Pls answer 4 questions in this case. Complete solutions and explanation.
Case 9-2 Innovative Engineering Company* Innovative Engineering Company was founded by two this would mean that the 90 percent that would be partners, Meredith Gale and Shelley Yeaton, shortly owned by Gale and Yeaton would have a value of after they had graduated from engineering school. $900,000. Although this was considerably higher than Within five years, the partners had built a thriving Innovative's net assets, they thought that this amount business, primarily through the development of a was appropriate in view of the profitability of the prod- product line of measuring instruments based on the uct line that they had successfully developed laser principle. Success brought with it the need for new permanent capital. After careful calculation, the this idea (hereafter, proposal A) was too risky. The re partners placed the amount of this need at $1.2 mil- sulting ratio of debt to equity would be greater than lion. This would replace a term loan that was about to 100 percent, which was considered unsound for an in- mature and provide for plant expansion and related dustrial company working capital. A little calculation convinced them, however, that Their next idea was to change the debt'equity ratio At first, they sought a wealthy investor, or group by using preferred stock in lieu of most of the debt of investors, who would provide the S1.2 million in Specifically, they thought of a package consisting of return for an interest in the partnership. They soon $200.000 debt. $900.000 preferred stock. amd discovered, however, that although some investors 100.000 common stock (proposal B). They learned. were interested in participating in new ventures.however. that Arbor Capital Corporation was not inter none of them was willing to participate as partner in ested in accepting preferred stock, even at a dividend an industrial company because of the risks to their that exceeded the interest rate on debt. Thereupon. personal fortunes that were inherent in such an they appruached Arbor with a proposal of $600.000 arrangement. Gale and Yeaton therefore planned to debt and $600.000 equity (proposal C. For the incorporate the Innovative Engineering Company. in S600.000 equity. Arbor would receive is (i.e. 40 per which they would own all the stock cent) of the common stock The Arbor representative was considerably inter Capital Corporation, a venture capital firm, might be ested in the company and its prospects but explained interested in providing permanent financing. In think- that Arbor ordinarily did not participate in a major fi- ing about what they should propose to Arbor, their first nancing of a relatively new company unless it obtained idea was that Arbor would be asked to provide $1.2 mil at least 50 percent equity as part of the deal. They were lion, of which SI.1 million would be a long-term loan. interested only in a proposal for $300.000 debt and For the other $100,000, Arbor would receive 10 percent 900.000 for half of the equity (proposal D). The of the Innovative common stock as a "sweetener." If debt/equity ratio in this proposal was attractive, but Arbor would pay $100,000 for 10 percent of the stock, Gale and Yeaton were not happy about sharing control After further investigation, they learned that Arbor of the company equally with an outside party Before proceeding further, they decided to see if they could locate another venture capital investor who Copyright O James S. Reece
