Brian Motley founded the MiniDiscs Corporation at the end of 2011. After nearly one year of development, the venture produced an optical storage disk about the size of a silver dollar that could store more than 500 megabytes of data along with a mechanism allowing the device to be integrated into a variety of portable consumer electronic devices including e-books, music discs, and video games. In addition to Brian Motley’s role as the venture’s CEO, Susan Sharpe, with 6 years of prior financial management experience at two high technology ventures, was hired as the CFO. The Vice-President of Marketing was Steven Davis and the Vice-President of Operations was Sanjay Chavarti. Before being hired by MiniDiscs, Davis had 12 years of marketing experience in the technology area. Chavarti worked in high tech operations for eight years before pursuing the opportunity with MiniDiscs. Leading electronic manufacturers were anxious to incorporate the minidisk in their products. Brian Motley obtained $7 million financing at the end of 2012 from venture investors in exchange for 43 percent of the stock in the venture. After this round of venture financing, Brian retained 50 percent ownership in MiniDiscs and the other three members of the management team (Sharpe, Davis, and Chavarti) owned 7 percent of the venture. Over a four-year period (2013-2016), MiniDiscs moved quickly through its startup and survival stages and is now in the midst of its rapid growth stage. Brian Motley has recently decided to harvest his investment by selling the firm. However, the other three members of the management team want to continue on and proposed a leveraged buyout to Brian Motley. An external valuation firm estimated that $45 million represented a fair price for all of the equity in the MiniDiscs Corporation. An abbreviated balance sheet in thousands of dollars for yearend 2016 follows: Current Assets $15,000 Payables & Accruals $5,000 Fixed Assets, Net 15,000 Long-Term Debt 10,000 Common equity 15,000 Total $30,000 Total $30,000 It is the beginning of 2017, and the management team has $5 million of their own capital, including their share of the sales price, available to purchase all of the venture’s existing equity capital. The intent is to retire all of the old stock and issue 2 million shares of common stock in the “new” venture to the management team. LBO financiers will put up $20 million in 8 percent, 5-year subordinated debt funds plus 1.9 million warrants that can be converted into 1.9 million shares of common stock. A bank will also offer a $10 million, 14 percent interest rate, 4-year fully amortized loan. To make the deal work, Brian Motley was asked to provide seller financing in the form of a below market 10 percent, 5-year, seller’s note. The amount of the note was to be for the difference between the $45 million selling price and the amount of funds raised from management, the LBO financiers, and the bank. In exchange for the seller financing by Brian Motley, the existing venture capitalists agreed to reduce their ownership rights from 43 percent to 40 percent. The management team also lowered their claim on the existing venture from 7 percent to 5 percent. Thus, as the result of agreeing to provide seller financing, Brian’s percentage ownership of the $45 million selling price was 55 percent. Brian estimated that the interest rate being paid on similar risk subordinated seller loans was currently at 16 percent. A. What will be the dollar amount of seller financing that Brian Motley will need to provide to complete the financing of the $45 million selling price? B. How much cash will be available to distribute to the existing owners of the MiniDiscs Corporation? What will be the dollar breakdown for Brian Motley, the management team, and the venture capitalists? C. What compound rate of return did Motley earn on his $1 million end of 2011 investment? D. What compound rate of return did the venture capitalists earn on their $7 million investment at the end of 2012? E. After five years of operating as a private venture owing to the LBO, assume that the common equity in the MiniDiscs Corporation could be sold for $60 million at the end of 2021. What compound rate of return would the management team earn on its $5 million investment? F. Assume that when MiniDiscs is sold at the end of 2021 for $60 million that the LBO financiers will have their debt retired and will sell their share of interest in the venture. What compound rate of return would the LBO financiers receive?
> The Hard Rock Mining Company is developing cost formulas for management planning and decision-making purposes. The company’s cost analyst has concluded that utilities cost is a mixed cost, and he is attempting to find a base that correl
> Archer Company is a wholesaler of custom-built air-conditioning units for commercial buildings. It gathered the following monthly data relating to units shipped and total shipping expense: Required: 1. Prepare a scattergraph using the data given above.
