PART I: Long-Term Sources and Cost of Capital

CASE STUDY:

You have been provided the case study for Lady M Confections, a specialty cake business. Assume you are working for this company in the Finance Department. Using the case study information and the commentary provided below, please answer the following questions.

Lets assume Lady M would like to expand into Vancouver. They plan on purchasing a warehouse with retail storefront. They have found an existing property with a building that they plan to renovate and add on to. The property they are buying is 2 acres of land, which includes a warehouse and parking, but no retail store front; this will need to be constructed. The land is estimated at $2,000,000 per acre for industrial space. The warehouse is approximately 6,000 sqft and is estimated to have a value of $1,500,000. They plan on constructing a retail store front to the building of approximately 1,500 sqft estimated to cost $350 per sqft. In additional, they will require approximately $575,000 in baking equipment, storage, shelving, refrigeration, etc. They have also included a contingency of 10% in the construction and equipment improvements in the budget.

The business currently has cash on hand, of which they will use $350,000. The owners are prepared to inject $600,000 into the company from their own personally holdings. Their existing chartered bank has agreed to finance 70% of the total cost of the project. You are working with the companys finance team to develop a budget for this project along with the capital structure required to complete the project. The owners have stated that they are open to other sources of capital and/or investors to participate in this project.

Notes:

• Investors expect a 12% annual return.

• Bank interest rate is 5.0%.

• Tax rate is 30%.

1. 1) What will the total project cost? (4 marks)

2. 2) Show the committed sources of financing (in a sources & uses table) (4 marks); is there as shortfall? (1 mark)

3. 3) There are many sources of capital, explain three additional sources of long-term capital the owners should pursue to find the capital required to complete this project. Include a positive and negative aspect of each source of capital. (6 marks)

4. 4) The ownership group has successfully secured an investor to fund the remaining capital to complete the project. The investor has agreed to finance the shortfall in exchange for an equity share in the company, as well as the expected return. Show the source of capital and calculate the weighted average cost of capital in this scenario. (3 marks)

5. 5) In another scenario, the ownership group has decided to inject another $250,000 of their own money. Also, their financial institution has offered to fund the remaining capital using a subordinated debt loan at 14%. Show the sources of capital and calculate the weighted average cost of capital in this scenario. (3 marks)