Question: ABBA Company is a privately held company with one shareholder, Ms. Smith, who also operates as the company's Chief Financial Officer (CFO). The company has the following debt covenants in its lending agreement with Bank of Montreal: Debt to Equity = Total liabilities/Total Equity. Must be lower than 2.0 Interest coverage = Net income / interest expense. Must be greater than 15.0 Working capital = Current Assets minus Current Liabilities. Must be greater than $500,000 The company's management plans to expand their current facility and plans to spend $500,000 on the expansion. Ms. Smith also would like to increase her personal income to $200,000 and plans to declare a dividend of $200,000 in 2019 to accomplish this. The balance sheet and income statement attached show the state of the company under various scenarios. Required (a) Calculate the debt covenants under each scenario and conclude if the company is compliant or non-compliant. - Respond on next page where noted. (b) Provide alternatives to Ms. Smith to reach her goals of personal income totalling $200,000 in 2019 (ignore personal income taxes for this discussion) For purposes of part (b) you do not need to recalculate the debt covenants to ensure compliance, but provide suggestions on various alternatives that will get the company closer to their goals and their covenants. (c) Provide alternatives to Ms. Smith on the expansion plans that would help to reach their goals and stay within their debt covenants For purposes of part (c) you do not need to recalculate the debt covenants to ensure compliance, but provide suggestions on various alternatives that will get the company closer to their goals and their covenants. ABBA Balonce Sheet December 31, 2018 Current reported amounts Purchase Purchase equipment quipment Pay dividend with cash for borowings of $200.000 of $500.000 510200 150.000 200,000 Current Cach Accounts receivable Due from shareholder Prepaid expenses Non-current Property, plant, equipment 310200 150.000 200.000 50.000 710.200 150.000 200.000 50.000 410200 510.200 150.000 200.000 50.000 910200 910200 2.500.000 3410200 2.500.000 32101200 3.000.000 3410200 3.000.000 3910200 57500 Liabilities Current Accounts payable Accrued liabilities Current portion of long term debt Non-current Long term debit 57.500 0.000 50.000 57500 4000 50000 57500 560 50000 2500.000 2.000.000 2.147.500 2.000.000 2147.500 2.000.000 2.147.500 Equity Share capital Retained comings 200 1089.500 200 1.262 500 200 1247500 Liabilities and shareholders equly 3/410200 3210200 3410200 3.910200 ABBA Home Student 15.000.000 13.000.000 2.000.000 15.000.000 13.000.000 2.000.000 15.000.000 13.000.000 15.000.000 13.000.000 20000 Costosa Gross margin Operating expenses Salaries and benefits-administration Salaries and benefits - CFO Office expenses Professionales-legal and accounting Interestepense 4% 100.000 120,000 10,000 20.000 100000 120.000 10.000 20000 80.000 100.000 120000 10.000 20,000 80.000 330000 100.000 120.000 10.000 20000 100.000 360000 80.000 1.670.000 417.500 1870.000 417.500 12 1.670.000 417.500 122.500 1850,000 412.500 1237500 Net income before income tax Income tax 25% Net income Retained earnings, beginning of you Net income Dividends Retained earings, end of year 10.000 10.000 10000 1282.500 10.000 1237.500 12100 200.000 1002500 12500 1207500 Debt Equity Interest.coverage Wording capital Compliant (Yesto) DebEquity Interest coverage Working capital