> Refer to the data for Highlands Company. Assume that the company uses the FIFO method in its process costing system. Required: 1. Compute the number of tons of pulp completed and transferred out during June. 2. Compute the equivalent units of production
> Refer to the data for Pureform, Inc., in Exercise 4–9. Exercise 4–9: Pureform, Inc., uses the weighted-average method in its process costing system. It manufactures a product that passes through two departments. Data
> Refer to the data for Alaskan Fisheries, Inc., in Exercise 4–10. Exercise 4–10: Alaskan Fisheries, Inc., processes salmon for various distributors and it uses the weighted-average method in its process costing system.
> MediSecure, Inc., uses the FIFO method in its process costing system. It produces clear plastic containers for pharmacies in a process that starts in the Molding Department. Data concerning that department’s operations in the most recent period appear be
> Brooks Corporation uses a job-order costing system to apply manufacturing costs to jobs. The company closes its underapplied or overapplied overhead to cost of goods sold. Its balance sheet on March 1 is as follows: During March the company completed th
> What is the meaning of margin of safety?
> Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below. Because the videos differ in length and in complexity of production, the company uses a
> What is the meaning of break-even point?
> What is the meaning of operating leverage?
> What is the meaning of contribution margin ratio? How is this ratio useful in planning business operations?
> Assume that a company has two processing departments—Mixing followed by Firing. Explain what costs might be added to the Firing Department’s Work in Process account during a period.
> How do direct labor costs flow through a job-order costing system?
> How do you compute the unadjusted cost of goods sold?
> How do you compute the cost of goods manufactured?
> How do you compute the total manufacturing costs within a schedule of cost of goods manufactured?
> How do you compute the raw materials used in production?
> What is underapplied overhead? Overapplied overhead?
> Stillicum Corporation makes ultra-light weight backpacking tents. Data concerning the company’s two product lines appear below: The company has a traditional costing system in which manufacturing overhead is applied to units based on di
> A number of terms relating to the cost of quality and quality management are listed below: Appraisal costs ……………………………………………………………… Quality circles Quality cost report …………………………………………………………… Prevention costs Quality of conformance ………………………………………………………
> Describe the terms (a) “control premium” and (b) “illiquidity discount” when discussing possible external or outside buyers of a venture.
> What is an employee stock option plan (ESOP)? How is an ESOP used to buy out a venture?
> What is foreclosure?
> What is meant by loan default? Also, describe (a) an acceleration provision and (b) a cross-default provision.
> What is the purpose of the U.S. Bankruptcy Code? What are some of the characteristics of ventures that use instead of private liquidation?
> Describe a venture bankruptcy. Also, indicate the difference between (a) a voluntary bankruptcy petition and (b) an involuntary bankruptcy petition.
> What is bankruptcy and how is it used by ventures?
> What are the steps or stages in a “typical” execution and time line schedule used in planning and executing an IPO?
> Describe the absolute priority rule.
> What is a private liquidation? What does the process of assignment mean?
> What is a private workout? Also, describe some of the characteristics of ventures that are likely to engage in private workouts.
> What is a systematic liquidation of a venture? What are some of the advantages and disadvantages of a systematic liquidation?
> What is meant by initial public offering (IPO) underpricing?
> Describe the two following terms that may be involved in underwriting a new securities issue: (a) green shoe and (b) lockup provision.
> When an investment banking firm decides whether to underwrite or market a securities issue, what is meant by a firm commitment and best efforts?
> What is meant by due diligence? How does a traditional registration differ from a shelf registration?
> An insolvent venture is one where equity is negative and/or the cash flow of the firm is unable to meet debt obligations.
> Define asset restructuring and describe how it can be implemented to escape from financial distress.
> Define operations restructuring and describe how it can be implemented to escape financial distress.
> What do we mean when we say a venture is insolvent?
> Use the concept of cash flow insolvency over time and describe what would happen if the problem is temporary rather than permanent.
