You, CPA, work for Conrad Consulting Ltd. and your boss, Marion Conrad, has just returned from a meeting. "I have just met with George and Kelly of Sloan Industries Ltd. (SIL)," Marion starts. "SIL manufactures and retails wooden picture frames. The company was incorporated by George over 20 years ago. 10 years ago, George's daughter, Kelly, became a part owner. Kelly has two young children of her own, and she hopes that one day they will show an interest in joining the family business. George currently owns 70% of the company and Kelly owns 30%. George is looking forward to retiring, and he and Kelly have been formulating a plan for the redemption of his shares. George's shares are worth $4 million. He would like to redeem 50% within the next year, with the remainder redeemed in three to five years." "George has been looking at ways to finance the redemption. He has been in discussions with the bank as SIL's line of credit is currently up for renewal. The bank has requested the annual draft financial statements (Appendix I and II) and has indicated that it will be willing to renew the existing line of credit or offer a term loan to replace it provided that SIL's financials are still in line with the industry. While considering this as an option, George dislikes the personal guarantees that are currently in place on the line of credit and is wondering about using SIL's property, plant, and equipment as collateral in place of guarantees. The bank's proposals, as well as an additional option presented by George, are included in Appendix III and IV." "I have also reviewed the financial statements and gathered information on industry standards (Appendix V),"

"I would like you to analyze the quantitative and qualitative aspects of the current financing proposals (Appendix III). Information has also been provided on a strategic partnership with Charles Wong. Can you analyze this information from a quantitative and qualitative aspect? (Appendix IV). Be sure to consider the impact of each of these proposals on the financial statements and make a recommendation on which proposal to accept. Prepare a draft memo to the Sloans with the results of your analysis."

Appendix I Sloan Industries Ltd. Draft statement of earnings for the years ending April 30 (in C$'000s) Head Current Retail Manufacturing office year Prior year Sales $ 10,402 $ 22,618 $33,020 $29,482 Cost of sales (Note 1) 5,513 15,154 20,667 17,984 Gross profit 4,889 7,464 12,353 11,498 Expenses Facilities 1,416 2,119 3,535 3,491 Office administration 482 1,119 1,601 1,483 Sales and marketing 1,782 2,044 3,826 3,614 Head office costs 1,419 1,419 1,327 Total expenses 3,680 5,282 1,419 10,381 9,915 Operating income (loss) 1,209 2,182 (1,419) 1,972 1,583 Interest costs 318 464 782 521 Income before taxes 891 1,718 (1,419) 1,190 1,062 Income taxes (25%) 298 266 Net income 892 $ 796 Statement of retained earnings Balance - beginning of year $ 880 $ 294 Net income 892 796 Dividends (210) (210) Balance - end of year $ 1,562 $ 880 Note 1: Approximately 50% of the manufacturing division's cost of sales is for wood materials.Appendix II Sloan Industries Ltd. Draft balance sheet as at April 30 (in C$'000s) Current year Prior year Assets Current assets Cash $ 16 $ 21 Accounts receivable (Note 1) 9,631 7,370 Inventories - Manufacturing 3,588 2,272 - Retail 918 835 Prepaid expenses 117 94 Total current assets 14,270 10,592 Property, plant, and equipment (Note 2) 3,767 3,626 Total assets $ 18,037 $ 14,218 Liabilities Current liabilities Bank indebtedness $ 5,572 $ 3,800 Accounts payables and accrued liabilities 10,511 9,158 Income taxes payable 122 110 Total current liabilities 16,205 13,068 Shareholders' equity Share capital 270 270 Retained earnings 1,562 880 Total shareholders' equity 1,832 1,150 Total liabilities and shareholders' equity $ 18,037 $ 14,218 Note 1: SIL offers its manufacturing customers 60-day payment terms on receivables. Credit is not extended to retail sales customers. Note 2: Fair market value is $12 million.Appendix Ill Financing proposals 1. Line of credit The company has a line of credit from the bank that has a general security over all of the assets of the company along with the shareholders' personal guarantees. The total maximum amount available on this line of credit is $6 million. The line of credit is callable on demand at the bank's option. The loan bears interest at prime plus 3%. The prime bank lending rate is currently 3%. 2. Five-year term loan The bank is also prepared to offer a long-term loan secured by the company's property, plant, and equipment for up to $4 million. The term loan would be for five years and bear interest at 6%. Interest only is payable monthly, with the principal due at maturity in five years.Appendix IV Strategic partnership Background information: Charles Wong, the owner of Original Woods Inc. (OWI), would like to become a strategic partner in SIL. SIL currently purchases 75% of its wood materials from OWI, so this partnership would streamline procurement of a major inventory item. The proposal: . OWI would obtain 35% ownership in the company for a $2 million investment. . OWI would sell wood materials to SIL at a discount of 10% from current costs paid by SIL. . Charles would be involved in the company as an executive manager and have a seat on the board of directors. SIL has been purchasing wood from OWI for the past two years. Charles deals primarily with George and has yet to meet Kelly