Based on the background, Should Marshall accept the offer of the private investor and issue new equity? To answer this question, consider how the deal will affect Burtons existing shareholders and
Burtons balance sheet?
Raising Capital by Issuing New Common Stock Marshall knew that Burton had to raise additional equity capital to sustain its projected sales growth while satisfying the covenants of its bank loan. She felt that Burton would have difficulty retaining existing customers and attracting new ones if it did not have enough inventory to meet the potential increase in customer orders. She was also concerned that restrictions on accepting new orders would make key sales personnel lose confidence in the company's ability to grow, and they could leave to join competitors. Burton also needed capital to finance its ongoing R&D for new product development to stay competitive and make improvements to existing production facilities. Burton's stock was traded on the over-the-counter (OTC) market. The average price in the first two months of 2017 had been $4.75. Given how thin the market was for its shares, the equity beta was challenging to estimate. Marshall and her family owned most of Burton's shares. The company's remaining equity was held primarily by its employees and other retail investors. Raising equity capital through stock issuance in the OTC market seemed unlikely. After a private investor approached Marshall and offered to acquire 450,000 shares of the company at $3.50 per share, Marshall approached a friend at a large financial services firm for advice. She was told that it would be very difficult for Burton to sell enough stock directly to the market for more than $3.50 a share. It seemed that the only realistic prospect for raising new equity capital would be to accept the investor's offer. To close the deal, Marshall would also need to pay 50,000 shares to the consulting firm that would broker the deal. Exhibit 1 Burton Sensors Consolidated Balance Sheets (Actual/Projected), 2014-2021 (Fiscal years ending December 31; U.S. 5000s) Cash and equivalents Accounts receivable Inventory Other current assets Current assets (24.5% of projected sales) (26% of projected sales) (4% of projected sales) Net PP&E Total assets 2014A 279.7 1,552.5 1,672.9 253.5 3,758.6 3,874,0 7,632.6 773. 1 418.2 3,020.0 351. 9 150.0 4,713.2 1,980.0 6,693.2 939.4 7,632.6 Accounts payable Accrued expenses Bank loans Deferred taxes Long-term debt, current portion Current Liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and equity 2015A 251. 3 1,894.0 2,096.7 311.8 4,553. 8 4,293, 3 8.8472 9 35.3 491.0 3,880. 0 360. 7 150.0 5,817,0 1,830.0 7,647.0 1,200.1 3,847.2 2016A 3 04.3 2,3154 2,436,3 371. 9 5,427.8 4,654.1 10,0520 1,153.0 567.2 4 ,580.0 406.2 150.0 6,856,5 1,680.0 8,536,5 1,545.5 10,082.0 2017 371.3 2,824,9 2,997.9 4 61.2 6,655,3 4.847.8 11 503,2 1,383.6 714.9 5,080.0 527.9 150.0 7,856.4 1.530.0 9,386,4 2,116.8 11,503.2 2018 359.7 3,276.9 3,477,6 535.0 7,649.2 4,938. 8 12,589.0 1,605.0 829.3 5,230.0 590. 1 150.0 8,4044 1,380.0 9,7844 2,803.6 12,588.0 2019 368.6 3,539.1 3,755.8 577.8 8,241. 3 4,875. 2 13,116,5 1,733.4 895.6 4,930.0 624.0 150.0 8,333.1 1,230.0 9,563,1 3,553.4 13,116,5 2020 4375 3,7514 3,981. 