Role: Potential Investor

Potential Investor / Creditor

Potential investors and creditors are expected to perform due diligence of any company interested in obtaining equity or lender financing by analyzing the financial statements. To determine if the company is a worthwhile investment, investors consider the company's forecasted future profits and the ability for the company to issue dividends. Creditors consider the financial health of the company, its ability/timeliness to pay back principles, and interest on loans.

The potential investor/creditor has been hired by management to determine the impact of strategic decisions on external users' views. As such, key financial ratios relevant to their important factors must be calculated as well as why those specific ratios were chosen and how external users interpret these calculations for the company. The financial ratios should be analyzed both before and after the strategic decision is made. For each analysis, discuss the due diligence (i.e. why) as to whether the company represents a good investment for the external user and how the strategic decision influenced their willingness to invest in or provide a loan to the company. (Note: The potential investors and creditors here are not the same as those mentioned in the strategic decisions below.)

Strategic Decisions

Asset Purchase:

Rent a factory or warehouse for $12,000 to increase future production (If current cash does not cover the costs, this choice is contingent on obtaining either an equity investment or from the proceeds of a loan.)

Assume a liability:

Take out a $50,000 loan from potential creditor B with $50,000 due in 4 years and $2,000 in interest payments due each year until the loan is fully paid.

Equity Transaction:

Sell 10% of the business to potential investor B for a valuation of $12,000.

(Evaluate the 3 above strategic decisions using the below information on the firm AirMaddens)

Financial ratios to evaluate: Price to Earnings, Price to Sales, Return on Equity, and Debt ratio.

What are the financial ratios before and after the strategic decisions are made?

Company Information Report

Course of Business

AirMaddens is a luxury footwear manufacturer focusing on high-end sneakers and high heels. The company sources high-quality materials and sells these products for high sales prices.

Forecasted Revenues

AirMaddens, though highly profitable in the past, is facing steeply rising costs in raw materials. The company expects to have $100,000 in forecasted revenues for fiscal year 2022, but net income on those revenues will only be $13,000.

Current Business Outlook

AirMaddens' board of directors expects continued rising costs in raw materials and is focusing on ways to decrease costs of production. The Chairman is interested in operating with economies of scale, suggesting that the more volume the company produces, the cheaper the costs for each unit of goods produced.

Current Balance Sheet Assets Liabilities Cash S 25,000 Accounts Payable 6,000 Accounts Receivables 6,000 Long-term Loan 20,000 Owner's Equity Capital Stock 5,000 Total Assets: $ 31,000 Total Liabilities & Owner's Equity: $ 31,000Per Unit Cost Machinery Depreciation 1.20 Machinery Maintenance 2.20 Salary - Assembly Line A 21.00 Salary - Supervisors 14.00 Salary - Admin Staff 2.00 Direct Materials 100.00 Rent - Office Space 5.00 Taxes - Warehouse 17.50 Marketing - Paper 22.00 Marketing - Digital 9.50 Insurance - Admin Staff 11.00 Utilities - Office Space 0.45 Utilities - Factory 3.75 209.60