For the Burton Sensors, Inc. case address the following questions:

1. Should Amy Marshall purchase the thermowell machines? In calculating the WACC, use 5.8% as the equity risk premium.

2. Should Amy Marshall accept the offer of the private investor and issue new equity? How does the deal affect Burtons existing shareholders? What is the effect of the issuance on Burtons balance sheet?

Exhibit 1 Burton Sensors Consolidated Balance Sheets (Actual/Projected), 2014-2021 (Fiscal years ending December 31, U.S. $000s) 2014A 2015A 2016A 2017E 2018 E 2019E 2020E 2021E Cash and equivalents Accounts receivable Inventory Other current assets Current assets 279.7 251.3 1,552.5 1,894.0 1,672.9 2,096.7 253.5 311.8 3,758.6 4,553.8 304.3 2,315.4 2,436.3 371.9 5,427.8 371.3 2,824.9 2,997.9 4612 6,655.3 359.7 3,276.9 3,477.6 535.0 7,649.2 368.6 3,539.1 3,755.8 577.8 8,241.3 437.5 3,751.4 3,981.1 612.5 8,782.5 484.6 3,976.5 (24.5% of projected sales) 4,220.0 (26% of projected sales) 649.2 (4% of projected sales) 9,330.3 Net PP&E Total assets 3,874.0 4,293.3 4,654.1 4,847.8 7,632.6 8,8472 10,082.0 11,503.2 4,938.8 12,588.0 4,875.2 13,116.5 4,789.5 13,572.0 4,698.6 14,028.9 1,733.4 895.6 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 773.1 935.3 4182 491.0 3,020.0 3,880.0 351.9 360.7 150.0 150.0 4,713.2 5,817.0 1,153.0 5672 4,580.0 406.2 150.0 6,856.5 1,383.6 714.9 5,080.0 527.9 150.0 7,856.4 1,605.0 8293 5,230.0 590.1 150.0 8,404.4 4,930.0 624.0 150.0 1,837.4 949.3 4,530.0 658.3 150.0 8,125.1 1,947.7 (12% of projected sales) 1,006.3 (6.2% of projected sales) 4,030.0 702.5 150.0 7,836.5 8,333.1 1,980.0 1,830.0 6,693.2 7,647.0 1,680.0 8,536.5 1,530.0 9,386.4 1380.0 9,784.4 1,230.0 9,563.1 1,080.0 9,205.1 930.0 8,766.5 939.4 1,200.1 7,632.6 8,847.2 1,545.5 10,082.0 2,116.8 11,503.2 2,803.6 12,588.0 3,553.4 13,116.5 4,366.9 5,262.4 13,572.0 14,028.9 0.49 Bank loan/ (receivables + inventory) Liabilities/book equity Total interest-bearing debt/book equity 0.94 7.1x 5.5x 0.97 6.4x 4.9x 0.96 5.5x 4.1x 0.87 4.4x 3.2x 0.77 3.5x 2.4x 0.68 2.7x 1.8x 0.59 2.1x 1.3x 1.7x 1.0x Exhibit 2 Burton Sensors Consolidated Income Statements (Actual/Projected), 20142021 (Fiscal years ending December 31; U.S. $000s) 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 6,336.9 2,686.8 3,650.1 7,794.4 3,359.4 4,435.0 9,298.7 4,035.6 5,263.1 11,530.4 4,958.1 6,572.3 13,375.3 5,751.4 7,623.9 14,445.3 6,211.5 8,233.8 15,312.0 6,584.2 8,727.8 16,230.7 6,979.2_ (43% of projected sales) 9,251.5 Net sales COGS Gross profit SG&A expense R&D expense Depreciation and amortization Net interest expense (income)* Pretax income (loss) Income taxes Net income Number of common shares (thousands) Earnings per share Cash dividend per share 2,230.6 697.1 98.9 247.5 376.1 2,790.4 857.4 102.9 283.3 401.1 3,263.8 1,022.9 122.7 322.3 531.3 4,035.6 1,153.0 152.2 352.6 878.9 4,681.3 1,337.5 176.6 371.8 1,056.7 5,055.8 1,444.5 208.0 371.8 1,153.6 5,359.2 1,531.2 238.9 347.1 1,251.5 5,680.7 (35% of projected sales) 1,623.1 (10% of projected sales) 253.2 316.8 1,377.7 482.2 (35% of projected EBT) 895.5 131.6 244.4 140.4 260.7 186.0 345.4 307.6 571.3 369.8 686.8 403.8 749.9 438.0 813.5 1,500 0.16 0 1,500 0.17 0 1,500 0.23 0 1,500 0.38 1,500 0.46 0 1,500 0.50 0 1,500 0.54 0 1,500 0.60 0 *Burton pays an average of 5.5% interest on all interest-bearing income. Exhibit 3 Burton Sensors Consolidated Statement of Cash Flows (Actual/Projected), 2014-2021 (Fiscal years ending December 31, U.S. $000s) 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 244.4 98.9 