Reference no: EM133275077

Here are two situations. Answer them as if you were the CFO of each company. There is not one absolute correct answer, but some answers should be obviously incorrect.

Scenario #1

You won your first contract to build parts for a Boeing commercial aircraft that will increase your sales by 40 million dollars per year for the 5 years of the contract. Your current corporate sales are 80 million dollars per year and your net profit margin is 15% After 5 years Boing will stop production of that particular model and you may not receive any other orders from Boeing. You will have to buy new equipment to fabricate the part. The equipment will cost 20 million dollars and have a life of ten years. You estimate the equipment can be sold at the end of the contract for 5 million dollars. Your total asset turnover before this contract win has been 1.5 to 1.

Assuming your debt to equity ratio is such that you can carry the 20 million debt without stressing the balance sheet, and you actually decide to finance the new equipment with debt, describe how you would raise 20 million dollars in the debt market.

Scenario #2

You have 10% of your capital financing in debt. You have annual sales of 500 million dollars and a net profit margin of 10%. Your total asset turnover is 1.5 to 1. Your total sales has been growing at 10% per year. You design and manufacture all items you sell. You have five (5) items for sale now and you have just introduced another item that should increase your total sales by 30%. After that the sales increase should be on going at 10% per year. You are using this new product introduction as the time to restructure your total production facilities which will cost 200 million dollars. You fill finance the expansion with debt. What debt structure will you offer and how will you take it to market?

If there is any additional information you would like to know you are permitted to assume (within reason) the information you need. Identify any assumptions you make before you answer each scenario.