Competition Bikes Inc. Storyline Essay

access emulation wheels Inc. is considering an working out to Canada and is trying to order whether to commingle with or take in the Canadian Biking Inc. installing. We concern a advert in this summary at work large(p) organise approaches, mesh topology attest Value and inner(a) place of call back and the tie ins surrounding that. contention Bikes work dandy is discussed and final examinationly an compend on if the political party should merge or acquire Canadian Biking Inc. peachy social organisation ApproachA1. This summary provides a nonify and recommendation of a working capital coordinate that outgrowths shargon carryer engender. majuscule Structure is how hearty a attach to funds its as roachs, operations and growth using short and pertinacious term debt, and coarse and favourite(a) equities. Overall, much legality and little(prenominal) debt attracts investors. Equity is both(prenominal) parkland var.s, or like stocks. tilt Bikes Inc . is looking to expand to Canada. To expand, the follow must bugger dour the to the highest degree let capital structure non only to be able to pay off debts, have an acceptable counterpunch on coronation, and append hard currency f baseborn, that to have the appropriate storageing to expand and for prox stability and growth. soon opposition Bikes has running(a) capital, retentive term whole steps due, mutual and preferred stocks, and retain wages. We get out subprogram Earnings per percent (EPS) from the table on a lower floor to make a recommendation as to what approach the comp each should use. This is what investors look into as well. There ar pentad capital structure approaches contention Bikes tramp take to gene valuate the capital required for the expansion. The table below renders the metrical EPS for each structure which is discussed after.9% Bonds Only. Bonds ar risk of exposurey because they require a placed pas term payment that could prohibitly tinge stockholder slangings if sales projections ar not as anticipated. Payments argon typically made semi-annually which lowers the come withs income. This is regarded as a debt, not equity which takes more than(prenominal) than cadence to realize benefits. This survival of the fittest awards the highest busy and freeze offs competitor Bikes Income before Tax (EBT). The electro overconfident to this pickax is that bonds are debt financing and hence tax deductible. In some littleened companies this is less(prenominal) expensive that using equity to finance debts. con leader Bikes does not illuminate into this category really because it is chartless if nedeucerk result addition or dividends turn over al hotshot be cut set downd in time to come historic period. Future monies earned exit be use to pay off the debts and not be reinvested into the union as raw(a) earnings. Using chairman anticipate earnings before saki and taxes amou nts (EBIT), the EPS for stockholders everywhere 5 years with this survival of the fittest is .103. The lower EPS is office less common land stock shares outstanding, less equity, and fewer dividends. The risk is higher in this cream as highly leveraged companies hunt down to have difficulties with silver play.50% favored Stock and 50% parking area Stock. In this picking the investors fund the expansion. contender Bikes equity is utilize sooner than debts to finance growth into Canada. Investors have more of an invested hobby in the association and argument Bikes has less debt to income ratio. Preferred stockholders pull up stakes earn dividend payouts on a regular radical while the Board of Directors determines if common stockholders perplex dividends. Preferred stockholders as well tend to hold on to their stocks pineer pr pointting a declined respect in them. There is no provoke to pay back in this picking therefore, all EBIT are retained. The EPS for this natural selection over 5 years is .203, one of the highest 2 in this analysis. Investors bequeath see an warm return on investment starting line in year 9. This option yields the highest clear income and preferred stock dividends. On a negative note, this option commode be a lengthy process consume time resources.20% in 9% Bonds and 80% in Common Stock. The 20/80 option mix of bonds and common stock is a better option that 100% bonds. This option uses both debt and investors to fund the expansion and allows ambition Bikes to give less dividends if it so chooses. The debt to income ratio remains small here and interest low as only 20% is being used as debt. Over 5 years this option yields .197 EPS which is the close to the 50% preferred and common stock. There is more risk here as debts must be remunerative back on a strict schedule, regardless of income. However, EBT is higher and the marrow income on tap(predicate) for common stock augments.40% in 9% Bonds and 60% Common Stock. Like the previous option, this option uses both debt and investors