Micro Tiles Limited Case 3: Finding Funding One of Robert's tasks as president of Micro Tiles was to raise funds from investors to finance the growth of the company and the $2.0 million project he expected to start operating in 2016. Micro Tiles required a $1.5 million investment in non-current assets and $300,000 in working capital (inventories and trade receivables) also in year 2016. Robert was now prepared to meet potential investors (shareholders and lenders) and present them with the project's business plan and financial statements. Before approaching lenders, Robert decided to raise funds from several business friends within the community. Some of these business people had known Bill Madden for years and considered him an honest, dedicated, and competent businessman. When they examined the business plan, they were confident about the reliability of the planning assumptions and the figures that made up the financial statements. They were impressed with the project's return. Several of them were willing to invest $400,000 in capital shares in the company. Robert, Bill, and Harry invested $150,000 of their own money. In total, Micro Tiles raised $550,000 in capital shares. Robert's biggest challenge was to raise money from lenders. the company's financial needs were $1.8 million made-up as follows: Non-current assets$ 1,500,000 Inventories 200,000 Trade receivables 100,000 Total$ 1,800,000 Robert negotiated an increase in trade credit from different suppliers in the amount of $140,000. Suppliers extended additional credit to Micro Tiles in view of its excellent credit standing. Robert also required $150,000 short-term borrowings to finance a portion of the inventories and trade receivable accounts and had no problems obtaining this loan. Now that Robert had obtained a firm $550,000 amount from friends as ownership capital and $290,000 for short-term borrowings ($150,000 line of credit and $140,000 from suppliers), he was prepared to approach the local banker to raise the rest of his financial requirements. He was hoping to obtain $960,000 bank financing for the purchase of the non-current assets; a $750,000 long-term borrowings and an additional $210,000 amount. When the branch manager examined the non-current assets requirements (land, buildings, machinery/equipment), he felt that the value of the assets was adequate collateral for lending the $750,000 amount. That represented 50% of the value of the assets. However, the branch manager had reservations about lending the other $210,000. He had to submit the loan proposal to the company's regional branch for review and approval. The breakdown of the various sources of financing required is as follows: Sources Amount Percentage Short-term borrowings $ 150,000 9% Long-term borrowings 750,000 45% Additional long-term loan 210,000 13% Equity 550,000 33% Sub-total 1,660,000100 100% Trade credit 140,000 Total financial needs $1,800,000 After several weeks, the branch manager met with Robert and informed him that the bank would extend the extra $210,000. The fact that Micro Tiles was a good credit risk and that its debt to total assets ratio for the year 2015 had improved substantially, the bank was prepared to use some of the company's existing assets as collateral. The bank would charge 10.5% for the short-term borrowings, 9.5% for the mortgage and 10% for the $210,000 amount. The shareholders were seeking a 15% return on their investment. Case Assignments 1. On the basis of the above information, calculate the company's weighted average cost of capital. 2. Evaluate the company's credit on the basis of the C's of credit. 3. What do you think about the various sources and forms of financing that could have been made available to Micro Tiles for financing its project