> Describe what is meant by (a) a leveraged buyout (LBO), and (b) a management buyout (MBO).
> Describe how the relative value method is used to value a firm’s equity.
> Describe an outright sale of a venture. What are the four categories of possible buyers?
> What are the three types or methods of restructuring available when trying to turn around financially troubled ventures?
> What is meant by financial distress?
> What evidence exists as to whether entrepreneurs think about and/or develop exit strategies?
> What is the meaning of harvesting a venture?
> Endco is a wireless solutions provider that facilitates wireless Internet access through small remote devices that connect to portable computers. During the past several years, Endco was lavished with an abundance of equity financial capital from a vari
> EnCal is a small West Coast-based power company specializing in power generation methods that use clean burning fuels and renewable natural resources. However, due to complex and confusing power pricing structure, EnCal is reeling from the aftereffects
> Following are the financial statements for the Chenhai Manufacturing Corporation for 2015 and 2016. The venture is in financial distress and hopes to turn around its financial performance in the near future. CHENHAI MANUFACTURING CORPORATION *Note a ta
> It was shown earlier in the chapter that Eastland Industries was suffering from cash flow insolvency. Let’s assume that scenario 1 projects that year 3 and following years will be like the results incurred for year 2 where profitability is low and conti
> What are unicorns? How might their exit values be impacted when they go public?
> It was shown earlier in the chapter that Westland Industries was suffering from cash flow insolvency in terms of its earnings before interest, taxes, and depreciation (EBITDA). Two scenarios are possible for Westland in year 3. Scenario 1 suggests that
> It was shown earlier in the chapter that Northland Industries was suffering from balance sheet insolvency. Two scenarios are possible for Northland in year 3. In scenario 1, year 3 for Northland is expected to result in an additional $150,000 operating
> New information for the Gamma Systems Manufacturing Corporation has been brought to the management’s attention. Use the financial statement information in Problem 5 and take into consideration that sales will grow at a 15 percent rate in 2017 and a 10 p
> Assume that some of the information relating to the Gamma Systems Manufacturing Corporation has changed. Using the financial statement data, answer the following questions. A. How would your valuation estimate change if the sales growth rate had been 6
> The Gamma Systems Manufacturing Corporation has reached its maturity stage and its net sales are expected to grow at a 6 percent compound rate for the foreseeable future. Management believes that as a mature venture the appropriate equity discount rate
> Benito Gonzalez, founded and grew the BioSystems Manufacturing Corporation over a several year period. However, Benito has decided to exit BioSystems as of the end of 2016 with the intention of starting a new entrepreneurial venture. The Fuji Electron
> Describe the business model turnaround Necton undertook. Comment on what you think would have been the challenges and your perceptions about the likelihood the new business model will succeed.
> Briefly define the following terms: cram down procedure, debtor-in-possession financing, and prepackaged bankruptcy.
> Comment on Tesla’s trip from incorporating in 2003 to its IPO in 2010. What impact do you think the IPO had on competitors in the electric car market?
> Briefly describe the common pool and holdout problems that often make it necessary for a venture to enter into a court-supervised reorganization.
> Identify major factors that cause ventures to get into financial trouble.
> Describe some of the preparations that a venture can undertake that may increase the possibility of IPO success.
> Indicate some of the differences between the NASDAQ’s National Market System and SmallCap listing requirements.
> Briefly describe how securities are traded on an organized stock exchange such as the New York Stock Exchange.
> The WestTek privately held venture is considering the sale of the venture to an outside buyer. WestTek has net sales = $21.2 million, EBITDA = $11.1 million, net income = $2.9 million, and interest-bearing debt = $12 million. Three publicly-traded comp
> The BETA firm is proposing to acquire the ACE Products venture described in Problem 1. BETA estimates that ACE’s free cash flow for next year could be improved to $5.5 million because of synergistic benefits in the form of operating or distribution econ
> What are some of the basic requirements of a successful turnaround plan?
> Define financial restructuring and describe what is meant by debt payments extension and debt composition change.
