You, CPA, work for Conrad Consulting Ltd. It is now May 12,202, 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 as well. 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 202 draft statements (Appendix I and II). It has indicated that, provided that SIL's financials are still in line with the industry, it will be willing to renew the existing line of credit or offer a term loan to replace it. 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." "I have also reviewed the financial statements and gathered information on industry standards (Appendix IV)," Marion continues. "As the bank will be looking to analyze SIL's financial situation, particularly in comparison to competitors, please prepare a ratio analysis and a vertical analysis for 201 and 202. You should include in your memo explanations and recommendations based on these analyses. Additionally, if there are ways that SIL can improve its working capital management, please discuss and explain how this could reduce the line of credit, supported by dollar values where possible." "Finally, I would like you to analyze the quantitative and qualitative aspects of the current financing proposals. Be sure to consider the impact of each of these proposals on the financial statements and make a recommendation on which proposal to accept. Please prepare a draft memo to the Sloans with the results of your analysis." Your response, not including Excel (if applicable), should not exceed 1,800 words. Note 1: Approximately 50% of the manufacturing division's cost of sales is for wood materials. Note 2: rair market value is $72 million. 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% and is up for renewal in June 202. 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 June 207. 3. Strategic partner - Charles Wong SIL currently purchases 75% of its wood materials from Original Woods Inc. (OWI), owned by Charles Wong. SIL has been purchasing wood from OWI for the past two years. Charles deals primarily with George and has yet to meet Kelly. Charles would like to become a strategic partner in SIL. In return for 35% ownership in the company, Charles will pay $2 million and OWI would sell wood materials to SIL at a discount of 10% from current costs paid by SIL. In return, Charles would be involved in the company as an executive manager and have a seat on the Board of Directors. Appendix IV Industry standards 1. Industry standards are as follows: 2. Vertical analysis of the balance sheet: Average industry percentages (percentage of assets) 3. Vertical analysis of statement of earnings: Average industry percentages (percentage of sales) You, CPA, work for Conrad Consulting Ltd. It is now May 12,202, 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 as well. 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 202 draft statements (Appendix I and II). It has indicated that, provided that SIL's financials are still in line with the industry, it will be willing to renew the existing line of credit or offer a term loan to replace it. 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." "I have also reviewed the financial statements and gathered information on industry standards (Appendix IV)," Marion continues. "As the bank will be looking to analyze SIL's financial situation, particularly in comparison to competitors, please prepare a ratio analysis and a vertical analysis for 201 and 202. You should include in your memo explanations and recommendations based on these analyses. Additionally, if there are ways that SIL can improve its working capital management, please discuss and explain how this could reduce the line of credit, supported by dollar values where possible." "Finally, I would like you to analyze the quantitative and qualitative aspects of the current financing proposals. Be sure to consider the impact of each of these proposals on the financial statements and make a recommendation on which proposal to accept. Please prepare a draft memo to the Sloans with the results of your analysis." Your response, not including Excel (if applicable), should not exceed 1,800 words. Note 1: Approximately 50% of the manufacturing division's cost of sales is for wood materials. Note 2: rair market value is $72 million. 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% and is up for renewal in June 202. 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 June 207. 3. Strategic partner - Charles Wong SIL currently purchases 75% of its wood materials from Original Woods Inc. (OWI), owned by Charles Wong. SIL has been purchasing wood from OWI for the past two years. Charles deals primarily with George and has yet to meet Kelly. Charles would like to become a strategic partner in SIL. In return for 35% ownership in the company, Charles will pay $2 million and OWI would sell wood materials to SIL at a discount of 10% from current costs paid by SIL. In return, Charles would be involved in the company as an executive manager and have a seat on the Board of Directors. Appendix IV Industry standards 1. Industry standards are as follows: 2. Vertical analysis of the balance sheet: Average industry percentages (percentage of assets) 3. Vertical analysis of statement of earnings: Average industry percentages (percentage of sales)