PA2

TAX

pay out within 180 days to be tax deductible

MA

need for earnings management

(moral hazard) manager may shirk responsibilities

using financial aspect only may lead to manager manipulating accounting policies

better to use financial & non-financial data such as balanced scorecard

financial - revenue, net income, return on capital, CF

business processes - eliminatiion of bottlenecks, timeliness, productivity rates

leadership & training - morale, knowledge, turnover, use of best demonstrated practices

customers - market share, customer satisfaction measures, customer loyalty

IT

a more robust IT is required to track the non-financial data

link to financial system

FR

timely, reliable, relevant information that captures data tied to the bonus plan

Ethics

manipulation of earnings

net realizable value

MEMO to BD

financial results shows that we cannot carry more debt

although, issuing bond is an option

stock rights

preferred shares

dividends not tax deductible

features

redemption option

corporation to redeem - equity

owner - liability

accelerated rates

goes up - liability

common shares

dividend policy

strategic partners

expansion

consider keeping the current facility open

scale down

recalculate NPV

capital budget

qualitative factors

keep skilled employees

will improve product quality

gain bigger market share

disclosure of expansion in MD&A

based on 20X5 R/E, retain R/E in pfd shares for expansion

negotiating point for bank if we lower covenant by selling laser-cutting machine

market share

preliminary market research

currently, not meeting targets (not meeting market needs)

high inventory

not meeting targe

improve product quality

increase market share by building the new facility

MEMO to CEO

acccounting issues

bank requirements

current ratio

acid test will indicate issues with inventory

working capital

ST: infusion of cash from sale of the laser-cutting machine will improve current ratio

LT: increase sales and deal with inventory issue

inventory

determine which section (clothing or accessories) is bringing in more sales (quality earnings)

production line is aligned to marketing and meeting sales projections (budget)

F/S presentation?

IFRS - absorption cost

GM dec eventhough revenue increase

increased cost related to breakdown of equipment

link to I/S and GM

QA

ongoing r&m

possible replacement

buy & lease

cash management policy

just bec there is excess cash, don't buy machines outright

foregoing oppotunity cost

keep reserve

cash budget

lease

good idea

risk management

closing of plant

HIGH

ST: dec market share, loss of sales, dec EPS, dec SW

LT: employees may leave, expertise will be gone

lease

MEDIUM

Subtopic

Raising capital

Ways to raise capital

If private

Using profits

CF if available

Issue bonds

MUST PAY interest when not profitable

TX: interest paid on bonds are tax deductible

Borrowing

Restrictive covenants

Working capital = current assets - current liabilities

Debt-to-equity ratio= total liab / shareholders equity

must comply with lending body (DO NOT VIOLATE)

cost of violating covenant: increase financing cost, loss of reputation, loss of sale, decrease in EPS

IPO

Issues with raising IPO

Costs: prospectus prep, legal fees, registration, increase cost of assurance, implementation of more internal control

Complexities: increase reporting requirement, audited F/S, MD&A

FR: requires 2 years of financial records, must hire auditor

IT: must have financial system in place to produce timely, reliable, relevant F/S

If public

Issue bonds

MUST PAY interest when not profitable

increase debt to equity covenants,potential loss of flexibility in future financing

TX: interest paid on bonds are tax deductible,thereby reducing after tax cist of capital

Stock offering

Common shares

PRO: attracts new s/h, no legal requirements to pay dividends,teherby reducing financial distress or insolvency,improve debt to equity covenants,dividends do not decrease reporting earnings.

CON: will dilute ownership, change direction & focus of company,increase the probability of takeovers by a small margin, the new skares may depress stock price during and soon after issue of new shares.

Preferred shares

paid when declared

paid after bondholders are paid their guaranteed interest payment

paid before common shares

features of the shares will determine if:

EQUITY

redemption is at company's discretion

LIABILITY

cumulative at x%,callable,convertible

redeption is at the s/h's discretion

Advantages & disadvantages

Advantages:avoids dilution of ownership,can omit dividends in bad years,do not reduce reported income,improve debt to equity ratio if treated as equity.

Disadvantages:cumulative feature may impose cash flow issues in a later year,not deductible for tax

Stock rights

offer current s/h option to purchase additional shares

will maintain current s/h ownership %

Going IPO

Advantages

increase access to capital,improve ratios i.e.debt to equity,current ratio,financial leverage,increase cashfrom sale of shares,negociate better interest,increase consumers awareness.

Disadvantages

increase accountability,disclose compensation of executives and MD&A,interin financial statements,change in control,substantial costs for IPO i.e. legal,underwriter,securities registration,consulting,audit fees,loss of small business deduction, increase financial reporting and auditing requirements, must use IFRS.

Current financing options

Borrowing

Restrictive covenants

Working capital = current assets - current liabilities

Debt-to-equity ratio= total liab / shareholders equity

must comply with lending body (DO NOT VIOLATE)

cost of violating covenant: increase financing cost, loss of reputation, loss of sale, decrease in EPS

RISKS

Business risks

CF risks

Stakeholders risks

key employees

Credit/Default risks

Operational risks

Equipment obsolence

decrease in productivity

NEED FOR CAPITAL BUDGET

TX: MPP deduction

Lease

is there ownership or bargain purchase option

YES

CAPITAL LEASE

NO

Is lease term >= 75% of economic life

YES

CAPITAL LEASE (IFRS) or FINANCE LEASE (ASPE)

ASPE

Subtopic

NO

Is PV of pmts >=90% of FV

NO

OPERATION LEASE

Buy

how to finance

if there is bank covenant

covenant on LT debt

consider equity financing

common shares

preferred shares

stock rights

covenant on ST debt

combo equity & LT debt

bonds

preferred shares

common shares

check CF

if CF is an issue

financing thru banks

issue shares

strategic partners

Things to consider

complex

increased reqporting and disclosures

increased costs