1 6125 8,7825 4.789.5 13,572 0 1,8374 949.3 4,530.0 658.3 150.0 8,125,1 1,080.0 9,205.1 4,366.9 13,572,0 2021E 484.6 3,976,5 4,220.0 649.2 9,330.3 4,698.6 14,028.9 1,947.7 1,006,3 4,030.0 702.5 150.0 7,836,5 930.0 3,766,5 5,262.4 14,028.9 (12% of projected sales) (6.2% of projected sales) 0.96 0.77 0.68 Bank loan/(receivables + inventory) Liabilities/book equity Total interest-bearing debt/book equity 0.94 71x 0.59 2.1x 5.5x 0.87 4.4% 3.2% 6.4 4.9 0.49 1.7% 1.0 5.5x 41x Raising Capital by Issuing New Common Stock Marshall knew that Burton had to raise additional equity capital to sustain its projected sales growth while satisfying the covenants of its bank loan. She felt that Burton would have difficulty retaining existing customers and attracting new ones if it did not have enough inventory to meet the potential increase in customer orders. She was also concerned that restrictions on accepting new orders would make key sales personnel lose confidence in the company's ability to grow, and they could leave to join competitors. Burton also needed capital to finance its ongoing R&D for new product development to stay competitive and make improvements to existing production facilities. Burton's stock was traded on the over-the-counter (OTC) market. The average price in the first two months of 2017 had been $4.75. Given how thin the market was for its shares, the equity beta was challenging to estimate. Marshall and her family owned most of Burton's shares. The company's remaining equity was held primarily by its employees and other retail investors. Raising equity capital through stock issuance in the OTC market seemed unlikely. After a private investor approached Marshall and offered to acquire 450,000 shares of the company at $3.50 per share, Marshall approached a friend at a large financial services firm for advice. She was told that it would be very difficult for Burton to sell enough stock directly to the market for more than $3.50 a share. It seemed that the only realistic prospect for raising new equity capital would be to accept the investor's offer. To close the deal, Marshall would also need to pay 50,000 shares to the consulting firm that would broker the deal. Exhibit 1 Burton Sensors Consolidated Balance Sheets (Actual/Projected), 2014-2021 (Fiscal years ending December 31; U.S. 5000s) Cash and equivalents Accounts receivable Inventory Other current assets Current assets (24.5% of projected sales) (26% of projected sales) (4% of projected sales) Net PP&E Total assets 2014A 279.7 1,552.5 1,672.9 253.5 3,758.6 3,874,0 7,632.6 773. 1 418.2 3,020.0 351. 9 150.0 4,713.2 1,980.0 6,693.2 939.4 7,632.6 Accounts payable Accrued expenses Bank loans Deferred taxes Long-term debt, current portion Current Liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and equity 2015A 251. 3 1,894.0 2,096.7 311.8 4,553. 8 4,293, 3 8.8472 9 35.3 491.0 3,880. 0 360. 7 150.0 5,817,0 1,830.0 7,647.0 1,200.1 3,847.2 2016A 3 04.3 2,3154 2,436,3 371. 9 5,427.8 4,654.1 10,0520 1,153.0 567.2 4 ,580.0 406.2 150.0 6,856,5 1,680.0 8,536,5 1,545.5 10,082.0 2017 371.3 2,824,9 2,997.9 4 61.2 6,655,3 4.847.8 11 503,2 1,383.6 714.9 5,080.0 527.9 150.0 7,856.4 1.530.0 9,386,4 2,116.8 11,503.2 2018 359.7 3,276.9 3,477,6 535.0 7,649.2 4,938. 8 12,589.0 1,605.0 829.3 5,230.0 590. 1 150.0 8,4044 1,380.0 9,7844 2,803.6 12,588.0 2019 368.6 3,539.1 3,755.8 577.8 8,241. 3 4,875. 2 13,116,5 1,733.4 895.6 4,930.0 624.0 150.0 8,333.1 1,230.0 9,563,1 3,553.4 13,116,5 2020 4375 3,7514 3,981. 1 6125 8,7825 4.789.5 13,572 0 1,8374 949.3 4,530.0 658.3 150.0 8,125,1 1,080.0 9,205.1 4,366.9 13,572,0 2021E 484.6 3,976,5 4,220.0 649.2 9,330.3 4,698.6 14,028.9 1,947.7 1,006,3 4,030.0 702.5 150.0 7,836,5 930.0 3,766,5 5,262.4 14,028.9 (12% of projected sales) (6.2% of projected sales) 0.96 0.77 0.68 Bank loan/(receivables + inventory) Liabilities/book equity Total interest-bearing debt/book equity 0.94 71x 0.59 2.1x 5.5x 0.87 4.4% 3.2% 6.4 4.9 0.49 1.7% 1.0 5.5x 41x
