Case Study Debt Finance

DEBT CAPITAL

• Jonathan has to approach the bank for an additional loan of $286,000 on behalf of the company
• What information will the bank need?
• Julie asks you the following questions:
• Arrange for the paper work to appoint Glenn as a director and arrange for the transfer of the 5% of shares from Julie to Glenn if appropriate.
• What are the best options for the company to acquire the funds?
• What are the benefits and disadvantages of each option?
• What if the company issues shares to raise funds, what does Julie need to consider to retain control of the company?
• If the company makes a profit from trading does it have to pay the amount out as a dividend to all the shareholders?
• What is a debenture?
• Why does the bank want a security for any loan?
• What is a personal guarantee?
• You prepare draft financial accounts for Bloomingdale Florists Pte Ltd showing the above acquisitions.
• The financial accounts show the following
• Stock of flowers and accessories of $87,000
• Trade debtors of $95,000 (all due within 60 days at the latest)
• Shop fixtures and fittings $15,000 (at written down value)
• Café business $250,000 (at current valuation)
• Shop $636,000 (at current valuation)
• Total assets are worth $1,083,000
• There is a current mortgage to ANZ  Bank secured over the house of $160,000 for the existing overdraft
• A debenture of $286,000 secured over the shop, equipment, stock and trade debtors.
• Trade creditors are $25,000
• Bank overdraft $92,000
• Unpaid superannuation for staff is $5,890
• Total liabilities is $568,890
• This leaves net assets of $514,110  being:
• Share capital $1,000
• Accumulated profits of $513,110
•  Julie, Jonathan and Glenn are now the ordinary shareholders of the company. Julie owns 90% of the company, Jonathan 5% and Glenn 5%.
• This was the result of Julie transferring 5% to Glenn.
• What are the consequences for Julie and Glenn?
• Glenn has also been appointed as a director to represent the interest of his family who hold $600,000 worth of preference shares in the company. His family hold their shares through a company (called Tiger Lily Investments Pte Ltd) as trustee for the Tiger Lily Family Trust.
• You have completed the paper work to transfer the shares from Julie to Glenn, appoint Glenn as a director and resign Christopher as the alternate director now that Jonathan is back.
• You have also issued the preference shares to Tiger Lily Investments Pte Ltd
• Under the terms of the issue the preference shareholders get 5.5% dividends every year non-cumulative.
• The shares are to be repaid in 5 years’ time.
• The acquisition of the café in Hawthorn and the new shop are going fine and profits seem to be improving.
• Given this Jonathan suggests at a board meeting of the directors that he and Julie should be paid a bonus of $150,000 each.