Question

Fram Fibreglass Corp. (FFC) is a private New Brunswick company, using private enterprise GAAP, that manufactures a variety of fibreglass products for the fishing and food services industry. With the traditional fishery in decline over the past few years, FFC found itself in a tight financial position in early 2011. Revenues had levelled off, inventories were overstocked, and most operating costs were increasing each year.
The Royal Montreal Bank, which FFC has dealt with for 20 years, was getting anxious as FFC’s loans and line of credit were at an all-time high, the most recent loan carrying an interest rate of 15%. In fact, the bank had just recently imposed stipulations on FFC that prevented the company from paying out any dividends or increasing its debt-to-equity ratio above current levels without the bank’s prior approval.
The Vice-President of Finance, Joe Blowski, CMA, knew that with aggressive investment in new equipment the company could go after new markets in the construction industry. He had investigated the cost of the necessary equipment and found that $50,000 of new capital investment would allow the company to get started. All it needed was the financing. Joe set up appointments with Kirk Cullen, the loans officer at the provincial Industrial Development Bank, and with Heidi Hazen, the manager of the local office of Municipal Finance Corp. Kirk Cullen was very receptive to Joe’s request. He indicated that the Industrial Development Bank would be interested in working with FFC, and could provide him with a lease on the equipment he identified. Heidi Hazen also welcomed the business, suggesting a lease arrangement between Municipal Finance Corp. and FFC as well. Two days later, Joe had proposals from both lenders on his desk.
You are an accounting major and co-op student placed with FFC for your final work term. On his way out of the office for a meeting, Joe provides you with the two proposals and asks, just before the elevator door closes, “Would you please review these and give me your analysis and recommendation on which proposal to accept, if either?” The details of the two proposals are as follows:
Instructions
Prepare the required report.


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  • CreatedAugust 23, 2015
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