Burton Sensors. Inc Case Solution & Answer

Burton Sensors. Inc Case Solution

Case Brief

Burton Sensors was an original equipment manufacturing company. The company is growing and has almost reached to its debt requirement, as mandated by the facilitating bank in the form of a credit line. In order to cope up with such issue and to support its growth and expansion opportunities; the company’s management wants to go for equity financing. The key options proposed by the company’s Chief Executive Officer include the purchase of new therms well machines costing $600,000, acquisition of EE Incorporation at $4.75 per share and the issuance of new common stock. The options will be analysed based on the NPV and other qualitative assessment.

Question No 1

The net profitability of Burton’s sensors is continuously increasing, as shown by the company’s income statement in the Exhibit 1. The company’s cash position is also strong, as it has the ability to pay for dividend and invest cash in market opportunities. The company earnings per share is also increasing, which is a positive sign, indicating the company’s growth. It also shows that the company’s profitability is increasing. From these figures, Marshallis suggested to pursue the high growth strategy, as the company is growing and the profits are increasing.

In addition, the solvency ratio analysis reveals that the company is mainly reliant on equity financing; however, the company’s debt to equity ratio has gone through major fluctuations over the past. The company’s ability to pay for its interest expense from its operating income is strong as indicated by the interest coverage ratio.

To finance the company’s growth strategies; Marshall has different options available, i.e. the company can expand its growth through investing the retained earnings, which will ultimately increase the company’s shareholders’ equity. However, this option would require Marshall to not pay dividends to the existing shareholders, most of whom are her family members and her employees. The other option is to implement a new stock offering to the private sector. However, is analysed through a contextual analysis that with issuance of new stock; the company’s share price and EPS decrease, but in future, the company would be able to achieve its target without an aggressive growth.

The effect of growth options on the company’s stock are summarized as follows

  • The purchase of thermos well machines are supposed to create a positive net present value, which increases the company’s share price.
  • The issuance of new equity would negatively affect the company’s price and earnings per share.

Question No 2

The net present value generated by the purchase Thermometer machine is positive i.e. it creates NPV of $947,555.38. In addition, the internal rate of return, i.e. 21.97% generated by the purchase of the thermowell machines is greater than the weighted average of capital, i.e. 4.3% (Appendix 1). So, it is recommended that the company should purchase the thermowelll machines.

Question No 3

The equity private equity offering should be accepted by Marshall. Marshal should issuance new equity, despite the option would result in a decreasing company’s share price and earnings per share. However, the case analysis reveals that the issuance of new stock would enable the company to achieve the target leverage ratio of 1:1 and meet the bank’s loan restrictions. The company will be able to achieve its targets without an aggressively growth rate approach. Lastly, it would generate sufficient financing for the company to meet its growth initiatives……………………

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