You are a 1st year CPA student at PricewaterhouseCoopers (PWC). It’s 5:30 on Friday afternoon and you’re packing up your laptop and heading out the door when you hear your name being called. You turn around and see a partner gesturing you into her office.

“Am I glad to see you! I just got off the phone with a client who’s looking for some advice. A client of mine, Ravidra, has got an incorporated small business up in York Region and, long story short, has been running into some cash-flow problems. He already has a bit too much debt, so a bank loan isn’t really an option.

After some discussions, we’ve come up with some different options to generate $200,000 of new financing. I told him I'd draft a one-page memo by Monday afternoon and I was wondering if you could take a first cut at it? I’d love to help you more, but I’m flying to Montreal for the weekend. You’ll find more details about each proposal on that notepad over there. Do your best and I’ll talk to you on Monday morning. Good luck!”

You look on the desk and find a notepad with the following information:

?? – Issue $200,000 of 5% bonds at 100

?? – Issue 20,000 additional Common Shares ($10 each)

?? – Issue 20,000 $2 Cumulative Preferred Shares ($10 each) (number of shares is 20,000; the price per share is $10; the dividend rate is $2) (cumulative means… if we don’t pay dividends thsi year, we pay 2x the dividends next year)

Other Stuff on notepad

• Business is high-end cricket equipment manufacturing – Ravindra’s family has been producing this equipment for the last 75 years. They have real expertise and have managed to keep their processes fairly secret over time. Their value is based on being the best at making this equipment.

• Ravindra doesn’t know much about bonds and shares etc. - give him some basics that are important in this situation.

• The corporate tax rate in Ontario is ~ 20%

• Prepare an analysis over a 3-year time period – with forecasted pre-tax net income of $100K; $150K; $200K.

• Ravindra currently owns 10,000 common shares of the company

Answer rating: 100% (QA)

The company has no current debt Ass um ptions The company will be able to sell the bonds at par valu... View the full answer