Competition Bikes Budgetary Analysis Budgetary Areas Raising

Competition Bikes Budgetary Analysis

Budgetary Areas Raising Concern in the Budget Plan.

Competition Bikes, Inc. - Year 8 Budget Concerns

The master budget for year 8 of Competition Bikes, Inc. has all of the required schedules and data. The data is generally sound and there are but a few concerns with regards to its presentation and content.

Concerns -- Lack of Quarterly Activity Reporting

The merger committee's first concern is that all of the reported activity is not broken down by quarter. Since bicycling is usually practiced in the outdoors and is weather dependent, we can assume seasonal the usual seasonal trends with regard to competitions and events that revolve around professional cycling teams.

Without a separation of production (especially by product category, e.g., Carbonlite, etc.) activity by quarter, we cannot forecast and respond to peak and low seasons. For example, many materials are purchased without regard to seasonal activity. In other words, if the peak is summer, the company should be building up inventory in the spring while lowering inventory it in fall, optimizing storage and allowing its conversion to other uses when not in service. Higher inventory levels can than be avoided. Reserve inventory can then be to cover unexpected increases in sales and not to cover up budgeting anomalies.

Without a quarterly breakdown of the data, it is impossible to have consistent and coherent planning to base a merger Canadian Bikes Inc. This would then make a purchase of Canadian Bikes Inc. A more reasonable proposition. The share sale offer price of seems reasonable at $1.485/share due its being 10% over the current market price. Also, we would acquire all licenses, especially to the bike base on the titanium frame and obviate the requirement of capital investment for the licensing that the management so strongly opposes anyway.

2. It is our recommendation lease the facility. Total costs for leasing the facility would be $527,000.

Proposed Expansion Analysis

Optimal Capital Structure

1. Compute the optimal capital structure based on obtaining the required funds from bank loan at 6%. The bank will require a compensating balance of $150,000 (earning 1%) to be maintained.

2. Computesthe optimal capital structure based on obtaining the required funds by issuing only bonds.

3. The student computes the optimal capital structure based on obtaining the required funds by issuing 5-year, 9% bonds for 50% and preferred stock for 50%.

4. The student computes the optimal capital structure based on obtaining the required funds by issuing 5-year, 9% bonds for 20% and common stock for 80%.

5. The student computes the optimal capital structure based on obtaining the required funds by issuing 5-year, 9% bonds for 40% and common stock for 60%.

6. The student computes the optimal capital structure based on obtaining the required funds by issuing 5-year, 9% bonds for 60% and common stock for 40%.

Choose the best option after considering the risks inherent in the options available. What measure is used in this analysis that indicates the best option? Use that measure for your choice.

CAPITAL BUDGETING

Complete a capital budgeting analysis based on the next five years of projected cash flows. You will compute the after tax cash flows for five years using two different sales forecasts (given) and then compute the net present value and internal rate of return for both sales forecasts.

The following data support this capital budgeting analysis:

1. The cost to build the manufacturing facility is expected to be $400,000. (All figures are in U.S.$) Working capital of $200,000 will also be necessary to support the operation. These two items will be considered as the total investment in the capital structure analysis.

2. The depreciation on the new asset will be based on a 10-year life. The building is expected to have $250,000 value at the end of the ten years.

3. Management has decided that the most reliable data for a capital budgeting analysis is to estimate the number of product sales using the U.S. pricing and cost data. It is anticipated that costs will be consistent in the new Canadian location.

Low demand: