which financing method is most suitable for the cases below (A, B, C, D, E , F, G)?

Question: which financing method is most suitable for the cases below (A, B, C, D, E , F, G) – Financing methods-CHOOSE ONE FOR EACH CASE

1. Leasing arrangement.

2. Long-term bonds or bank loans.

3. Debt with warrants for share purchases.

4. Friends or relatives and/or bank overdraft.

5. Ordinary shares – private placement.

6. Preference shares (non-convertible, with preference dividends).

7. Ordinary shares – rights offering.

8. Convertible debentures.

9. Factoring. A. Mistral Yachts. Mistral Yachts is a private company founded in 1970 by Gail Billow to build a quality line of yachts. The company’s debt ratio is 48%, compared with an average ratio of 36% for yacht building companies in general. The shares are owned in equal parts by ten individuals, none of whom is in a position to put additional funds into the business. Sales for the most recent year were $20 million, and earnings after taxes amounted to $1,200,000. Total assets, as of the latest balance sheet, were $16 million. Mistral Yachts needs an additional $6.5 million to finance expansion during the current fiscal year. Given the worldwide growth in leisure activities, the interest in America’s Cup sailing and the fast new catamarans in particular, the firm anticipates additional outside capital needs in the years ahead.

B. Kemmerer Wines Ltd. Kemmerer is engaged in the production of many types of wines, and is developing a new winery in Central Otago. Since the firm sells to a multiple distributors and many of its products have won international awards, sales are relatively stable. The current price of the company’s shares, which are listed on the stock exchange, is $2.50 per share. The most recent earnings per share and dividends per share are $0.31 and $0.15, respectively. The rate of growth in sales, earnings, and dividends in the last few years has averaged 5%. Kemmerer has total assets of $40 million. Current liabilities, which consist primarily of accounts payable and accruals, are $2.8 million; long-term debt is $8.3 million; and ordinary equity totals $28.9 million. An additional $3.3 million of external funds is required to build and equip the new winery, and to supply the facility with working capital.

C. Orchard Fresh Canning Company. Orchard Fresh Canning Company is a private Waipukurau company with a large operation, purchasing peaches and other fruits from farmers in the Wairarapa, Hawkes Bay and Gisborne areas. Fruit is canned and sold on 60-day credit terms, largely to food wholesalers and small retail grocers in the lower North Island. The company’s plant and equipment have been partially financed by a mortgage loan, and this is the only long-term debt. Therefore, the company’s level of long-term debt is low. Raw materials (fruit) are purchased on terms calling for payment within 30 days of receipt of goods, but no discounts are offered. Because of the Heart Foundation’s regular campaigns to improve the quality of our diet, and the current programme to reduce obesity in the population, there has been an increase in the popularity of vegetables and fruits, and canned fruit sales have increased dramatically. To finance a higher level of output to take advantage of this increased demand, Orchard Fresh will need approximately $550,000.

D. Parson Healthcare Ltd. This firm is a major provider of healthcare and retirement villages for the ageing population. The company’s shares are widely held, actively traded and listed on the stock exchange. Recently, they have been trading in the range of $5.40-$6.60 a share. The latest 12 months’ earnings were $0.35 per share. The current dividend rate is 13 cents a share, and earnings, dividends and the price of the company’s shares have been growing at a rate of about 7% over the last few years. Parson’s debt ratio is currently 42%, versus 25% for other large healthcare providers. Other firms in the industry, on average, have been growing at a rate of about 5% a year, and their shares have been selling at a price-to-earnings ratio of about 15. Parson has an opportunity to expand its operations in a new location and requires $5 million in cash for the necessary land and development.

E. Silver Hill Mining Company. Silver Hill Mining needs $12 million to finance the acquisition of mineral rights to some land in the Thames area, and to pay for tests (surveys, core borings, magnetic aerial surveys, and other types of analyses) designed to determine whether the mineral deposits on this land warrant development. If the tests are favourable, the company will need a further $12 million. Silver Hill Mining’s ordinary shares are currently selling at $1.10 per share, while the Company is earning approximately $0.10 per share. Other firms in the industry sell at 8-13 times earnings. Silver Hill’s debt ratio is 30%, compared with an industry average of 35%. Total assets at the last balance sheet date were $120 million.

F. The Way Bowling Lane and Bar. Bud Greer is an avid ten-pin bowling fan. He has just returned from a holiday in the United States and has learned that a recently developed downtown shopping and entertainment centre has a lease available for the original, renovated building of the First National Bank of Waiwhetu. The bank outgrew the building in the late 1980s, and it would be ideal for a ten-pin bowling cum nightclub establishment. Greer knows the market well and has often noted the lack of a real entertainment centre in Waiwhetu. Greer believes that if he can obtain approximately $200,000 for the bar, bowling equipment and interior decoration, he can open a small but successful operation in the old building. His liquid savings total $50,000, so Greer needs an additional $150,000 to open the proposed centre.

G. GC Engineering Ltd. GC, a medium-sized engineering company specialising in the latest computerised technologies used in the engineering and building industries, is located in Pukekohe. Its sales distribution is approximately 30% for domestic contracts and 70% for export contracts. The company has been growing steadily in recent years, and the turnover, based on current research and development prospects, is expected to grow at a rate of 5-7% a year. Recent reports of several brokerage firms suggest that the firm’s rate of growth might be slowing because of the high price of fuel, the expected slowdown in large building projects start-ups and the high exchange rate of the New Zealand dollar. The company’s shares, which are traded on the stock exchange, are selling at 15 times earnings. This is slightly below the industry average of 17 times earnings. The company has assets of $35 million and a debt ratio of 25% (the industry average is 23%). GC needs an additional $10 million, over and above additions to retained earnings, to support the projected level of growth during the next 12 months.

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