Granite Apparel- Source of Funding

Presented to Mr. Kurt Sullivan Subject Source of funding From JMSB consultants Despina Papadopoulos Angela Christopoulos Mathieu Apuzzo AJ Kenth Date process 2007 Main Issues * Choosing the appropriate microbe of financing, between Initial public religious offering, farsighted end point debt or like sh atomic number 18s, to raise funds for the expansion of Granite robes. Recommendations * Granite lop should use an Initial Public Offering as a source for raising funds. Analysis Quantitative Initial Public Offering The woo of issuing common takes for your take note social club was found by adding the following expenses (APPENDIX ONE) bridgework Financing Rate ( yearly) 10. 25% Amount of Bridge Financing 50,000,000 season period 6 calendar months Yearly Interest Cost 2,562,500 Lump Sum egress Fee 4,000,000 be Issuance Costs 6,562,500 To cut back common sh ars is really expensive to underwrite and there ar all overly other colligate costs for a caller-up going pub lic. These costs abide be * More experienced accountants for monetary statements number and gritty internal configu proportionalityn * scrutinizeing fees * Dividends Much of the factors be above are very difficult to quantify, scarce using assumptions we could have an idea of the cost over a 5 grade basis to compare with preferred shares.First, lets husking a dividend cost, hoping the comp either does well and we throw out a 20% dividend rate with a growth of 25% in trades from 2007 2012. We get a farsighted a come in dividend amount to be 18. 82 million (APPENDIX ONE). Since dividends are not an obligation but they are a benefit for shareholder satisfaction, we have a range over a 5 year period of costs between 11. 5 million and 30. 4 million. These determine take into consideration many assumptions (g= 8%, b = 0. 80 and hard roe= 10. 55%) Total 5 year dividend 18. 82 million Audit fee (1M per year assumption) 5 million Fees/ Bridge Financing 6. 56 million Total 30 . 80 million Range 11. 5 30. 4 million Another factor to consider for an initial offering is the decrease in control for Taylor and the current shareholders. Before IPO After IPO Total Shares 20,000,000 26,000,000 Taylor will power 12,000,000 12,000,000 Percentage Ownership 60% 46. 15% If Mr. Taylor is comfortable losing inwardness control of his company with 46. 15% ownership (where control is 50%), the IPO can be a very attractive solution. If Mr. Taylor molds to keep wide-cut control of his company, he can either purchase himself more shares or the company could issue two types of common shares Non- right to vote and voting.Taylor Ownership 12,000,000 Percentage Ownership 50% Total Voting Shares 24,000,000 Total Non Voting Shares 2,000,000 Preferred Shares As suffern in APPENDIX THREE, the total cost of issuing preferred shares would be $30,200,000 over 5 years. Raised Capital 50,000,000 Dividend Yield 9% Annual Dividend (9% * 50,000,000) 4,500,000 Repurchase Premium 10% Face Value 55,000,000 Issuance Fees 2,700,000 5 year Dividends (4. 5M x 5) 22,500,000 Repurchase Premium 5,000,000 Total Cost 30,200,000 long-term Debt Long-term debt is the second source of financing the company has the option of adopting.Metropolitan aliveness approached Granite Apparel and was prepared to lend them 50 Million dollars at a fixed rate 2% higher than the long-term U. S exchequer yield. The term of the add was 10 years. Exhibit 6 illustrates the U. S treasury yields. Since the bringword has a 10 year term, we decided to select the 10 year Risk Free rate, which is 4. 56%. In total the following rate of the loan would amount to 6. 56%. In order to decide, which utility(a) is best suitable for the company, we essential find the cost associated with borrowing. In addition, we must also add the upfront fee of 1,800,000.The upfront fee is mensural by multiplying 200,000 common shares and the inventorying price of 9$. We assumed that the rank of the dissolute w as equal to 180,000,000 in order to use the 9$ line of credit price. We also assumed that the loan deliverments would be done monthly, which gave us a monthly settlement of 569,267. 46$. Appendix 2 is a loan amortization schedule and indicates the amount of use up and neat is included in each payment. The sum of all interest payments is equal to 18,312,099. If we take the total interest cost and the upfront fee the total cost of the loan would equal to 20,112,099.However it is also important to note that interest is tax deductible. The loan amortization schedule enabled us to find the PV of the tax shield of 79,712. 24$. In conclusion, the total cost of the debt option is equal to 20,032,386. 75$ We also wanted to note that paying 10% principal per year for 10 years on the loan is impossible. According to loan amortization schedule, the 10% yearly principal payment would start from year 6. For the first 5 years, most of the payment is attributed to interest, which decreases the principal portion of the payment.Performance and Ratios An important factor in deciding on which way to finance growth is how it affects your financial statements. Since these tools lead be the primary source for investors it is important have them appear significant (APPENDIX FOUR). If the company chooses an IPO, the following ratios would continue in the 2007 financial statements of Granite Apparel. Ratio exertion Granite Apparel Debt/Capital 15. 1% 31. 0% TIE 41. 2 57. 75 PE 22 12 ROE 18. 4% 14. 16% With an IPO the companys financial statements would look very strong.Its debt is already higher than the sedulousness average and therefore issuing common shares would decrease the jeopardy of the company. twain the Debt/Capital and TIE ratios express that strength. If the company chooses to issue debt, the following ratios would occur in the 2007 financial statements of Granite Apparel. Ratio Industry Granite Debt/Capital 15. 1 61. 52 TIE 41. 2 6. 47 ROE 18. 4 21. 94 The tr y of the company by issuing more debt would be extremely high and way above the industry averages. By demonstrating both Debt/Capital and TIE, we could see a large sum up in the companys risk which is not in the companys favor.They might be reevaluated as a riskier company and therefore would no longer be able to purchase at low interest. The ROE plays in favor, however, because the total Equity is divided among less shareholders. It looks good for investors but not for creditors. If the company chooses to issue preferred shares, the financial statements would look very similar to issuing an IPO. This occurs because the preferred shares would be schedule in the Equity section of the financial statements due to their ownership qualities. QualitativeGranite Apparel is faced with three financing mediums initial public offering, long term debt or preferred shares. In the decision process, it is important to weigh the benefits and shortcomings of each financing option. Initial Public Offering (IPO) Benefits * Increase in shareholder Capital * Increased wealth without dividing authority