to fund the expansion. go having 60% in common stock still keeps the union from forced dividend payouts, its not as safe as 20/80 option. The split in bonds and common stocks keeps interest low. Not as low as the 20/80 option, plainly not as high as the 60/40 option. The same holds true for operational income. There is more available for common stock than 100% bonds. The EPS for this option is .182 because of the flake of outstanding shares is higher than the 20/80 option.60% in 9% Bonds and 40% in Common Stock. In this option, there is debt just as there is in the first option. The increase in interest (12%) causes less equity and fewer dividends. The income available for common stock is the lowin this option. Its also important to note that competition Bikes had declining sales the past two years. It is un haven if they leave alone have exuberant sales to meet their interest payments on time and continue business as usual. The EPS over 5 years with this option is .16, the second lowest.Recommendation. Capital structure as we empennage see evoke be tricky. It is the best balance of debt and equity to maximize returns, EPS. Excluding the 60/40 option, all the options show continued growth through the years. However, 50% common and preferred stock option yields the stronger EPS at .203 and is therefore the recommendation for contestation Bikes. The continued strength and growth in this option ordain maximize shareholder return, and yield addition dividends to investors with less risk. The change magnitude EBIT will be retained in the smart set. The goals of this analysis were to ensure the highest EPS belongings shareholders quelled while building strong illuminate income in the business. The larger equity versus debt in the 50% Common Stock and 50% Preferred Stock accomplishes that. This option is recommended for Competition Bikes to improve the associations pecuniary position. The alternate capital structure would be the 20/80 option.Net Present Value and Internal Rate of ReturnA2. In this summary we discuss the Net Present Value (NPV) and Internal Rate of Return (IRR) regularitys in regards to the proposed investment. These areas determine if the investment is worth moving onward with the uniting or skill without financially harming the company. The Capital Budget income statements were reviewed to make the following determinations.NPV. This method appraises investments. The calculation for NPV is the investments total net cash in flows minus initial re looks. If the result is positive then the investment should be accepted. proscribe results should be rejected. The NPV indicates the investments tax, or profitability.IRR. This method is more often used to make investment ends with companies. The IRR calculation is the entailment array of interest that decreases the assets net present value to the constitute of the investme nt, or back to zero. This is the true economical return earned. The IRR should be equal to or greater than the cost of the capital, or burial vault rate, to accept the investment. Competition Bikes requires a 10% vault rate to pursue the investment. raze results should reject the investment. Growth is considered in this method. The IRR is the talent and yield of an investment.Competition Bikes Inc. has provided the following five dollar bill year projection on NPV and IRR. This is provided in both the low demand and moderate demand scenarios.Concerns for NPV Low Demand. After investment $600,000 in this scenario, the total present value of $573,260 yield a negative $26,740 NPV. Although this does not mean the company will bemused bullion in this scenario, it does mean they will not meet their self-set 10% hurdle rate. Growth in sales is set at 49,000 or six units and not enough to increase to a positive NPV in five years. This is an property the company should not mov e forward with the expansion as investors will most likely not want for the cost of capital to be realized. The global economy is also at a low point which give Competition an even higher risk of not qualification its even low demand molding sales expectations.Concerns for NPV Moderate Demand. After investing $600,000 in the moderate scenario, the total present value is $602,243 leaving a NPV of $2,243. While this is a positive number, it is not a high one so the company would have to decide if projections were more straight in the moderate demand, or low. If Competition Bikes does not meet its projections by any margin, this NPV will move into a negative status. In addition the declined economy,Competition Bikes has been over predicting sales in recent years. If the company follows this same pattern, the numbers in this scenario could be off.Concerns for IRR Low Demand. The rate of return for this scenario is 8.7%, 1.3% lower than Competition Bikes 10% threshold. This indica tes the project will not be funded or profitable, charge investors a agency from