Burton Sensors Incorporation Case Solution
Burton Sensors, Inc. a small sensor OEM (Original Equipment Manufacturer), is a rapidly growing company. It has almost reached to dent limitation, provided by the credit line facilitating bank and now it aims to go for equity financing in order to expand and meet the production needs. The company’s CEO is considering three possible solutions to resolve the issues being faced by the company. The options include: purchasing 4 Thermo-well machines at a cost of $600,000, issuing new common stock and acquiring the Electro engineering Inc. at a price of $4.75 per share in an all shares deal. Each option must be analysed based on its NPV and benefits provided to the company in order to resolve its key issues.(Fruhan, 2018)
(See Exhibit 1) From the table, we noticed that the Net income of Burton Sensor, Inc. is gradually increasing with a growing rate. The company has enough cash to invest and pay dividends to its investors later. It also shows an increase in the Earnings per share at a rate which is beneficial for the company. A higher earnings per share indicates that the company has higher profitability. So it is clear that Marshall should pursue the high growth strategy, because the company is doing well in profitability. The company’s bank loans to (receivables plus inventory), total interest bearing equity and debt, and liability to book equity, can obtain Marshall’s leverage ratio target of 1:1 and in future, liability to equity can be generated.
From the leverage ratio analysis; we understand that Burton Sensors Inc. mainly relies on equity finance. It also shows that the company’s debt to equity ratio has fluctuated over the past few years. Therefore, we observed that the company have enough money available in EBIT to cover its interest expenses.
Marshall has several ways to finance her high growth strategy. One way is that she should do it by utilizing the retained earnings as it will increase the company’s equity. Due to this, she wouldn’t need to issue any dividends to the shareholders as most of the company’s shareholder are from her family and other are her employees. Another way is that she should give new stock to the private investor. As per the contextual analysis; we have observed that issuing equity has driven down the EPS and the share price has also decreased, but in future it will achieve the target without any aggressive growth rate. She also has an option tofinance through bank loans.
The potential effect are the following growth on the company’s stock price:
- Due to the purchase thermo-well machines, a positive NPV can be achieved. Positive NPV contributes in increasing the price of shares.
- Issuing new equity shares tothe private investors which would resultin decline of EPS,which would contribute in decreasing the stock price………………………
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