Corporate Finance Assignment: Analysis of Investment Decisions

This assignment analyzes the financial decisions of a company, Marshall, focusing on growth strategies, equity financing, and potential acquisitions. The analysis begins with the need for additional equity capital and the benefits of a high-growth strategy, including the option of a public share offering. It then evaluates the financial impact of investing in thermowell machines, considering cost savings and returns. The assignment further explores the implications of equity financing from private investors, calculating the effects on Earnings Per Share (EPS). Finally, it assesses the potential acquisition of Electro-engineering, considering the benefits of acquiring fiber-optic sensor technology, reduced expenses, and the overall financial health of Electro-engineering, which includes strong assets and revenue. The document concludes by emphasizing how the acquisition of Electro-engineering could fund the investment in thermowell machines, presenting a comprehensive analysis of the company's financial strategies.

Corporate Finance
2019

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Answer – 1
The growth of the company can be financed through two means that is the internal source and
debt. As depicted from the case study that the additional equity capital was the need of the
hour. Retaining the customers and expansion will be difficult if the company did not have
additional inventory. To aid this, it is imperative that Marshall should opt for growth strategy
and this can be done through public offering of shares. High growth strategy comprises of
increment in sales by attracting additional clients and development of better campaigns like
activities that will help in enhancing the prospects of the business (Melville, 2013).
The sensor market is signalling a boost in the sales and the performance. As projected in the
case study the following is observed for it:
 Cumulative growth rate – 4.5% (year 2013- 2017)
 Market potential - $3.5 billion by 2024.
Hence, it can be observed that provided the high prospects of growth, Marshall should vouch
for the high growth method of raising finance. It can be done through the public issuance of
shares where the public will purchase the shares and will lead to an enhanced level of equity
financing and procure funds from a venture capitalist that is ready to have grown the business
to bring more revenue.
The table provides a clear picture that the listed companies are able to do a better business
because of the availability of funds. The net sales are a clear indication that the companies
are able to do strong sales.
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It needs to be noted that high growth cannot be funded with the help of internal funds because
the internal sources of finance fall weak when it comes to a higher domain. For growth, it is
essential to have a wider pool of funds, hence it is essential to have a method of equity-based
financing (Lapsley, 2012). The major impact on the stock price of Burton can be witnessed as
the market will flourish and the business will attain more profitability. This will help the
stock price of the company to increase and in tune to it, the return ill even increase. Once the
stock is listed the company will have potential to make a huge impact in the stock market.
Answer -2
Thermowell is an essential element of the RTD and immense benefits can be attained by the
installation of the thermowell with the sensor. In the year 2016, the company spent an amount
of $1.4 million in the purchase of the thermowell as the production was unable to cater to the
function of the company. Hence, Marshall thought of linking it with a new manufacturer
through which they can purchase four thermowell machines for an amount of $600,000.
Going by this prospect, it needs to be ascertained whether the net value by accepting the
proposal would lead to a positive response or not. When it comes to the net savings, it is more
on the part of the company and if an investment is made under such machines. The company
should vouch for an initiative that will help in the investment of such types of machines so
that the total return is positive and will even aid in solving the sensor problem of the
company (Madura & Fox, 2012).
Answer – 3
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It is a viable option and will help Marshall if he accepts the offer by the private investors
because funds are needed for the expansion of the business. Equity financing is the best
viable option because of the following:
Offering by the investors $3.50 per share
Increment in the number of equity shares
Beforehand, the total number of equity shares was 1,10,000 and currently, the private
investor has offered for the acquisition of 450,000 shares so that the overall hares will
enhance to 1,55,000 and 50,000 shares paid to the broker will even be contained making the
total capital as 16,00,000. The new computed share capital is as follows:
Equity shares before 1100000
private investors acquisition 450000
Total shares 1550000
paid to broker 50000
New Capital 1600000
After the acceptance of the offer, the EPS will fall. An increment in the total share capital
