Agri-Panel Inc. is a manufacturer of high-density fibreboard panels. The company, based in Manitoba, has been in business for nearly 28 years and is owned equally by two brothers, Derek and Alex Maise. Currently, there are 1,000,000 common shares outstanding. The company follows IFRS. Extracts from the financial statements are included in Appendix I. Agri-Panel blends agricultural fibre from crop waste, which is essentially free, with wood chips to form the panels. The product has a very good reputation in the market, so Agri- Panel can charge premium prices and achieve higher than average operating margins. The company is looking to upgrade its equipment, which will cost $40,000,000. The shareholders have agreed to use $5,000,000 of the company's existing cash and finance the remaining balance of $35,000,000. The CFO has narrowed it down to two lenders (Appendix II). In addition to the lenders, SLR Manufacturing Inc. (SLR), the manufacturer of the equipment, has offered to lease the equipment to Agri-Panel (Appendix III). You, CPA, work as an associate with Campbell and Associates LLP, a financial and business advisory firm. Derek and Alex have engaged your firm to assist them in assessing the financing alternatives. It is July 2, 2023, and you have been asked by your boss, Heather Larimer, to prepare a draft memo to Agri-Panel addressing the items below. Revenue Cost of sales Gross profit Appendix I Agri-Panel Inc. Excerpts from statement of profit and loss Operating expenses EBITDA Assets Cash Accounts receivable Finished inventory Raw materials Prepaid expenses Excerpts from statement of financial position As at June 30 (in $'000s) Property, plant, and equipment, net Total assets Liabilities Line of credit (Note) Payables and accruals For the year ended June 30 (in $'000s) Other liabilities Deferred tax liabilities Total liabilities Shareholders' equity Total liabilities and equity 2023 130,000 97,000 33,000 (14,000) 19,000 2023 11,200 16,000 26,000 3,000 1,000 57,200 35,600 92,800 14,000 26,000 40,000 900 1,100 42,000 50,800 92,800 Note: Line of credit from MNB committed five-year revolving credit facility with a fixed 5% interest rate secured by the accounts receivable and finished goods inventory Proposal 1: MNB secured term loan In addition to the existing line of credit, MNB has offered a term loan for up to $40 million (provided maximum limits and covenants are met) with the following terms and conditions: Appendix II Financing proposals five-year term loan 7% interest rate, payable annually maximum loan proceeds available: up to 50% net book value of property, plant, and equipment equal annual instalments of principal repayment of $7,000,000 due at end of each year first charge on all capital assets including land, building, and equipment Negative covenants for the credit line and the term loan facilities together: maximum debt leverage of 3.0:1 of EBITDA- defined as [(line of credit + secured term loan) / EBITDA] minimum debt service charge ratio of 1.8:1 - defined as [EBITDA / (interest + annual principal repayment)] Proposal 2: Hudson Bay Teachers' Union Pension Fund convertible bonds The Hudson Bay Teachers' Union Pension Fund (HBT) is interested in lending to Agri-Panel using convertible bonds. HBT has many investments in companies that process natural resources and is particularly interested in Agri-Panel's unique product. HBT believes that there is a large untapped global market for this process that uses crop waste. The convertible bonds (amount: $35,000,000) have the following terms and conditions: unsecured debentures 3% interest rate, payable annually five-year term . no annual principal repayments - all principal ($35,000,000) is due June 30, 2028 convertible at the holder's option into 20 shares per $1,000 any time after July 1, 2025 Task #2 Prepare a forecast of after-tax cash flows for fiscal 2024, 2025, and 2026 for each of the two financing proposals, assuming the following: Revenue increases 5% annually. Earnings before interest taxes depreciation and amortization (EBITDA) margin is 15%. Annual depreciation is $8,000,000 with equivalent annual capital cost allowance. The line of credit balance will remain at $14,000,000 for the forecast period. Annual capital expenditures are $3,000,000 for each year. Net working capital investments are $1,500,000 in fiscal 2024 and then increase 5% annually. Income tax rate is 25%. Assume that financing will be advanced in early July, and one year's worth of interest will be paid in fiscal 2024. Conclude on whether the company can comply with the loans' requirements for each of the years forecasted. Provide a recommendation to Agri-Panel as to which financing alternative is preferable, also considering the qualitative analysis provided in Task #1. Your response should be no longer than one page, excluding any Excel files.