Burton Spenser Inc.: Financial Analysis and Investment Strategies

This accounting assignment analyzes Burton Spenser Inc.'s financial strategies, focusing on growth through equity financing, investment in thermowell machines, and the potential acquisition of Electro-engineering Inc. The analysis evaluates the impact of these decisions on the company's stock price, earnings per share (EPS), and overall profitability. The report examines the benefits of acquiring Electro-engineering Inc., including cost reduction and access to more durable and less expensive sensors. The conclusion supports the acquisition of Electro-engineering Inc. and the investment in thermowell machines, highlighting the potential for improved profitability and cost savings. The assignment also considers the offer from a private investor and its effect on the total number of equity shares. References from various academic sources support the analysis.

Accounting
Assignment

By student name
Professor
University
Date: 24th April 2019.
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Table of Contents
Introduction................................................................................................................ 3
Analysis...................................................................................................................... 3
Conclusion.................................................................................................................. 7
References..................................................................................................................... 8
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Introduction
The following assignment deals with the case of Burton Spenser Inc, in which the company is
aiming for the growth of the company by expanding its overall business and exploring various
options that the company has with respect to reducing the overall cost and increasing the overall
profit of the company and considering various options of investment that the company has.
Analytical review of all the options have been given below here under.
Analysis
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1) Marshall was financing its growth through internal sources previously and all its
operations were boot strapped but seeing the market that was emerging and the various
opportunities that was there, Marshall thought of switching to high growth strategy. In
this case the company offered its share to the public and raised funds through equity
financing. High growth strategy included increase in sales by taking on additional clients,
developing better marketing campaigns, any such activities that would help in improving
the business prospects. With respect to the sensor market there was stipulated to be a
cumulative annual growth rate of 4.5% and that was between 2017 and 2023. The market
was expected to reach a $3.5 billion by 2024. Thus, we see that given the high prospects
of growth, Marshall should stick to high growth strategy of raising finance.
This can be financed through issuing more shares to the public which means increased
equity financing and can take funds through venture capitalist who are interested in this
growing business to generate more revenue. High growth strategy cannot be funded only
through internal sources of finance, so the company needs to switch to other methods like
equity-based financing.
The potential effect of the growth of the market on Burton’s stock price would be that as
the market grows and the business becomes more profitable, the price of the stock would
also increase as the investor return shall also increase because of that. So, the prices of
the stock will grow as the business expands.
2) Thermowell is an important part of the RTD and there was a lot advantages that was
associated with installing a thermowell with the sensor. In 2016 the company spend
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around $1.4 million in purchasing the thermowell as the production was not able to
satisfy the needs of the company. So, Marshall thought of contacting a new manufacturer
from which they can purchase four thermowell machine for $600,000. Given this
prospect we need to check whether the net value from accepting this proposal would be
positive or not. The net savings on part of the company is more and if they invest in these
machines and thus the company should take an initiative to invest in these kinds of
machines so that the overall return is positive, and it would also solve the problem of
sensors for the company.
3) Marshall should accept the offer of the private investor as he needs to generate more
funds through equity financing and as per the brokerage firm Marshall will not get more
than $3.50 per share. So, if the investor was offering $3.50 per share than Marshall
should accept that offer and raise finance from that mode.
In case Marshall accept this offer, the total number of equity shares shall increase.
Previously the total number of share was 1,100,000 and now the private investor has
offered to acquire 450,000 shares so the total shares would increase to 1,550,000 shares
and 50,000 share that was paid to the broker shall also be included so that will make the
total share capital to be 16,00,000 and the earning per share shall also change. In 2016 the
EPS was 0.27, but now the EPS shall decrease as the total number of shares has
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decreased. Thus, we see that this would have a negative impact on the shareholders of the
company, as their EPS shall decrease.
After accepting the offer the share capital of the company in the balance sheet shall
increase by 15,75,000. And that would mean that there would be more growth
opportunity for the company as they will have more funds to invest (Boghossian, 2017).
4) Marshall is considering buying Electro-engineering Inc as the company is manufacturing
fibre-optic sensors. These sensors are less expensive and are overall more durable. They
are easier to install over other competitive products. The company is having huge issues
dealing with these kinds of sensors and their manufacturing as the overall cost associated
with these items are huge. It was also seen that if the company takeovers the operation of
EE it would help in reducing the selling and administrative expenses from 26.5% to
23.86% and if EE takes access to the supply chain of the company, it would help in
reducing the cost of goods sold from 51% to 49%. If EE were part of the bigger
enterprise, the suppliers would also provide better terms of trade credit to the company
(Bose, Podder, & Biswas, 2017). If we do a rational analysis the overall cost would
reduce, and low sensors would help in increasing the overall profit of the company. The
strong balance sheet of the company also attracted the attention of the Marshall, and thus
there were many such strong factors based on which the company can invest in the EE
holdings. The company has a strong balance sheet also that includes total assets of
$2million and revenue of $4million in 2016. Thus, we see that Marshall will earn more
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revenue if they ended up investing and taking over the investment related to Electro-
engineering Inc and manage its finances accordingly.
5) Given the overall prospect of the business it can be said that investing in EE shall help in
funding the thermowell machines as the total investment that is required for investing in
those machines can be easily generated through acquisition of EE, as it can be seen that
EE is having a large amount of unsecured funds that can be used initially to fund
operations. It was also found from the conversation that the owner of EE was ready to
sell its overall equity at a price that 10 times over its EBIT and that was in exchange of
Burtons common stock which was to be taken over at $4.75 per share (Webster, 2017).
So that is a profitable deal Moreover, acquisition of these thermowell machines shall also
help in reducing the cost to a huge level for the company so investing in the same seems
to be good prospect and that is supported with the acquisition of EE (Wellmer, 2018).
Conclusion
Based on the overall analysis it can be said that the company should go for acquisition of these
thermowell machines shall also help in reducing the cost to a huge level for the company so
investing in the same seems to be good prospect and that is supported with the acquisition of EE.
It will also help in improving the overall profit of the company with the reduction in the cost of
the sensors that are used in production of these thermowell machines.
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References
Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic
responsibility. Educational Philosophy and Theory, 50(3), 244-253.
Bose, S., Podder, J., & Biswas, K. (2017). Philanthropic giving, market-based
performance andinstitutional ownership: Evidence from an emerging. The
British Accounting Review, 3(1), 429-444.
Webster, T. (2017). Successful Ethical Decision-Making Practices from the
Professional Accountants' Perspective. ProQuest Dissertations Publishing,
3(1), 142-156.
Wellmer, A. (2018). The Persistence of Modernity: Aesthetics, Ethics and
Postmodernism (fourth ed.). UK: Polity Press.
Wendt, K. (2018). Positive Impact Investing: A Sustainable Bridge between Strategy,
Innovation, Change and Learning (first ed.). Switzerland: Springer.
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