will impact the EPS because of the share dilution. The company’s earnings will be divided by
the new and hence larger number of shares will be needed to ascertain the EPS of the
company. This will lead to a drop in the EPS.
This clearly reflects that there will be a higher growth opportunity for the company because a
higher level of funds is present with the company (Petty et, al, 2012).
Answer – 4
Marshall is having the interest to buy Electro-engineering because the company manufactures
fiber-optic sensors. The major benefit of the sensors is that it is less expensive in nature and
has higher durability. It is easy to install other products. The company is a high level of
problems when it comes to the management of such sensors and the manufacture of such
sensors because the items are he in nature. Further, it is observed and noted that if the
company take over the operation of EE then such an act will help in lessening the selling and
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administrative expenses from 26.5% to 23.86% and if EE gets access to the supply
mechanism of the company then it will help the company to reduce the cost of goods sold
from 51% to 49%. Moreover, as per the ales record of EE, it can be commented that the
company has strong potential and will help Marshall to get a major hold over the market. As
seen from the balance sheet of the company that it has high level of cash and cash equivalent
together with shareholder equity. An acquisition of the same will provide a major boost to the
company in terms of assets and performance.
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If EE involves itself in a bigger enterprise then the supplier will even attain better terms of
trade credit from the supplier. On the application of scientific analysis, the total cost will
lessen and the presence of low sensors will help in the increment of the total profit of the
company (Gowthrope, 2012). The strong balance sheet of the company was a major attraction
for Marshall and hence there were various other factors that led to the attraction of Marshall.
Overall it can be commented that there were various strong factors on which it seems
lucrative for the company to invest in holdings of EE. The noteworthy factors were the
presence of strong fundamentals together with a strong balance sheet that projected an asset
composition of $2 million and revenue of $4 million in the year 2016. Hence, it is observed
that Marshall will end up earning more revenue if an investment is done in terms of Electro-
engineering and managing the financing properly. EE has cash spent in investing activities
and cash flow from operating activities indicating that the business will be able to flourish.
Acquisition of a company with higher level of financial statements leads to a sportive impact
on the company.
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Answer- 5
Going by the overall scenario and fundamentals of the business, it can be commented that the
investment in EE will help in funding the machines of thermowell because the overall
investment needed for investment in such machines can be generated with ease through the
acquisition of EE because it can be seen that EE comprises of a huge amount of funds that are
unsecured and can be used at the initial point of time for the acquisition of EE (Adra &
Barbopoulos, 2018). Further, it is even noted that the EE owner was ready for selling the
overall equity at a price that was 10 times higher than the EBIT and this was in exchange of
Burton's common stock that was deemed to be acquired at $4.75 per share. Hence, going by
the overall features, it can be commented that the deal s profitable in nature and acquisition of
the thermowell machine will help in the reduction of the cost to a major level hence
investment in it seems to be lucrative and is well augmented through the EE acquisition.
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References
Adra, S., & Barbopoulos, L.G. (2018). The valuation effects of investor attention in stock-
financed acquisitions. Journal of Empirical Finance. 45, 108-125. Retrieved from:
https://doi.org/10.1016/j.jempfin.2017.10.001
Gowthrope, C. (2011). Business accounting and finance for non specialists (3rd ed.). South
Western
Lapsley, I. (2012). Commentary: Financial Accountability & Management. Qualitative
Research in Accounting & Management. 9(3), pp. 291-292. Retrieved from
https://doi.org/10.1111/1468-0408.00081
Madura, R., & Fox, J. (2011). International financial management (2nd ed.). South Western
Melville, A. (2013). International Financial Reporting – A Practical Guide (4th ed). Pearson,
Education Limited, UK
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012).
Financial Management: Principles and Applications, 6th ed. Australia: Pearson
Education Australia.
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Appendix
1. Comparative data for Publicly Traded Firms
2. New computed Share capital for Marshall
Equity shares before 1100000
private investors acquisition 450000
Total shares 1550000
paid to broker 50000
New Capital 1600000
3. Financial statements of Electro engineering
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