COMPETITION BIKES

Competition Bikes Inc. Canadian Expansion

Competition Bikes Inc. Canadian Expansion

Recommendation

In looking at the opportunity to expand into the Canadian market, it is best to assess your current financial position and then make sure that you are utilizing the best method to finance this expansion. In looking at the options that you could utilize to address is expansion, I have considered the following as those that would be the best based on your current situation along with the existing market conditions. Please remember that the timeline to look at is a period of 5 years, being years 9 through 13 with the objective of locating $600,000 for this project.

1. Bank Loan at 6% with compensating balance of $150,000 (minimum) at 1% return

2. 100% of funding from Bonds at 9%

3. Issuing combination of 50% Preferred Stock ($5, $50 par) and 50% Common stock

4. 20% Bonds @ 9% with 80% Common Stock

5. 40% Bonds @ 9% with 60% Common Stock

6. 60% Bonds @ 9% with 40% Common Stock

While each of these has benefits and drawbacks, I would first remove the bank loan as an option altogether due to the requirement of the $150,000 balance only receiving a 1% returns. Basic TVM equations would suggest that using the $150,000 and investing in other areas would be more lucrative than to meet the minimum balance requirement as one of the stipulations of the bank loan. For now, I will focus on the two options that appear to have the most impact to earnings per share, with these being option number 3, Combination of 50% Preferred Stock and 50% Common Stock and option number 4, 20% Bonds @ 9% with 80% Common Stock.

Below are the estimated calculations for the year 9 and year 13 on both low and moderate sales forecasts.

Year 9 Low EBIT

Year 9 Moderate EBIT

Year 11 Low EBIT

Year 11 Moderate EBIT

Year 13 Low EBIT

Year 13 Moderate EBIT

By going through these capital structure options in three future randome years that is 9, 11 and 13 in both the low and moderate sales, it can be concluded that option number 3, the combination of Preferred and Common stock will provide the best option with the desire to have the best earnings per share, while option number 4 will provide a slightly better short term return over the period. Choosing these options will decrease the liabilities and interest expense, which is in the best interest for the company.

Capital Budgeting Concerns

The Capital Budget is a tool used for the planning process costs for the assets of the company, whose economic benefits are expected to extend in terms of more than one fiscal year. The capital budget is a list of projects valued presumed to be achievable for the acquisition of new fixed assets, i.e. when a company makes an investment commodity incurs a capital outflow of cash today, hoping to change future benefits. It overall, these benefits extend beyond one year in the future (Levy and Marshall, 2005). Examples include investment in assets such as equipment, buildings ...