Innovative company Essay Example for Free

Innovative company Essay?Innovative Engineering caller-up was founded by two partners Meredith Gale and Shelley Yeaton, shortly after they graduated from engineering school. Within five years the partners had built a thriving business, primarily through the study of a product line of measuring instruments based on the laser principle. Success brought with it the need for new permanent capital. After careful calculation, the partners placed the quantity of this need at $1. 2 million.This would replace a term loan that was about to mature and provide for plant expansion and related working capital. At first, they sought a wealthy investor, or group of investors, who would provide the $1. 2 million in founder for an interest in the partnership. They soon discovered, however, that although some investors were interest in participating in new ventures, none of them was willing to participate as partner in an industrial company because of the risks to their personal fortunes that were inherent in such an arrangement.Gale and Yeaton therefore planned to incorporate the Innovative Engineering association, in which they would own all the line of credit. After further investigation, they learned that bower Capital Corporation, a venture capital firm, might be interested in providing permanent financing. In thinking about what they might propose to Arbor, their first topic was that Arbor would be asked for $1. 2 million, of which $1. 1 million would be a long-term loan. For the other $100,000, Arbor would receive 10 percent of the Innovative greenness stock as a sweetener. If Arbor would pay $100,000 for 10 percent of the stock, this would mean that the 90 percent that would be owned by Gale and Yeaton would have a evaluate of $900,000. Although this was considerably higher than Innovatives net assets, they thought this amount was appropriate in view of the profitability of the product line they had successfully developed. A little calculation convinced th em, however, that this idea (hereafter, proposal A) was too risky. The resulting ratio of debt to equity would be greater than 100 percent, which was considered unsound for an industrial company.Their next idea was to change the debt/ equity ratio by using preferred stock in lieu of most of the debt. Specifically, they thought of a package consisting of $200,00 debt, $900,000 preferred stock, and $100,000 common stock (proposal B). They learned, however, that Arbor Capital Corporation was not interested in accepting preferred stock, even at a dividend which exceeded the interest rate on debt. Thereupon, they approached Arbor with a proposal of $600,000 debt and $600,000 equity (proposal C).For the $600,000 equity, Arbor would receive 6/15 (i. e. , 40 percent) of the common stock. . . . Assignment 1. For each of the 4 proposals, calculate the return on common shareholders equity (net income after preferred dividends divided by common shareholders equity) that would be earned under e ach of the three income assumptions. Round calculations to the near $1,000 and 1/10 percent. 2. Calculate the pre-tax earnings and return on its $1. 2 million investment to Arbor Capital Corporation under each of the four proposals.Assume that Arbor receives a dividend equal to its portion of common stock ownership times Innovatives net income after preferred dividends (if any) larn a negative dividend if Innovative has a net loss. 3. Were the partners correct in rejecting proposals A and B? 4. Comment on the likelihood that Innovative Engineering Company could find a more attractive financing proposal than proposal D. Answer A. 1. 100k long term loan, 100k = 10% of Common Stock. B. 200k Debt, 900k Preferred Stock, 100k Common Stock. C. 600k Debt, 600k Equity, mandrel will get 40% of the equity D. 300k debt, 900k equity, 50% Interest 8% Dividend 10%