> Describe the terms “tombstone ad” and “red herring disclaimer.”
> What is investment banking? What is an underwriting spread?
> Describe an initial public offering (IPO). What are the differences between a primary offering and a secondary offering?
> The venture investors and founders of the ACE Products venture, a closely held corporation, are contemplating merging the successful venture into a much larger diversified firm that operates in the same industry. ACE estimates its free cash flows that wi
> Make the journal entry (or entries) necessary to record the following transaction: Gave land to an employee. The land originally cost $52,000, and it had that same value on the date it was given to the employee. This land was given in exchange for serv
> Make the journal entry (or entries) necessary to record the following transaction: Declared and paid a $12,000 cash dividend to shareholders.
> Using the following information, compute total current assets: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Make the journal entry (or entries) necessary to record the following transaction: Sold land that had an original cost of $50,000. Received $40,000 cash. Also received a piece of equipment with a fair value of $90,000.
> Using the following information, compute total current liabilities: Accrued Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Notes Payable (due in 14 months). . . . . . . . . . . . . . . . . . . . . . . . . .
> Make the journal entry (or entries) necessary to record the following transaction: Purchased equipment with a fair market value of $100,000. Paid $10,000 cash as a down payment and signed two notes for the remaining cost—a 6% note for $20,000 tha
> Account balances taken from the ledger of High Flying Logistics Co. on December 31, 2013, follow: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,000
> Dylan’s Taxidermy Corporation reports revenues and expenses of $142,300 and $91,500, respectively, for the period. Give the remaining entries to close the books assuming the ledger reports Additional Paid-In Capital of $400,000 and Retained Earni
> On the Clark and Company Inc. balance sheet, indicate the amount that should appear for each of the items (a) through (n) on the balance sheet.
> For the years 2011–2013, Robbins Soccer Company had net income and average shares outstanding as follows: What was the percentage of change in earnings per share (EPS) in 2012? In 2013?
> Use the following account balance information to construct a trial balance: Salary Expense …………………………………………… $24,000 Unearned Ser
> The following accounts were taken from the trial balance of Cole Company as of December 31, 2013: Sales ………………………………………………&he
> Use the following account balance information to construct a trial balance: Cost of Goods Sold ……………………………. $ 9,000 Accounts Payable …………&helli
> Refer to Practice 4-1. Assets with the same productive capacity as the assets comprising the $365,000 beginning asset balance had a current cost of $437,000 at the end of the year. Using the physical capital maintenance concept, determine the company&r
> Make the adjusting journal entry necessary at the end of the period in the following situation: Bad debts created by selling on credit during the year are estimated to be $1,200. So far, none of these accounts have been specifically identified and writ
> Match the numbered statements below with the lettered terms. An answer (letter) may be used more than once, and some terms require more than one answer (letter). 1. Key ingredients in quality of relevance. 2. Traditional assumptions that influence th
> Refer to Practice 4-16. Use that information to compute the price-earnings ratio. In Practice 4-16 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.67 Cost of
> Use the following information to compute return on sales. Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.67 Cost of goods sold . . . . . . . . . . . . . . .
> The company started business in 2011. In 2013, the company decided to change its method of computing oil and gas exploration expense. The company has only two expenses: oil and gas exploration expense and income tax expense. The following sales and oil
> Use the following information to compute net income and comprehensive income. For simplicity, ignore income taxes. Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 U
> Make the closing entry (or entries) necessary to close the following accounts: Salary Expense ………………………………………….. $18,000 Unearned Servic
> Make the closing entry (or entries) necessary to close the following accounts: Cost of Goods Sold ………………………………….. $ 7,000 Accounts Payable ……&h
> Make the adjusting journal entry necessary at the end of the period in the following situation: On June 1, the company received $9,600 in advance for 12 months of service to be provided, with the service period beginning on June 1. This $9,600 was reco
> Make the adjusting journal entry necessary at the end of the period in the following situation: On August 1, the company paid $3,600 in advance for 12 months of rent, with the rental period beginning on August 1. This $3,600 was recorded as Prepaid Ren
