BUSINESS ORGANIZATIONS

Gishma and Gyan graduated from UC in $2020$ with a master$$s degree in project management and public health respectively. They established a healthcare business in $2021.$ The business sources and distributes pharmaceutical products in the United States. Gishma and Gyan have been partners for two years sharing profits and losses equally. Their partnership business has been very successful, as they agree on most business$-$related issues. One disagreement, however, is about the legal form of their business organization. Gishman wants Gyan to agree to changing the business from a partnership to a corporation. Gishman believes that there is no major problem with corporations and incorporating the business would attract investors to help them raise large capital to expand the business internationally. Gyan thinks otherwise and believes that the business should remain a partnership to avoid any agency problems. Gishma and Gyan need your help to address the following questions:

$1.$ What are the advantages and disadvantages of changing the business organization from a partnership to a corporation?

$2.$ Limited partnerships, limited liability companies, and corporations enjoy limited liability, but Gishma and Gyan are not very sure what that means. Explain the concept of limited liability to Gishma and Gyan.

$3.$ Assuming Gishma and Gyan have invested $$6\mathrm{.}0$ million in the business $($assuming the $$6\mathrm{.}0$ million is equal to the market value of their assets$).$ If the company happens to declare bankrupt and has $$8$ million in unpaid debts. Explain the nature of payments, if any, by Gishma and Gyan in each of the following situations:

i$.$ The company continues as a partnership $($state the amount of money each partner is likely to pay if they share profits and losses equally$).$

ii$.$ The company changes to a corporation $($state the amount of money each of them is likely to pay$)$

$4.$ If Gishma and Gyan decide to go for a corporation, they would like to consider alternative methods of issuing new securities in the capital market $($i$.$e$.,$ raising long$-$term funds$)$ and the costs associated with issuing such securities$.$ They can raise funds through either a public issue or a private issue:

i$.$ Distinguish between a public issue and a private issue of raising long$-$term funds. Give two examples of each.

ii$.$ Identify five examples of flotation costs associated with issuing securities in financial markets that Gishma and Gyan must consider. The flotation cost should include both direct and indirect costs for full points.

PART $2.$ FINANCIAL STATEMENT ANALYSIS AND FINANCIAL MODELS

Gishma and Gyan want to use financial planning models to prepare a projected $($pro forma$)$ financial statement to determine the profitability and financial health of the business for the next four years if they go public. The income statement ending Dec $31,2023,$ and the company$$s balance sheet as of Dec $31,2023,$ are shown below. Use the financial statement to answer the following questions:

INCOME STATEMENT

$($$millions$)$

Total operating revenues

$1,262$

Less expenses

$1,042$

Less depreciation

$90$

Earnings before interest and taxes $($EBIT$)$

$130$

Less interest

$19$

Net income before taxes

$111$

Less taxes @ $11\mathrm{.}71\%$

$13$

Net income

$98$

$*$Dividend is $$60$m

$*$Retained earnings is $$38$m

BALANCE SHEET

Assets:

Cash

$25$

Other current assets

$88$

Net Fixed Assets

$30$

Total Assets

$143$

Liabilities and Equities:

Accounts payable

$35$

Long$-$term debt

$48$

Stockholders' Equity

$60$

Total Liabilities & Equities

$143$

$5.$ What was the company$$s profit for $2023?$

$6.$ Compute the following three profitability ratios and explain to Gishma and Gyan whether the business did better or worse in $2023$ relative to the performance of the industry.

i$.$ Profit margin

ii$.$ Return on assets

iii. Return on equity, and

iv$).$ Also, calculate and explain operating cash flow.

The profitability ratios for the industry in $2023$ are as follows:

Industry ratios

Profit margin

$7\mathrm{.}07\%$

Return on assets

$60\mathrm{.}00\%$

Return on equity

$42\mathrm{.}50\%$

Current ratio $3$ times

Total debt ratio $60\mathrm{.}0\%$

According to financial analysts, the industry performed better than expected despite the covid$-19$ pandemic.

$7.$ The business$$ current assets comprise of cash and other current assets whilst its current liabilities comprise only of accounts payable. Compute and explain the current ratio and total debt ratio for the business in $2023.$

$8.$ Gishma believes that if the business goes public a large amount of capital can be raised to expand the business to maximize the value of the firm. Assuming the business projects a $32\%$ increase in operating revenue $($sales$)$ per year, what will be the anticipated operating revenue in three years from now $($i$.$e$.,$ in $2026)?$

$9.$ If net income