Century Group Ltd. (CGL) is a public company in Ontario that reports under IFRS. The company is
Question:
Century Group Ltd. (“CGL”) is a public company in Ontario that reports under IFRS. The company is financed by 10,200,000 common shares and $23 million in long-term debt.
CGL is planning to launch a new product line the following year, which will require an additional $50 million in capital to be spent on research and development as well as adding production capacity.
CGL’s leadership team is looking for funding that will serve two purposes:
- To finance the new product line; and
- To complete a share buyback
Management has been talking to various lenders and has settled on two “finalists”.
- A loan facility from the Algonquin Bank (see Appendix 1 for the term sheet agreed with the bank)
- A new private bond issue (see Appendix 2 for a draft of the bond agreement). Despite the interest rate proposed in the draft debenture agreement, the expected yield on the bond will be 7.8%.
CGL’s discussions with the private lending group initially focused on a “plain vanilla” bond. However, the interest rate that the lending group was demanding, 10%, was rejected as a non-starter by CGL management.
CGL leadership would also like to purchase and cancel 1,000,000 common class A shares at an expected value of $10 per share (see Appendix 3 for details on CGL’s share structure). They had issued 2,000,000 shares February 1st of this year when the share price was at a high of $12.40 per share. There have been no other capital transactions this year.
In order to make the final decision on which financing arrangement would be more suitable for CGL, you have been asked to complete several tasks. The CFO has directed you to assume that the decision will be made in time to execute either of the lending facilities by November 1, 2021, and the full amount of each facility would be drawn down on that date, while the share buyback will be completed one month afterwards.
CGL has a December 31 year end.
Task #1:
Show the journal entries that CGL would make for each of the finalist debt issues, at inception and for the remainder of fiscal 2021. Describe any reporting alternatives available to CGL.
Task #2:
Show how each of the finalist borrowings would be reflected on CGL’s 2021 and 2022 year-end balance sheets and income statements. Ensure you distinguish between current and long-term liabilities on the balance sheet.
Note: Only debt-related accounts need to be shown (i.e. accounts indirectly affected (such as cash) need not be shown).
Task #3:
Draft a separate debt note for each of the finalist borrowing options, that could be included in CGL’s December 31, 2021 financial statements, should that option be selected. Ensure you show all required disclosures.
Task #4:
Given the information generated in Tasks 1-3, and any other factors that should be considered, provide a thorough analysis, incorporating both qualitative and quantitative perspectives, of the two finalist borrowing options. At the end of your analysis, provide a recommendation as to which option CGL should select.
Task #5:
Show the journal entries that CGL would make to complete the common share buyback.
Expert Answer:
Task 1 Assuming CGL decides to go with the Algonquin Bank loan facility the journal entries would be as follows November 1 2021 Debt financing Algonquin Bank ... View the full answer