320.0 289.8 55,6 120.3 30.2 (163.9) (335.5) 260.7 102.9 341.5 423.7 58.3 162.2 72.8 8.8 (216.1) 345.4 122.7 421.3 339.6 60.2 217.7 76.2 45.6 (13.5) 571.3 152.2 509.6 561.6 89.3 230.6 147.7 121.7 62.9 686.8 176.6 452.0 479.7 73.8 221.4 114.4 62.2 255.9 749.9 208.0 2622 278.2 42.8 128.4 66.3 33.9 603.4 813.5 238.9 212.3 225.3 34.7 104.0 53.7 34.3 772.0 895.5 253.2 225.1 238.9 36.7 110.2 57.0 44.2 859.4 Operating Activities Net income Depreciation and amortization Less: increase (decrease) in accounts receivable Less: increase (decrease) in inventory Less: increase (decrease) in other current assets Add: increase (decrease) in accounts payable Add: increase (decrease) in accrued expenses Add: increase (decrease in deferred taxes Operating activities - net cash flow Investing Activities Less: Cap Ex Investing activities - net cash flow Financing Activities Add: changes in bank borrowings Add: long-term debt net issuance Add: net issuance of common stock Less: cash dividend Financing activities -net cash flow Total net cash flow (354.9) (354.9) (522.2) (483.5) (5222) (483.5) (345.9) (267.5) (345.9) (267.5) (144.5) (144.5) (153.1) (153.1) (162.3) (162.3) (300.0) 800.0 (150.0) (150.0) 0.0 860.0 (150.0) 0.0 0.0 710.0 700.0 (150.0) 0.0 0.0 550.0 500.0 (150.0) 0.0 0.0 350.0 150.0 (150.0) 0.0 0.0 0.0 (400.0) (150.0) 0.0 0.0 (550.0) 0.0 0.0 (450.0) (500.0) (150.0) 0.0 0.0 (650.0) 0.0 650.0 (40.3) (28.4) 53.0 67.0 (11.6) 8.9 68.9 47.1 Beginning cash Change in cash Ending cash 320.0 (40.3) 279.7 279.7 (28.4) 251.3 251.3 53.0 304.3 304.3 67.0 371.3 371.3 (11.6) 359.7 359.7 8.9 368.6 368.6 68.9 437.5 437.5 47.1 484.6 Purchasing New Thermowell Machines The thermowell was a major part of the RTD. There were many advantages to installing a thermowell with the sensor. First, in providing a physical barrier between the production process and the sensing element, the thermowell protected production from corrosive processes, extremely high temperatures, and high pressure. Second, it allowed the RTD to be removed and serviced without interfering with the production process. Because the temperature had to travel through the metal of the thermowell before reaching the RTD, however, the RTD sensor's response time was reduced. The thermowell's quality and design thus affected the RTD's quality. Most thermowells were made from carbon steel, stainless steel, nickel, and brass. Other chemical compounds such as silicon carbide and silicon nitride were sometimes used to produce thermowells. The cost of thermowells was a major component of the production cost of sensors. Burton's thermowell equipment allowed it to fulfill only half of its production needs, so the company had to purchase the rest of the equipment from other manufacturers. During 2016, Burton spent $1.4 million to purchase thermowells. Marshall contacted a large thermowell machinery manufacturer and learned that a purchase of four new thermowell machines for $600,000 would have enabled Burton to manufacture all the thermowells that it purchased in 2016. The equipment would have an economic life of seven years. Marshall HARVARD BUSINESS SCHOOL BRIEFCASES 3 estimated that Burton would need to hire two operators to run the new machines for $170,000 annually. Costs for buying additional materials and renting warehouse space were estimated at $780,000 annually. Marshall also estimated that if Burton started manufacturing additional thermowells, its average net working capital needs would increase immediately by $650,000 due to the increase in inventory arising from in-house production. The working capital would remain at that level during the equipment's life and would return to normal levels afterward. 