amongst partners * No dividend obligation on common shares. * Inexpensive method of financing. * Able to maintain control of the company as long as shareholders have less than 20% ownership Drawbacks Granite would need to undergo a thorough assessment of its operations, financial records and ratified situation by both Continental Securities and the securities bearing. * Three to six month due diligence process. * Minimum requirements in accordance to US generally accepted accounting principles system is very expensive to implement * Decisions based on stock price The public trading of the shares establishes a value for the company and sets a benchmark. This works in favor of the company as it is helpful in case the company is looking for an acquisition or merger. It also provides the share holders of the company with the present value of the shares.Furthermore, once the shares are traded, they carry a foodstuff value that is different from the book value depending on bring (volume traded) this can provide Granite with the incentive of offering stock options to employees as an added recompense. Additionally, the investors that are in the company have liquidity on their share of the company, however, if an investor should decide to redeem his portion the company is not stainlessly affected because the sale is completed on the trade. When a company issues common shares, there is no obligation to pay dividends.This can be an immense advantage for Granite as the company is in a growth phase and dividends can be limited in order to compete in an industry with bigger players. In turn, this also allows Granite to keep the cost low for the future. In addition, the firm will not go bankrupt if is not able to pay out dividends. More than frequently, watchfulnesss decisions may be effectuate by the market price of the shares and the feeling that they must get m arket recognition for the companys stock. Often, this can lead to bad decisions and consequently a correct in stock price.As the share price of Granite falls, may lose market confidence, decreased valuation of the company may affect lines of credits, secondary offering pricing, the companys dexterity to maintain employees, and the personal wealth of insiders and investors. Not to mention if Granite decides to issue most of its shares to the public it may be a target for a hostile takeover, evidently a loss of insider control. Long term Debt exploitation long term debt will allow granite apparel to immediately flummox the funds, however it will place both financial and operational standard covenants in effect. Operational Prohibited to surpass annual capital work out * Not allowed to postulate without authorization * Cannot change current executive compensation or dividends Financial * Limited to a borrowing to equity ratio of 1. 20 * No possibility to raise short or long term debt without authorization Using long term debt for Granite is very savage if the economy suffers and sales are down. Granite will still have to pay the interest on the principle loan without having the flexibility of acquiring other loan. When the interest payments are not distributed to debt holders, the firm may go bankrupt.As stated, If loot decrease it might be very high-risk to carry over 3. 57 million dollars in interest expense as an annual obligation. Moreover, in the event that Granite is presented with the opportunity to merge or outright acquire a competitor, the decision will have to pass through Metropolitan. This can lead to further complications and loss of decision making control for the management of Granite. Preferred Shares Although this method is cost effective, it can also confiscate the ability for management to take important decisions without approval from shareholders. Granite can redeem the shares at a ten percent premium only after atomic number 23 years * Shareholders have no voting right, but receive priority over dividends * Can be given voting rights if Granite does not pay for two consecutive years Similar to long term debt, preferred shares present the drawback for potential loss of control. For instance if there is an economic downswing and Granite is unable to issue payments for two consecutive years to its preferred shareholders, they are granted full voting rights and can potentially control the entire company.Preferred shares can either be placed in the equity or liability section of the balance sheet. In this particular scenario, the preferred shares would be in the equity section because they show evidence of ownership. For instance, if dividends are not paid for two years consecutive, they can exercise their voting rights and consequently allow them to decide on major business developments. attached the three financing methods, Granite would receive the necessary capital in time to fulfill their marketing needs. Given the economic state preferred shares are risky when considering the potential loss of control to the shareholders. Similarly, long term debt caries the interest risk warhead without possibility of acquiring a new loan. Conversely, initial public offering allows the flexibility to acquit capital at any point with the exchange of ownership and still allows the decisions to be made by the come along of directors. Although the net income on the expansion is not quantifiable, by the issuance of IPO, Granite remains protected from third party influence and control, interest burden and loss of decision control. Plan of Action Announce the plan to the visiting card of directors and wait for quorum approval or issuing an IPO * If Mr. Taylor and other board members are expressing worries about dilution of ownership, consider issuing two classes of shares non-voting and voting. * Contact the investing firm to find out potential differences for issuing two classes of shares * take in and find experienced accountants to prepare the financial statements in accordance to US GAAP for public companies since the company will go public * require an investment bank with a good reputation and expertise to advice and manage underwriting functions. Organize internally for high compliance in accordance to the securities commission Contact and find a reputable auditing firm (KPM, Deloitte, Price Waterhouse or Ernst Young) * File with the Securities and Exchange Commission. * Once the orison has been processed Granite Apparel should request its IPO on the stock exchange with firm commitment. * Once capital is certain (under firm commitment) and as quickly as possible, search for inventory locations.These locations should be prime, and in an area where Granite * Apparel can compete strongly with the major players. Time is important, since competitors are catching up to Granites sophisticated products. The company must enter quickly and efficiently into the market. * Pre pare for manufacturing increase to supply new stores. * The company should find new innovative products to keep it a step ahead from the competition and become first movers to gain customer loyalty.