Reference no: EM132892427

Kenneth Gordon is astonished to learn from Prince Will, his longtime accountant that his tree farm earnings are little over $150,000 per year and that his property and his other assets are valued at about $2,000,000. It is no surprise that he owes the bank $600,000. Twenty years ago, Kenneth understood that his western Massachusetts dairy farm was almost ready to break with seven grueling days of backbreaking work a week. The young family would have struggled without the income of its wife as a high school science teacher and the health insurance company it provided. Throughout the journey, Kenneth sold his herd but wanted to maintain the land that his family cultivated for three generations. At the time, his aim was to recast the farm and its equipment, sell horses, sell hay balls, create small landscape company and blow snow in winter. Nearly on a whim, he planted several hectares with seedling spruces and Fraser firs that he expected to sell as Christmas trees. He rapidly realized that in his landscaping company, he could utilize them more economically and sell them in local nurseries and other landscapers.

• He gradually added plants to the popular arborvitae, yew, dogwood, maple red, pear and cherry ornamental. Demand expanded so swiftly that he gave up his other tree-farming enterprises. There are now three full-time workers with his wife, two college children, and numerous friends in the summer. He is also the owner and renter of some rather costly specialist planting, excavating, and shipping equipment. Because the company grew so quickly and almost inadvertently, Kenneth didn't think a lot about his structure. His accountant says that it is now time for his wife and children to switch to a more formal sort of organization from an informal partnership. Prince gives Kenneth some pamphlets on the formation of a normal business and two options: a subsection S, or an S, and a limited liability company or LLC. He invites Kenneth to look at them and come back in a week or two. Major choices in financial management include capital budgeting, capital structures and management of working capital. Take an example of each one relating to the Tree Farm of Gordons. Fender Innovation Technologies (FIT) plant manager, Kristin Roney is mulling an unusual offer offered by Steven Card, Chief Financial Officer and majority shareholder. Steven is now 60 and is scheduled to retire gradually. None of his kids are keen to take over and are now pursuing occupations that are unrelated to the plastics sector, so Steven chose to give its control share to Kristin. The FIT started producing plastic lawn decorations, including bright tropical birds which in the 1980s became a significant trend. His fantastic invention, pleased and delighted by its popularity, Steven added bunnies, skunks, trolls, angels and garden feasts to the range. FIT has also become a key secondary supplier of plastic housings for speakers, mobile phones, computers and similar items under Kristin's leadership. Kristin began working at FIT as a color technician soon after completing a degree in chemistry from the University of the State. She was the plant manager within five years, a post she retained during the final eight years. Along the way, she acquired an MBA via her alma mater's evening program. Because FIT stocks are traded openly, we may give Steven's shares confidently a value of $10,000,000. Steven said he is open to any sensible purchasing financing option. Kristin would probably buy the money directly to buy the shares since the shares were to act as collateral and profits covered most of the loan installments. The interest rate is 7%, and the loan will be amortized with equal installments from the loan.

Problem 1: What are the yearly installments if the bank pays off the loan over 5, 10 or 20 years?