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 tojoin 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. $000s) 2014A 2015A 2016A 2017E 2018 E 2019E 2020E 2021E Cash and equivalents Accounts receivable Inventory Other current assets Current assets 279.7 251.3 1,552.5 1,894.0 1,672.9 2,096.7 253.5 311.8 3,758.6 4,553.8 304.3 2,315.4 2,436.3 371.9 5,427.8 371.3 2,824.9 2,997.9 4612 6,655.3 359.7 3,276.9 3,477.6 535.0 7,649.2 368.6 3,539.1 3,755.8 577.8 8,241.3 437.5 3,751.4 3,981.1 612.5 8,782.5 484.6 3,976.5 (24.5% of projected sales) 4,220.0 (26% of projected sales) 649.2 (4% of projected sales) 9,330.3 Net PP&E Total assets 3,874.0 4,293.3 4,654.1 4,847.8 7,632.6 8,8472 10,082.0 11,503.2 4,938.8 12,588.0 4,875.2 13,116.5 4,789.5 13,572.0 4,698.6 14,028.9 1,733.4 895.6 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 773.1 935.3 4182 491.0 3,020.0 3,880.0 351.9 360.7 150.0 150.0 4,713.2 5,817.0 1,153.0 5672 4,580.0 406.2 150.0 6,856.5 1,383.6 714.9 5,080.0 527.9 150.0 7,856.4 1,605.0 8293 5,230.0 590.1 150.0 8,404.4 4,930.0 624.0 150.0 1,837.4 949.3 4,530.0 658.3 150.0 8,125.1 1,947.7 (12% of projected sales) 1,006.3 (6.2% of projected sales) 4,030.0 702.5 150.0 7,836.5 8,333.1 1,980.0 1,830.0 6,693.2 7,647.0 1,680.0 8,536.5 1,530.0 9,386.4 1380.0 9,784.4 1,230.0 9,563.1 1,080.0 9,205.1 930.0 8,766.5 939.4 1,200.1 7,632.6 8,847.2 1,545.5 10,082.0 2,116.8 11,503.2 2,803.6 12,588.0 3,553.4 13,116.5 4,366.9 5,262.4 13,572.0 14,028.9 0.49 Bank loan/ (receivables + inventory) Liabilities/book equity Total interest-bearing debt/book equity 0.94 7.1x 5.5x 0.97 6.4x 4.9x 0.96 5.5x 4.1x 0.87 4.4x 3.2x 0.77 3.5x 2.4x 0.68 2.7x 1.8x 0.59 2.1x 1.3x 1.7x 1.0x Exhibit 2 Burton Sensors Consolidated Income Statements (Actual/Projected), 20142021 (Fiscal years ending December 31; U.S. $000s) 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 6,336.9 2,686.8 3,650.1 7,794.4 3,359.4 4,435.0 9,298.7 4,035.6 5,263.1 11,530.4 4,958.1 6,572.3 13,375.3 5,751.4 7,623.9 14,445.3 6,211.5 8,233.8 15,312.0 6,584.2 8,727.8 16,230.7 6,979.2_ (43% of projected sales) 9,251.5 Net sales COGS Gross profit SG&A expense R&D expense Depreciation and amortization Net interest expense (income)* Pretax income (loss) Income taxes Net income Number of common shares (thousands) Earnings per share Cash dividend per share 2,230.6 697.1 98.9 247.5 376.1 2,790.4 857.4 102.9 283.3 401.1 3,263.8 1,022.9 122.7 322.3 531.3 4,035.6 1,153.0 152.2 352.6 878.9 4,681.3 1,337.5 176.6 371.8 1,056.7 5,055.8 1,444.5 208.0 371.8 1,153.6 5,359.2 1,531.2 238.9 347.1 1,251.5 5,680.7 (35% of projected sales) 1,623.1 (10% of projected sales) 253.2 316.8 1,377.7 482.2 (35% of projected EBT) 895.5 131.6 244.4 140.4 260.7 186.0 345.4 307.6 571.3 369.8 686.8 403.8 749.9 438.0 813.5 1,500 0.16 0 1,500 0.17 0 1,500 0.23 0 1,500 0.38 1,500 0.46 0 1,500 0.50 0 1,500 0.54 0 1,500 0.60 0 *Burton pays an average of 5.5% interest on all interest-bearing income. Exhibit 3 Burton Sensors Consolidated Statement of Cash Flows (Actual/Projected), 2014-2021 (Fiscal years ending December 31, U.S. $000s) 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 244.4 98.9 320.0 289.8 55,6 120.3 30.2 (163.9) (335.5) 260.7 102.9 341.5 423.7 58.3 162.2 72.8 8.8 (216.1) 345.4 122.7 421.3 339.6 60.2 217.7 76.2 45.6 (13.5) 571.3 152.2 509.6 561.6 89.3 230.6 147.7 121.7 62.9 686.8 176.6 452.0 479.7 73.8 221.4 114.4 62.2 255.9 749.9 