Robins Rockets currently has a term loan. Because it can be called at any time it is booked as a current liability. The debt carries with it a cost of prime plus 4%. Robin
Referencing Styles : Open Robins Rockets currently has a term loan. Because it can be called at any time it is booked as a current liability. The debt carries with it a cost of prime plus 4%. Robins Rockets is public and so there is a calculated beta of 1.4. Robin the controlling shareholder is getting tired of fighting with the minority shareholders about her vision for the company though and is thinking about going private. What would the Beta be? Would you suggest this approach? Robins worried about the investors and how much they are asking for in return. She feels that they are asking for a return of 15% but the market rate of return is only about 9%. She would like to know if the 15% is reasonable. What are some of the factors that affect the return that the investors are requiring? Is there something she can do to reduce the amount they are asking for? Robin has asked you to look into refinancing the loan. The first step will be to determine whether their debt to equity mix is appropriate. RR issued a bunch of shares this year (mostly to Robin who exercised a bunch of warrants) but this hasnt seemed to help. Robin has looked at the industry standard and has determined the appropriate mix should be a ratio of 1.25:1 (debt to equity calculated as total debt divided by total equity). Robins wondering how much debt she will need to issue to get to this amount and what the return on equity required will be as well what this will do to the beta of the company. Note you may need to refer to the financials to help you answer this question. 1. Is the minority shareholder asking too much? 2. CAPM calculation 3. What kind of hidden information that cause the Beta to be incorrect 4. Calculate debt-equity, increase in debt happens the same time as retire in equity 5. Calculation of WACC 6. Discussion about going private or public 7. Robin may not care about cost of equity going up Part 2) Robins Rockets is a firework manufacturer in Burnaby BC. They currently manufacture professional fireworks for worldwide distribution to companies, cities etc. that use fireworks for celebrations. The organization has grown over the past several years but the last year things hit a snag. Some additional requirements were passed by the US government that their current machinery could not meet. Due to this issue about $35,000 worth of inventory had to be written off as it was no longer sellable under the current legislation. In order to meet these new requirements the company needs to add some new processes and equipment. The company will need to spend $40,000 to improve the computer equipment to track the chemicals. Because the materials are combustible they must also spend $300,000 on a machine that will seal the fireworks in travel tubes and appropriately label them. This machinery will need more space. Luckily they have some room in the warehouse that they were currently renting for $12,000 per year but which adds to their Utility bill to the extent of about $3,500 per year. The equipment has a useful life of 8 years and will be added to the tax pool which depreciates the assets at a rate of 20%/annum. At the end of 8 years the expected salvage valye is expected to be $5,000. The business in the US that will be gained if the equipment is added represents about $75,000 gross margins per annum. Margins will be the same as the other sales. Use the interest rate of 6% on the debt and 12.5% on the equity. Discuss whether this project should be undertaken using the four different methods of analyzing a project. Consider the risk of the project What risks do you think are present and do you think these will affect the decision to undertake the project? Discuss how you might address these uncertainties using the discount rate. (include a capital budget evaluation) Part 3) Robin has been watching TV and has determined the best way for her to raise funds would be to go on the TV show Dragons Den ( http://www.cbc.ca/dragonsden/ ) As her analyst she has asked you to do some research for her. You should watch several episodes of the show (see above website for free access to the versions). This will help you understand the types of things that the presenter must be able to respond to and the type of information she should have prepared. Figure out the value of the company as is using the equation for the value of the company as a whole. She would like to get an investment of about $300,000 to help with an expanded worldwide rollout including distribution channels and a European warehouse. The project would have an NPV of $1.5m over the next 5 years. How much ownership do you think she should offer in exchange for this investment. Discuss 5-10 questions that the Dragons may ask her explaining why they would ask the question and what it will help prove. Discuss the advantages and disadvantages of going on the show. Do you think she should do it? Why do investing on the Dragons? How much she has to give up? Evaluate expansion project. You will undoubtedly use some internet sources for this exercise which is great but do more than copy and paste from the support you need to use your own words to show you understood what the issues were and please prepare a resource section that indicates the page you used with link and the date it was accessed. For instance Dragons Den Investors http://dragonsdeninvestors.com/ Last Accessed October 4, 2014 Part 4) Robin realizes she hasnt been monitoring the company with enough regularity. She has been relying a lot on her instincts and would instead like to create a consistent financial analysis report to help her monitor the company, its operations and in general how the company is doing. Using the information attached which is the industry information of her comparables, discuss what ratios she should consider and why. Prepare the ratios to help demonstrate how the ratios will be useful.