Granite Apparel- Source of Funding
Presented to: Mr. Kurt Sullivan
Subject: Source of funding
From: JMSB consultants;
Despina Papadopoulos
Angela Christopoulos
Mathieu Apuzzo
AJ Kenth
Date: March 2007
Main Issues * Choosing the appropriate source of financing, between Initial public offering, long term debt or preferred shares, to raise funds for the expansion of Granite Apparel.
Recommendations * Granite Apparel should use an Initial Public Offering as a source for raising funds. Analysis
Quantitative
Initial Public Offering
The cost of issuing common shares for your company was found by adding the following expenses (APPENDIX ONE):
Bridge Financing Rate (Annual) | 10.25% | Amount of Bridge Financing | 50,000,000 | Period | 6 months | Yearly Interest Cost | 2,562,500 | Lump Sum Issuance Fee | 4,000,000 | Total Issuance Costs | 6,562,500 |
To issue common shares is very expensive to underwrite and there are also other related costs for a company going public. These costs can be: * More experienced accountants for financial statements issuance and high internal compliance * Auditing fees * Dividends
Much of the factors are above are very difficult to quantify, but using assumptions we could have an idea of the cost over a 5 year basis to compare with preferred shares.
First, let’s find a dividend cost, hoping the company does well and we pay out a 20% dividend rate with a growth of 25% in sales from 2007 - 2012. We get a total dividend amount to be 18.82 million (APPENDIX ONE). Since dividends are not an obligation but they are a benefit for shareholder satisfaction, we have a range over a 5 year period of costs between 11.5 million and 30.4 million. These values take into consideration many assumptions (g= 8%, b = 0.80 and ROE= 10.55%)
Total 5 year dividend | 18.82 million | Audit fee (1M per year assumption) | 5 million | Fees/ Bridge Financing | 6.56 million | Total | 30.380 million | Range | 11.5 - 30.4 million |
Subject: Source of funding
From: JMSB consultants;
Despina Papadopoulos
Angela Christopoulos
Mathieu Apuzzo
AJ Kenth
Date: March 2007
Main Issues * Choosing the appropriate source of financing, between Initial public offering, long term debt or preferred shares, to raise funds for the expansion of Granite Apparel.
Recommendations * Granite Apparel should use an Initial Public Offering as a source for raising funds. Analysis
Quantitative
Initial Public Offering
The cost of issuing common shares for your company was found by adding the following expenses (APPENDIX ONE):
Bridge Financing Rate (Annual) | 10.25% | Amount of Bridge Financing | 50,000,000 | Period | 6 months | Yearly Interest Cost | 2,562,500 | Lump Sum Issuance Fee | 4,000,000 | Total Issuance Costs | 6,562,500 |
To issue common shares is very expensive to underwrite and there are also other related costs for a company going public. These costs can be: * More experienced accountants for financial statements issuance and high internal compliance * Auditing fees * Dividends
Much of the factors are above are very difficult to quantify, but using assumptions we could have an idea of the cost over a 5 year basis to compare with preferred shares.
First, let’s find a dividend cost, hoping the company does well and we pay out a 20% dividend rate with a growth of 25% in sales from 2007 - 2012. We get a total dividend amount to be 18.82 million (APPENDIX ONE). Since dividends are not an obligation but they are a benefit for shareholder satisfaction, we have a range over a 5 year period of costs between 11.5 million and 30.4 million. These values take into consideration many assumptions (g= 8%, b = 0.80 and ROE= 10.55%)
Total 5 year dividend | 18.82 million | Audit fee (1M per year assumption) | 5 million | Fees/ Bridge Financing | 6.56 million | Total | 30.380 million | Range | 11.5 - 30.4 million |