208.0 2622 278.2 42.8 128.4 66.3 33.9 603.4 813.5 238.9 212.3 225.3 34.7 104.0 53.7 34.3 772.0 895.5 253.2 225.1 238.9 36.7 110.2 57.0 44.2 859.4 Operating Activities Net income Depreciation and amortization Less: increase (decrease) in accounts receivable Less: increase (decrease) in inventory Less: increase (decrease) in other current assets Add: increase (decrease) in accounts payable Add: increase (decrease) in accrued expenses Add: increase (decrease in deferred taxes Operating activities - net cash flow Investing Activities Less: Cap Ex Investing activities - net cash flow Financing Activities Add: changes in bank borrowings Add: long-term debt net issuance Add: net issuance of common stock Less: cash dividend Financing activities -net cash flow Total net cash flow (354.9) (354.9) (522.2) (483.5) (5222) (483.5) (345.9) (267.5) (345.9) (267.5) (144.5) (144.5) (153.1) (153.1) (162.3) (162.3) (300.0) 800.0 (150.0) (150.0) 0.0 860.0 (150.0) 0.0 0.0 710.0 700.0 (150.0) 0.0 0.0 550.0 500.0 (150.0) 0.0 0.0 350.0 150.0 (150.0) 0.0 0.0 0.0 (400.0) (150.0) 0.0 0.0 (550.0) 0.0 0.0 (450.0) (500.0) (150.0) 0.0 0.0 (650.0) 0.0 650.0 (40.3) (28.4) 53.0 67.0 (11.6) 8.9 68.9 47.1 Beginning cash Change in cash Ending cash 320.0 (40.3) 279.7 279.7 (28.4) 251.3 251.3 53.0 304.3 304.3 67.0 371.3 371.3 (11.6) 359.7 359.7 8.9 368.6 368.6 68.9 437.5 437.5 47.1 484.6 Purchasing New Thermowell Machines The thermowell was a major part of the RTD. There were many advantages to installing a thermowell with the sensor. First, in providing a physical barrier between the production process and the sensing element, the thermowell protected production from corrosive processes, extremely high temperatures, and high pressure. Second, it allowed the RTD to be removed and serviced without interfering with the production process. Because the temperature had to travel through the metal of the thermowell before reaching the RTD, however, the RTD sensor's response time was reduced. The thermowell's quality and design thus affected the RTD's quality. Most thermowells were made from carbon steel, stainless steel, nickel, and brass. Other chemical compounds such as silicon carbide and silicon nitride were sometimes used to produce thermowells. The cost of thermowells was a major component of the production cost of sensors. Burton's thermowell equipment allowed it to fulfill only half of its production needs, so the company had to purchase the rest of the equipment from other manufacturers. During 2016, Burton spent $1.4 million to purchase thermowells. Marshall contacted a large thermowell machinery manufacturer and learned that a purchase of four new thermowell machines for $600,000 would have enabled Burton to manufacture all the thermowells that it purchased in 2016. The equipment would have an economic life of seven years. Marshall HARVARD BUSINESS SCHOOL BRIEFCASES 3 estimated that Burton would need to hire two operators to run the new machines for $170,000 annually. Costs for buying additional materials and renting warehouse space were estimated at $780,000 annually. Marshall also estimated that if Burton started manufacturing additional thermowells, its average net working capital needs would increase immediately by $650,000 due to the increase in inventory arising from in-house production. The working capital would remain at that level during the equipment's life and would return to normal levels afterward. 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 tojoin 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