Burton Sensors, Inc Case Solution
High Growth Strategy
On the basis of data given in the Exhibit A, the company should continue to pursue its high growth strategy but with aggressive targets as compared to current targets, as it would lead to a positive change in EPS, negative change in Debt to Equity and Leverage ratios. It would also enable the company to fulfil the restrictions over future debt.Burton should finance the growth strategy by equity to achieve the restrictions and targets. As EPS would increase due to the growth strategy, Burton’s stock price would increase.
Purchase of Thermowell Machine
Thermowell machine has a positive NPV i.e. $483720, and an IRR greater than the company’s WACC i.e. 19%. On the basis of positive NPV and IRR, the company should purchase thermo well machine.(Brigham, 2016)
Issuance of New Equity
The company should issue new stock to private equity investor. Although, it would result in a huge decline in EPS,and might cause the share prices to decline. But the offer would enable the company to fulfil the restrictions and targets in near future with normal growth rates rather than aggressive growth. Along with it, it would provide necessary funds to the company, which are required for its growth strategy.(Wang, 2018)
Acquisition of Electro-Engineering
On the basis of Negative NPV i.e. -$2453 and IRR i.e. -7%, the company should not acquire Electro-Engineering.
The firm can only pursue its growth strategy and the issuance of common stock. The company should prioritise issuance of new stock to finance its growth strategy.
Exhibits
Exhibit A: Growth Strategy
| Overall Impact of Growth Strategy On Burton’s Financials | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| EPS Previous | 0.38 | 0.46 | 0.5 | 0.54 | 0.6 |
| EPS Current | 0.68 | 0.87 | 1.12 | 1.43 | 1.81 |
| % Change in EPS | 44% | 47% | 55% | 62% | 67% |
| Change in Liab./book E Ratio | |||||
| Previous | 4.4 | 3.5 | 2.7 | 2.1 | 1.7 |
| Current | 2.9 | 2.8 | 2.5 | 2.3 | 2.1 |
| % Change in Debt to Equity | -35% | -21% | -7% | 9% | 21% |
| Change in Leverage Ratio | |||||
| Previous | 3.2 | 2.4 | 1.8 | 1.3 | 1 |
| Current | 2.01 | 1.83 | 1.53 | 1.23 | 0.95 |
| % Change in Leverage Ratio | -37% | -24% | -15% | -5% | -5% |
| Restrictions an Targets: | |||||
| Outstanding Loans/A/R+Inv (75%) | 87% | 72% | 55% | 41% | 29% |
| debt to equity (3) | 2.9 | 2.8 | 2.5 | 2.3 | 2.1 |
| Leverage ratio target Total Ibd/equity (1) | 2.0 | 1.8 | 1.5 | 1.2 | 0.95 |
Exhibit B: New Stock
| Overall Impact On Burton’s Financials | |||||
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Net Income | 571.3 | 686.8 | 749.9 | 813.5 | 895.5 |
| No. of Outstanding Shares | 2000 | 2000 | 2000 | 2000 | 2000 |
| EPS Previous | 0.38 | 0.46 | 0.5 | 0.54 | 0.6 |
| EPS Current | 0.29 | 0.34 | 0.37 | 0.41 | 0.45 |
| % Change in EPS | -33% | -34% | -33% | -33% | -34% |
| Change in Leverage Ratio (Liab./book E) | |||||
| Previous | 4.4 | 3.5 | 2.7 | 2.1 | 1.7 |
| Current | 3.1 | 2.6 | 2.1 | 1.7 | 1.4 |
| % Change in Leverage Ratio | -30% | -26% | -21% | -18% | -17% |
| Change in T IBD/book equity | |||||
| Previous | 3.2 | 2.4 | 1.8 | 1.3 | 1 |
| Current | 2.2 | 1.8 | 1.4 | 1.1 | 0.8 |
| % Change | -33% | -27% | -24% | -19% | -20% |
| Restrictions an Targets: | |||||
| Outstanding Loans/A/R+Inv (75%) | No Change | ||||
| debt to equity (3) | 3.1 | 2.6 | 2.1 | 1.7 | 1.4 |
| Leverage ratio target Total Ibd/equity (1) | 2.2 | 1.8 | 1.4 | 1.1 | 0.8 |
