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.

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…