ABBA Company is a privately held company with one sharecholder, Ms. Smith, who also operates as...
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ABBA Company is a privately held company with one sharecholder, Ms. Smith, who also operates as the company's Chief Financial Officer (CFO). The company has the following debt covenants in its lending agreement with Bank of Montreal: • Debt to Equity = Total liabilities / Total Equity. Must be lower than 2.0 • Interest coverage = Net income / interest expense. Must be greater than 15.0 Working capital = Current Assets minus Current Liabilities. Must be grcater than S500,000 The company's management plans to expand their current facility and plans to spend S500,000 on the expansion. Ms. Smith also would like to increase her personal income to s200,000 and plans to declare a dividend of $200,000 in 2019 to accomplish this. The balance sheet and income statement attached show the state of the company under various scenarios. Required (a) Calculate the debt covenants under each scenario and conclude if the company is compliant or non-compliant. - Respond on next page where noted. (b) Provide alternatives to Ms. Smith to reach her goals of personal income totalling S200,000 in 2019 (ignore personal income taxes for this discussion) For purposes of part (b) you do not need to recaleulate the debt covenants to ensure compliance, but provide suggestions on various alternatives that will get the company closer to their goals and their covenants. (c) Provide alternatives to Ms. Smith on the expansion plans that would help to reach their goals and stay within their debt covenants For purposes of part (c) you do not need to recalculate the debt covenants to ensure compliance, but provide suggestions on various alternatives that will get the company closer to their goals and their covenants. ABBA Balce Seet December 31, 2018 Purchase Puchae equipment with Pay dividend with cash for bomowings d S600.000 Curent equipment reported amourts of S200.000 Assets Curent 510200 150000 200000 Cah 310200 S10200 150000 Accounts reoivable Due from shareholder Prepaid expenses 150000 200000 150000 200000 200000 S0000 910200 500 910200 710200 410200 Non-current Property, plant, equipment 2500.000 3,410.200 2500000 3210200 3000000 3410200 a000.000 3910.200 Liabities Curent Accounts payable Accrued labite Current porton of long term debt S7S00 57500 40000 50.000 147500 ST500 57500 56000 50000 162500 40000 40000 5000 14/500 S000 14/500 Non-current 2000000 2147500 Long term dett 2000000 2000.000 2500000 2147500 2147500 2662500 Equty Share capital Retained eamings 20 200 1262500 12200 1,062500 1262500 12200 1247500 1,062.700 1200 Linbiltes and shareholder's equity 3410200 3210200 3410200 3910200 ABBA hcome Satermert 15000000 13.000000 2000.000 15000000 Saks Cost of sales Gross margin 15.000000 13.000.000 2000.000 15000000 13.000000 2000000 13000000 2000000 Operating expenses Salaries and benefts - admiristration Salaries and benefts CFO Office expenses Professional lees - legal and accourting nterest experse e4% 100000 100000 100000 120000 1000 20000 10000 120.000 10000 120000 10000 120000 10000 20000 20000 20000 80000 30000 80000 80.000 300000 100.000 360000 30000 Net income belore income tax 1670.000 1,670000 1870.000 1680000 hoome tx e25% 417500 122500 417500 417500 412500 Net income 122500 120 123500 Retained eamings begnning of year Net income Dividends 10.000 10000 1252500 200.000 1002500 10000 10000 1237500 122500 12500 Retained earmrings, end of year 12200 12:200 124/500 Ros DebvEquty Interest coverage Woking capital Compliant (YesNo) DetvEquity Interest coverage Woking capital ABBA Company is a privately held company with one sharecholder, Ms. Smith, who also operates as the company's Chief Financial Officer (CFO). The company has the following debt covenants in its lending agreement with Bank of Montreal: • Debt to Equity = Total liabilities / Total Equity. Must be lower than 2.0 • Interest coverage = Net income / interest expense. Must be greater than 15.0 Working capital = Current Assets minus Current Liabilities. Must be grcater than S500,000 The company's management plans to expand their current facility and plans to spend S500,000 on the expansion. Ms. Smith also would like to increase her personal income to s200,000 and plans to declare a dividend of $200,000 in 2019 to accomplish this. The balance sheet and income statement attached show the state of the company under various scenarios. Required (a) Calculate the debt covenants under each scenario and conclude if the company is compliant or non-compliant. - Respond on next page where noted. (b) Provide alternatives to Ms. Smith to reach her goals of personal income totalling S200,000 in 2019 (ignore personal income taxes for this discussion) For purposes of part (b) you do not need to recaleulate the debt covenants to ensure compliance, but provide suggestions on various alternatives that will get the company closer to their goals and their covenants. (c) Provide alternatives to Ms. Smith on the expansion plans that would help to reach their goals and stay within their debt covenants For purposes of part (c) you do not need to recalculate the debt covenants to ensure compliance, but provide suggestions on various alternatives that will get the company closer to their goals and their covenants. ABBA Balce Seet December 31, 2018 Purchase Puchae equipment with Pay dividend with cash for bomowings d S600.000 Curent equipment reported amourts of S200.000 Assets Curent 510200 150000 200000 Cah 310200 S10200 150000 Accounts reoivable Due from shareholder Prepaid expenses 150000 200000 150000 200000 200000 S0000 910200 500 910200 710200 410200 Non-current Property, plant, equipment 2500.000 3,410.200 2500000 3210200 3000000 3410200 a000.000 3910.200 Liabities Curent Accounts payable Accrued labite Current porton of long term debt S7S00 57500 40000 50.000 147500 ST500 57500 56000 50000 162500 40000 40000 5000 14/500 S000 14/500 Non-current 2000000 2147500 Long term dett 2000000 2000.000 2500000 2147500 2147500 2662500 Equty Share capital Retained eamings 20 200 1262500 12200 1,062500 1262500 12200 1247500 1,062.700 1200 Linbiltes and shareholder's equity 3410200 3210200 3410200 3910200 ABBA hcome Satermert 15000000 13.000000 2000.000 15000000 Saks Cost of sales Gross margin 15.000000 13.000.000 2000.000 15000000 13.000000 2000000 13000000 2000000 Operating expenses Salaries and benefts - admiristration Salaries and benefts CFO Office expenses Professional lees - legal and accourting nterest experse e4% 100000 100000 100000 120000 1000 20000 10000 120.000 10000 120000 10000 120000 10000 20000 20000 20000 80000 30000 80000 80.000 300000 100.000 360000 30000 Net income belore income tax 1670.000 1,670000 1870.000 1680000 hoome tx e25% 417500 122500 417500 417500 412500 Net income 122500 120 123500 Retained eamings begnning of year Net income Dividends 10.000 10000 1252500 200.000 1002500 10000 10000 1237500 122500 12500 Retained earmrings, end of year 12200 12:200 124/500 Ros DebvEquty Interest coverage Woking capital Compliant (YesNo) DetvEquity Interest coverage Woking capital
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Related Book For
Accounting Information Systems
ISBN: 978-0133428537
13th edition
Authors: Marshall B. Romney, Paul J. Steinbart
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