investing.Concerns for IRR Moderate Demand. The rate of return for this scenario is 10.1%. Although it is above Competition Bikes set bounce for moving forward, it merely meets the minimum. With the martplace in a down swing, its best to look at the low demand quite than moderate at this point. Having the moderate barely meet the 10% should raise concern for the company. Investors may not want to go on money for a venture that is marginally acceptable.Not recommended. From the summaries above on the NPV and IRR, it is not recommended that Competition Bikes move into the Canadian market at this time. There is a speculation that the expansion would be a success, scarce the risks are too high. The 10% rate of return is not only seldom met in these scenarios, that threshold may be a little low too. magnification into another country with additional building planned is much riskier than just an i nbred investment due to economic and regulatory issues. The cash flows used to create these scenarios are not exact either. Competition Bikes would deal to leave itself a little more room for cash flow fluctuation. Although they will be expenditure more on advertising in the first year, it is un cutn if it will increase sales. The expansion is something that could be reconsidered after the economy bounces back. workings Capital for Canadian ExpansionA3. (1) Obtain Working Capital. Working capital is Assets minus Liabilities and chiffonier be obtained by several avenues. Competition Bikes will have to build working capital to afford the expansion. Below are some of the avenues the company can use to acquire working capital.Debt financing. One time transaction bank loans is debt financing and commonly comes with a higher closing cost. Loans can also be obtained through regimen loans such as the Small fear Administration. These type of loans can be long or short term neverthel ess general hold high interest rates. SBA loans general have price less restrictive than those at the bank because they are services through the loan guarantor, not the lender. Avoiding using outside monies to fund a project is optimal assuming a favorable cost/ benefit ratio.Revolving book of facts. Credit can be used unceasingly to fund multiple projects. Lines of honorable mention tend to have lower payments than bank loans. Lines of doctrine can be used as working capital when appropriate. Interest is paid here and monthly payments cannot be at sea or the companys credit rating is at risk.Liquidating Assets. Companies can transmit unnecessary assets such as structures or buildings, land, machinery, etc. Competition Bikes can transfer its excess parts.Equity Financing. Offering preferred and common stock is a way to obtain working capital without outlet further into debt. Maximizing shareholder returns will raise funds for the company. Stocks will dilute ownership in the company but make the expansion feasible without the holy terror of debt. ontogenesis Sales. Managing already existing finances such as paying off debts, increasing sales and capacity, investing in marketing and advertising, lowering production be and growing the business can increase working capital. Retained earnings can be reinvested as working capital as well.Lending. Working capital can be obtained from selling accounts receivable or increasing their accounts receivable collections system. Loaning more money with protracted terms or reducing frozen and variable cost can also increase working capital.A3. (2) Manage Working Capital. Managing or preserving working capital is done by budgeting, reinvestments, managing accounts payable and receivable, and inventory and asset management. There are other ways to manage or exert working capital but these are discussed here.Budgeting. Competition Bikes can note its working capital by budgeting properly. peremptory costs and m anaging debt and assets will carry on cash flow. The balance sheets showed errors and ambiguous spending. Good unload charge is essential to know where money is going and where its coming from. The company can improve their debt management to know where costs can be cut. nonrecreational debts on time will decrease interest paid and worthy recruit keeping can divine service know when the debts are due.Reinvesting. The company can reinvest working capital to preserve it. The 50% common stock and 50% preferred stock structure mentioned earlier will help the company manage working capital. This option yields the highest earnings per share building capital.Increase Accounts Receivable Interest and Discounts. Competition Bikes shortly invoices at net/30 days. This should be reviewed and shortened to less than 20 days. Discounts should not be leaded in excess and should be careful managed. Smart cost check off maximizes cash flow. Accounts payable credit terms can be negotiated wit h suppliers as well. This may decrease interest and help maintain working capital.Inventory/ Asset Management. In addition to an acceptable record keeping system, inventory control can help the company in knowing whats on hand, whats incoming and outgoing. This can help determine what assets can be liquidated and used as working capital.A3. (3) permit vs. Buy. Deciding whether to lease or defile is a way to manage or preserve working capital. Competition Bikes involve to know which the better option to preserve their working capital is. The assessment below discusses the options.Lease. The lease for Competition Bikes would be a 5 year lease with unyielding monthly payments. There is a $50,000 buyout option at the end of the lease and no tax deductions are offered. There is a 6% interest rate on leasing the facility. The company would not be locked into keeping the building after the 5 years. Leasing would yield a lower NPV than get the facility and sustains working capital. Buy. If Competition Bikes chooses to purchase the Canadian facility, it would increase debt and still have fixed monthly payments. However, they would be able to take advantage of tax deductions. There is also a 6% interest rate in this option. Some considerations in purchasing are the depreciation of the facility, the down payment, and the living upkeep. Purchasing the facility requires a $50,000 down payment which results in lower monthly payments than leasing.Recommendation. Leasing seems to make the most financial thought for Competition Bikes in this scenario. Investing the $50,000 into the company to build revenue and manage working capital is a smarter decision than spending it on a down payment. This option will produce less debt and less risk of bad credit. Given that future growth is unknown, it is better to lease for five years and determine at that time how to expand base on how the market is doing at that time. There is lower inbuilt risk in leasing and better dete ct of increase returns. The overall lease payments will be less than purchasing so the company should lease, reassess after 5 years, and look into the option to buy at that time.Merger or AcquisitionA4. Competition Bikes must consider to merge with or acquire Canadian Bikes Inc. If the company does nothing, it could be faced with market competition that slides the company under. Below we look into the options, the consequences, positives and negatives of each. A final recommendation is made for Competition Bikes based on all information indeed far.Merger. In a merger, the two companies would combine. Competition Bikes is a larger company with 975,000 shares of common stock versus Canadian Bikings 200,000. Currently the earnings per share for Competition Bikes is .032 and Canadian Biking is at .121. If the companies merge, their earnings per share would increase to .053, an increase for Competition Bikes. In a merger, the acquiring company uses its own securities in exchange for the merged companys so it will dilute shareholder equity. However, since the exchange would be 31 basis, this would result in 65% increase for Competition Bikes, holding as a positive for the company. Both companies have expected continued growth over the close five years becoming a stronger competitor. A Merger would mean increased technology, customer base, and pre-established business departments. The merge will also come with more employees and possible duplication of duties making layoffs inevitable.Acquisition. In an acquisition, one company (in this case Competition Bikes) will take ownership of the target company (Canadian Biking). Canadian Biking Inc. will no longer exist and stocks for Competition Bikes Inc. will continue, expecting a return on investment. Competition Bikes is fling shares at 1.43, 30% premium over their current stock of 1.10. The projected cash flow does not meet the 10% hurdle rate Competition Bikes requires for investments. With an offer price of $286 ,000 and present value of $212,138, that would leave a negative NPV of $73,862. This will not leave the company with a return on investment. Since Competition Bikes has had decreased sales in the past few years, acquisition is riskier than a merger. In an acquisition Competition Bikes would acquire all of the patents and copyrights from Canadian Biking. remainderCompetition Bikes Inc. is considering a Canadian expansion and is faced with the determination whether to merge with or acquire the Canadian Biking Inc. facility. We have examine the source and management of working capital to help the company in the decision to merge with Canadian Biking, Inc. or to acquire the company. After consideration of the items discussed, it is recommended that Competition Bikes merge with Canadian Biking Inc. The monies required to merge with Canadian Biking Inc. should come from 50% preferred and 50% common stock. The growth of the merged company yields more projected cash flow over five year s than if Competition Bikes simply acquires Canadian Biking Inc.