PRAIRE Ventures Limited Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Debt:

The company was earlier financing its money through offering the new common equity by the management which will allow the company to predict and forecast the profitability and the performance of the company from the time period 2005 to 2012. The company is generating the profits and transferring it to retained earnings of 2889 which is continuously increasing at a rapid rate and it reaches to the amount of 8354 in 2012 which is an increase of around 5500+ and 60+% growth in net income after tax. However, this will result in lower interest cost and there will be no any higher changes in balance sheet except an increase in common stock of which will also increase the cash requirements by $300,000.

Now, if the company acquires all the financing requirements from debt, it will result in higher finance cost for the Crestline which will eventually increase the gearing ratio of thecompany and the earnings of the company will also be reduced in the projected years because finance cost is part of the expenses. It will provide the company with a benefit through tax shield which will reduce the burden of high finance cost. This will lead to the high cash requirement for the company due to financing through debt. It can be seen from excel spreadsheet. The company will have to pay more interest expense which will result in lower profit before tax. The company is earning before income and tax around 3965 to 12101 dollars. However, interest cost has increased by 30 dollars each year with the acquisition of debt of $300,000. This will lead to the lower profit before tax of around $30 each year and it will get the tax benefit of $9 each year. Moreover, thecompany will not be paying any dividend which will lead to higher retained earnings for the company.

PRAIRE Ventures Limited Harvard Case Solution & Analysis

This will lead to the cash and marketable securities requirement of around 6505 in 2005 which is reduced to 4993 dollars and 2334 dollars in 2007 whereas, it becomes positive in the later years and it reaches to the 25993 dollars in 2012. The debt financing will change the capital structure of the company and the gearing ratio, as well as leverage position of the company, will be changed which will lead to the fundamentals for attracting the investors for developing new ways of credit terms and utilization of money for paying off its debt.

Moreover, for the acquired company, it is necessary to check whether the cash flows of Crescent are quite enough to pay off its debt or not and its creditworthiness in the market before acquisition so that it does not lead to the unfavorable and unprofitable deal for the company before they move to the next round of the deal of acquiring and paying all the debts of the company. The creditworthiness of the company will be checked by the company through its interest coverage ratio which will lead to the better decision for acquiring the target or not...............

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