Question

Bindloss Ltd. is a small manufacturing company in Alberta that produces products needed by companies in the oil and gas in dustry. With the oil patch booming, Bindloss is looking for financing for a planned expansion. The company is currently owned by Harry Bindloss, who owns 100 percent of the outstanding shares of the company. The oil and gas industry is cyclical, so although Bindloss has been successful for the last few years it's likely that there will be years where the company doesn't do well. Harry Bindloss is considering two financing alternatives for the expansion: a $750,000 five-year, 9 percent term loan with equal principal repayments due at the end of each year ($150,000 of principal must be repaid each year) and interest payments due monthly. Alternatively, Harry has located an in vestor who would provide $750,000 of equity financing in exchange for a 25 percent in terest in the company. The liabilities and shareholders' equity side of Bindloss's balance sheet as of its most recent year-end, along with a summarized income statement, is provided below.

Bindloss Ltd
Summarized Liabilities and Shareholders’ Equity
As of December 31, 2017
Bank loans............... $ 100,000
Accounts payable and accrued liabilities... 275,000
Current portion of long-term debt...... 75,000
Total current liabilities......... 450,000
Long-term debt............ 250,000
.................... 700,000
Common share capital.......... 250,000
Retained earnings............ 750,000
.....................1,000,000
Total liabilities and shareholders’ equity... $1,700,000
Bindloss Ltd
Summarized Income Statement
For the year ended December 31, 2017
Revenue............ $2,150,000
Expenses............ 1,700,000
Interest expense......... 30,000
Net income............ $ 420,000

During 2017, the company paid Mr. Bindloss $195,000 in dividends or $0.26 per share on his 750,000 shares.

Required:
Harry Bindloss would like you to prepare a report analyzing the pros and cons of each financing alternative. He would like you to explain the impact each alternative would have on the company's balance sheet, its income statement, and on measures of performance.



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  • CreatedFebruary 26, 2015
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