Prepare a forecast of after-tax cash flows for fiscal 2022, 2023, and 2024 for each of the two financing proposals, assuming the following: 

• Revenue increases 5% annually. 

• EBITDA margin is 15%. 

• Annual depreciation is $8,000,000 with equivalent annual capital cost allowance. 

• The line of credit balance will remain at $14,000,000 for the forecast period. 

• Annual capital expenditures are $3,000,000 for each year. 

• Net working capital investments are $1,500,000 in fiscal 2022 and then increase 5% annually. 

• Income tax rate is 25%. 

Assume that financing will be advanced in early July, and one year’s worth of interest will be paid in fiscal 2022. Conclude on whether the company can comply with the loans’ requirements for each of the years forecasted. Provide a recommendation to Agri-Panel as to which financing alternative is preferable

 

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Appendix II Financing proposals Proposal 1: MNB secured term loan In addition to the existing line of credit, MNB has offered a term loan for up to $40 million (provided maximum limits and covenants are met) with the following terms and conditions: • five-year term loan • 7% interest rate, payable annually maximum loan proceeds available: up to 50% net book value of property, plant, and equipment equal annual instalments of principal repayment of $7,000,000 due at end of each year • first charge on all capital assets including land, building, and equipment Negative covenants for the credit line and the term loan facilities together: • maximum debt leverage of 3.0:1 of EBITDA-defined as [(line of credit + secured term loan) / EBITDA] • minimum debt service charge ratio of 1.8:1 - defined as [EBITDA / (interest + annual principal repayment)] Proposal 2: Hudson Bay Teachers' Union Pension Fund convertible bonds The Hudson Bay Teachers' Union Pension Fund (HBT) is interested in lending to Agri-Panel using convertible bonds. HBT has many investments in companies that process natural resources and is particularly interested in Agri-Panel's unique product. HBT believes that there is a large untapped global market for this process that uses crop waste. The convertible bonds (amount: $35,000,000) have the following terms and conditions: • unsecured debentures • 3% interest rate, payable annually • five-year term • no annual principal repayments all principal ($35,000,000) is due June 30, 2026 • convertible at the holder's option into 20 shares per $1,000 any time after July 1, 2023 Appendix II Financing proposals Proposal 1: MNB secured term loan In addition to the existing line of credit, MNB has offered a term loan for up to $40 million (provided maximum limits and covenants are met) with the following terms and conditions: • five-year term loan • 7% interest rate, payable annually maximum loan proceeds available: up to 50% net book value of property, plant, and equipment equal annual instalments of principal repayment of $7,000,000 due at end of each year • first charge on all capital assets including land, building, and equipment Negative covenants for the credit line and the term loan facilities together: • maximum debt leverage of 3.0:1 of EBITDA-defined as [(line of credit + secured term loan) / EBITDA] • minimum debt service charge ratio of 1.8:1 - defined as [EBITDA / (interest + annual principal repayment)] Proposal 2: Hudson Bay Teachers' Union Pension Fund convertible bonds The Hudson Bay Teachers' Union Pension Fund (HBT) is interested in lending to Agri-Panel using convertible bonds. HBT has many investments in companies that process natural resources and is particularly interested in Agri-Panel's unique product. HBT believes that there is a large untapped global market for this process that uses crop waste. The convertible bonds (amount: $35,000,000) have the following terms and conditions: • unsecured debentures • 3% interest rate, payable annually • five-year term • no annual principal repayments all principal ($35,000,000) is due June 30, 2026 • convertible at the holder's option into 20 shares per $1,000 any time after July 1, 2023

Answer rating: 100% (QA)

Forecast of AfterTax Cash Flows Proposal 1 MNB Secured Term Loan Fiscal 2022 Revenue 95000000 EBITDA 14250000 Interest Expense 2100000 Principal Repay... View the full answer