cash flows would be increased causing the appropriate WACC to increase to 16 percent. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture also has surplus cash of $4 million. ACE Products has five million shares of common stock outstanding.
2A. Determine ACE's enterprise value from the perspective of BETA. What is ACE's equity worth to BETA in dollar amount and on a per share basis?
2B. Use the per share value of ACE from Problem 1 and the per share value from this problem and establish a range of values (i.e., without and with expected synergistic benefits). If one-half of the synergy derived benefits were allocated to ACE's venture investors and founders, what price per share would the merger take place?
2C. BETA has thirty million shares of stock outstanding with a market capitalization value of $600 million. What is BETA's stock price? Determine the exchange ratio between ACE's stock value and BETA's stock price at each of ACE's values established in Part B. That is, what would ACE's venture investors and founders receive in BETA's shares for each share of common stock they currently hold in ACE Products?