Executive Summary
This paper will evaluate the value of a probable takeover company by Yoogiboost as a plan of expansion of the company. Later the various options of finance are discussed selecting the most suitable one.
Introduction
Yoogiboost is a healthy frozen yogurt food chain. It provides people with the option of eating healthy frozen yogurt with some wide variety of delicious toppings. This company was established 12 years ago and has expanded immensely during that time span. It is running in the competitive business of fast food chains, however it falls in the healthy side of the foo business. Hence one of its biggest competitors in the market is Healthysubs. Healthysubs is a publically own company that specializes in providing healthy organic sandwiches to the customers. It’s one of our biggest competitors in the market. The company’s strategy is to expand and acquire new products to the customers from the same market. Hence, Healthysubs is a fairly acquisition target for Yoogiboost. This would offer customers a wide variety of healthy food products, with Yoogiboost being the dessert and Healthysubs serving as the entre for health conscious individuals.
Valuation
Valuing a target company is of crucial importance before acquiring the company. It signifies the fact that if its profitable for the company to actually go ahead with the planned expansion. If the Net Present Value of the investment is positive, then Yoogiboost will be able to add value through taking over Healthysubs. The valuation technique we would employ is net present value (NPV) and following are the given financials for the calculation o NPV.
Yoogiboost is contemplating on acquiring Healthysubs Company for $15,000,000. Healthysubs cost of capital is 16%. Established on market analysis, a leveled cost of capital for Healthysubs is 12%. Yoogiboost financial advisors have anticipated that Healthysubs can produce $ 280,0000 free cash flows (FCF) consecutively for 12 years.
Initial Cash Outlay $ (15,000,000)
FCF of $280,0000 *6.1944 * $ 19822080
NPV $ 2344320
Established on NPV, Yoogiboost should buy Healthysubs, as there is a positive NPV for this investment.
Financial Analysis
It’s imperative to assess the financial position of the company before going ahead with the expansion. This gives a clear picture if the company is able to afford the expansion and carry on its burden. The most important is the profitability ratios. These ratios will measure Yoogiboost’s current aptitude of producing earnings as compared to its expenses. This will highlight the fact that company is going through a profitable phase and should be able to afford expansion as it is generating profit. The company’s financial reports shows that it has a profit margin of 15%, which has shown a consistent increase during the past years. We will also examine the retained earnings of the company. This will show that how much surplus cash is left with the company after it has paid all its dividends. This can be used to finance the expansion. It will be a evaluation that the company has more then enough earnings that should be invested in more profitable ventures to generate further profit. The history for the company shows a consistent improvement in the retained earnings. It shows that Yoogiboost is generating enough cash earnings and it should invest it in expansion. By looking at these two major figures it becomes clear that the company can afford expansion and it should go ahead with the investment.
Source of Finance
Debt Market
One of the option for debt financing available for Yoogiboost is to raises money by selling bonds, bills, specific and influential investors. In return for loaning the capital, the entities become creditors and obtain an assurance that the primary and interest on the debt will be reimbursed over a specific period of time.
Banks are another options for borrowing funds for this expansion.
Commercial banks usually provide a vital source for finance for lucrative expansion opportunities. With the current financial portfolio of the company, it will be easier extracting finance from the commercial banks.
Commercial finance companies are also a source of finance available to raise the required capital. ‘Commercial finance companies are second only to banks in making loans to small businesses, and, unlike their conventional equivalents, they are willing to bear more risk in their loan portfolios’ (Wolff)
Equity Market
On of the sources of finance available for Yoogiboost is from the existing investors. The company can call up a meeting and present the current investment scenario. This can become one of the primary sources of finance for raising the required capital for the competitors purchase. It will be beneficial in terms of less-time consuming in negotiation and the hassle free availability of the substantial amount of money.
The firm could also raise the required finance from wealthy individuals. According to a research in the book ‘Angel Investing’, it has been shown that wealthy individuals have less risk aversion and lesser expectation as compared to other investors hence they demand a lesser return on their portfolio which will make financing fairly cheaper comparatively.
Suitable Choice
After the careful analysis of the sources of financing options available to us. We would consider raising the required amount from the existing investors first and if any were left we would move on to a bank loan. The reason for the selection of our source of finance is the convenience and lower amount of cost involved in raising finance from the existing investors. Also theory of information asymmetry will support our decision. Akerlof (1970) provided theory of information asymmetry occurring when insiders such as management have more information than external investors do. Consequently, external investors would be incline to undervalue the venture and need higher return that ultimately increases the cost of capital of the firm (Ogden). Therefore, using the fund from the existing investors can lessen the adverse selection problem leading to lower cost of financing.
The signaling theory by Spence (1973) can support another benefit of using fund from the existing investors. Further investment from the existing investors will be a valuable signaling to the market as the existing investors are the ones who obtain the internal information, hence decision to invest more money in the firm can increase the confidence of the external investors (Na). This signal can act like a benchmark for the firm to raise fund from outsiders who have less information.
Therefore in light of all these above-mentioned benefit the preference would be to raise the capital from the existing investors.
Works Cited
Mason, Colin (2011) “Business Angels,” Encyclopedia of Enterpreneurship
Na, Dai (2007). “Does investor identity matter? An empirical examination of investments by venture capital funds and hedge funds in PIPEs,” Journal of Corporate Finance 13, 538- 563
Wolff, M. (n.d.). Sources of Financing: Debt and Equity. Retrieved December 16, 2014, from http://www.usheproduction.com/design/8020/downloads/4a.pdf
Stuart Paul, Geoff Whittam and Janette Wyper (2007) “The pecking order hypothesis: does it apply to start-up firms?,” Journal of Small Business and Enterprise Development 14, 8- 21
