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Finance — Practice Case 3
Case (80 minutes)
DeAngelos Foods Ltd. (DeAngelos) is a grocery store company specializing in high-
quality fresh produce, and gourmet foods. Cu
ently, there are three locations in
downtown Vancouver.
DeAngelos is a private company, with 100,000 common shares issued and outstanding
to each of Brenda and Anthony DeAngelo (200,000 common shares total). The
company follows accounting standards for private enterprises (ASPE) for accounting
purposes. DeAngelos’ first store opened 20 years ago, when Anthony a
ived in Canada
from Italy. Six years later, a second location was opened, followed by a third location.
All three stores have similar formats and layouts. All inventory items are sourced locally,
where possible. Anthony and Brenda pride themselves on having developed stores
where customers enjoy the shopping experience.
DeAngelos has recently decided to expand outside of the downtown core and plans to
open one new store in July 2020 and another in June 2021. The new stores will be
similar in format and size to the cu
ent locations.
You, CPA, work as a consultant for Henderson and Mulik (HM), a regional financial
consulting firm. Anthony recently contacted David Henderson, a partner at HM, for
financing advice for the expansion. DeAngelos requires $13.4 million to finance
leasehold improvements and new equipment purchases for the new locations. Inventory
and store opening costs can be financed via the cu
ent line of credit and cash flow from
operations.
Anthony has provided David with a three-year operating projection including both the
income statement and balance sheet (Appendix I). These projections include existing
financing but do not include any new financing alternatives for the expansion.
It is now January 2020. David would like you to review the three new financing
alternatives (Appendix II) and prepare an updated set of income statement and balance
sheet projections for each alternative, using Anthony’s operating projections as a base
(Appendix I). David also suggests that you provide the DeAngelos with qualitative
considerations and a final recommendation.
Your response should be no longer than 2,400 words, excluding any Excel files.
Finance — Practice Case 3 Case
2 / 6
Appendix I
DeAngelos Foods Ltd.
Actual and forecast income statements prepared by Anthony DeAngelo
For the years ended December 31
(Excluding new financing charges)
(in ’000s)
Actual Forecast Forecast Forecast
XXXXXXXXXX
Sales $ 55,080 $ 64,444 $ 80,555 $ 91,833
Cost of goods sold (37, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,610)
Gross profit 17,626 21,911 27,389 31,223
Direct store expenses (12, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,403)
Pre-opening expenses — (1,800) (2,300) —
Amortization (Note 1) (1,200) (1,239) (2,062) (2,859)
General and administration (1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,906)
Operating income $ 2,204 $ 2,992 $ 3,552 $ 6,055
Interest on line of credit (Note XXXXXXXXXX50)
Interest on mortgage (Note XXXXXXXXXX) (448)
Interest on new financing ? ? ?
Earnings before income taxes and
onus 1,669 2,458 3,037 5,557
Amount available for management
onus (Note XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,057)
Earnings before income taxes XXXXXXXXXX
Income taxes (Note XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX)
Net income XXXXXXXXXX
Opening retained earnings XXXXXXXXXX,123 1,548
Dividends — — — —
Closing retained earnings $ XXXXXXXXXX $ 1,123 $ 1,548 $ 1,973
Finance — Practice Case 3 Case
3 / 6
Appendix I (continued)
DeAngelos Foods Ltd.
Actual and forecast balance sheets prepared by Anthony DeAngelo
As at December 31
(Excluding new financing)
(in ’000s)
Actual Forecast Forecast Forecast
XXXXXXXXXX
ASSETS
Cash (Note 5) $ XXXXXXXXXX $ XXXXXXXXXX $ XXXXXXXXXX $ XXXXXXXXXX
Inventory 1,762 1,981 2,476 2,823
Prepaid expenses XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Total cu
ent assets XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,141
Property, plant, and equipment (Note XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,063
Total assets $ 13,035 $ 20,209 $ 27,504 $ 28,204
LIABILITIES
Bank line of credit (Note 2) $ XXXXXXXXXX $ XXXXXXXXXX $ 1,238 $ 1,412
Accounts payable 3,078 3,496 4,370 4,982
Cu
ent portion of mortgage debt XXXXXXXXXX
Cu
ent portion of new financing ? ? ?
Total cu
ent liabilities 4,328 4,937 6,058 6,844
New financing required (plug) — 6,590 12,789 12,728
Long-term mortgage debt (Note XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,559
Total liabilities $ 12,237 $ 18,986 $ 25,856 $ 26,131
SHAREHOLDERS’ EQUITY
Common shares $ XXXXXXXXXX $ XXXXXXXXXX $ XXXXXXXXXX $ XXXXXXXXXX
Retained earnings XXXXXXXXXX1, XXXXXXXXXX, XXXXXXXXXX,973
Total shareholders’ equity XXXXXXXXXX1, XXXXXXXXXX, XXXXXXXXXX,073
Total liabilities and shareholders’ equity $ 13,035 $ 20,209 $ 27,504 $ 28,204
Finance — Practice Case 3 Case
4 / 6
Appendix I (continued)
DeAngelos Foods Ltd.
Forecast notes prepared by Anthony DeAngelo
(in ’000s)
Note 1: Property, plant, and equipment
XXXXXXXXXX
Opening balance $ 9,700 $ 10,323 $ 17,184 $ 23,822
Additions (sustaining) 1,823 1,700 1,700 3,100
Additions (new equipment) — 1,400 1,400 —
Additions (new leaseholds) — 5,000 5,600 —
Amortization (12% XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,859)
Closing balance $ 10,323 $ 17,184 $ 23,822 $ 24,063
Assume an average amortization rate of 12% on the opening property, plant, and
equipment balance on a go-forward basis. Capital cost allowance approximates
amortization.
Note 2: Existing financing
The line of credit with King Bank allows a maximum limit of up to 50% of the inventory
and requires that the cu
ent ratio be at least 0.6:1. Interest on the line of credit is
incu
ed at 4% annually.
Additional unsecured operating funds can be bo
owed at 9% annually.
The existing mortgage, also with King Bank, requires principal payments of $450,000
annually on December 31 and is secured by real estate of the existing three locations.
Interest on the existing mortgage is incu
ed at 6% annually.
All loans from King Bank include personal guarantees from the shareholders.
Note 3: Management bonus
Anthony and Brenda DeAngelo do not take a salary, and instead live off of annual
onuses. The company prefers to keep income before taxes at $500,000 to maximize
the small business deduction and pay the lowest rate of tax in the corporation.
Note 4: Income tax
The company’s cu
ent tax rate is 15%, assuming $500,000 or less of taxable income.
Above this threshold, the effective corporate tax rate is 25%.
Note 5: Cash
A minimum cash balance of $400,000 is required for cash floats and purchases.
Finance — Practice Case 3 Case