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InfoMemo Audit 2.0 Citlali Perez, Saida Schmidt, Jacob Brownfield, Justin Ricaurte
Scenario <ul><li>Start-up company preparing to launch a mini-laptop </li></ul><ul><li>Needs $15 million  </li></ul><ul><li...
<ul><li>Loan </li></ul><ul><li>10- year  </li></ul><ul><li>20% Interest  </li></ul><ul><li>Bond </li></ul><ul><li>10-year ...
Outline <ul><li>Explanation of Term Sheet </li></ul><ul><li>Consequences of Term Sheet </li></ul><ul><ul><li>Scenario 1 </...
Explanation of Term Sheet
<ul><li>Debt converted into common stock at the creditor’s option. </li></ul>Convertible Bond Stock Bond
Accounting Guidance <ul><li>APB 14 </li></ul><ul><li>FAS 133 </li></ul><ul><li>FAS 84 </li></ul><ul><li>EITF 98-5 </li></u...
<ul><li>1/1/X1 </li></ul><ul><li>Dr. Cash  $15M </li></ul><ul><li>Cr. Bonds Payable $15M </li></ul>The Balance Sheet Journ...
<ul><li>12/31/X1,X2…10 </li></ul><ul><li>Dr. Bond Interest Expense  $1.5M </li></ul><ul><li>Cr. Cash $1.5M </li></ul><ul><...
Consequences of Term Sheet Scenario 1
Assumptions <ul><li>No discount or premium to be amortized </li></ul><ul><li>No debt issuance costs </li></ul><ul><li>Paid...
Conversion After 5 Years <ul><li>*Assuming $1 Par Value </li></ul>1/1/X6 Dr. Bonds Payable $15M Cr. Common Stock $ 1.5M Cr...
Effect on EPS <ul><li>Prior to Conversion </li></ul><ul><li>Net Income   $10,000,000 </li></ul><ul><li>Outstanding Shares ...
Sample Footnote Disclosure 0.62 $   0.48 $   0.64 $ Diluted net income per share                    0.7 $   0.55 $   0.72 ...
  Consequences of Term Sheet:  Scenario 2
Beneficial Conversion Feature Effective Conversion Price  $10 < Fair Value of the Stock (@ commitment date)  $12 Convertib...
Valuation of Beneficial Conversion Feature <ul><li>Fair Value of Stock  $12 </li></ul><ul><li>Conversion Price  ($10)  </l...
Journal Entries for Beneficial Conversion <ul><li>1/1/X1 </li></ul><ul><li>Dr. Cash  $15M </li></ul><ul><li>Dr. Bond Disco...
Interest Expense and Bond Discount Amortization <ul><li>Debt discount…should be amortized as a component of interest expen...
Journal Entries for Beneficial Conversion <ul><li>12/31/X1,X2…X7 </li></ul><ul><li>Dr. Interest Expense  $1.5M </li></ul><...
<ul><li>All unamortized bond discount    Interest Expense </li></ul><ul><ul><li>$3M/10yrs = $300K/yr </li></ul></ul><ul><...
Journal Entries for Beneficial Conversion (After IPO) <ul><li>IPO: 1/1/X8 </li></ul><ul><li>Dr. Interest Expense $900K </l...
Analysis of Financing Options InfoMemo
Alternative Financing Instruments <ul><li>Common Stock </li></ul><ul><li>Bridge Loan </li></ul><ul><li>Preferred Stock   <...
Investment Assumptions <ul><li>Company lasts for at least 10 years </li></ul><ul><li>Investor has 50/50 probability of con...
Key Good Bad
<ul><li>Equity Dilution </li></ul><ul><li>Cost </li></ul><ul><li>Loss of Control </li></ul><ul><li>Investor-Company Intere...
What InfoMemo Cares About Cost Lost Control Aligned Interests Common Bridge Convertible Preferred Loan Good Bad Dilution
<ul><li>Potential ROI </li></ul><ul><li>Taxes </li></ul><ul><li>Risk </li></ul>What the Investor Cares About
What the Investor Cares About ROI Risk Taxes Common Bridge Convertible Preferred Loan Good Bad
The Convertible Bond Dilution Cost Lost Control Aligned Interests ROI Risk Taxes
Recommendation <ul><li>Currently, Convertible Bond best option </li></ul><ul><li>Solicit More Investors </li></ul>
Questions? InfoMemo
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ALPFA National Convention KPMG Case Competition

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This is the PowerPoint for my team's case presentation. My part was on the Financial Analysis. The tables had each column appearing one-at-a-time, so that it was easier for people to follow what I was saying, and the boxes with a white border were the points I briefly talked about.

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  • Transcript of "ALPFA National Convention KPMG Case Competition"

    1. 1. InfoMemo Audit 2.0 Citlali Perez, Saida Schmidt, Jacob Brownfield, Justin Ricaurte
    2. 2. Scenario <ul><li>Start-up company preparing to launch a mini-laptop </li></ul><ul><li>Needs $15 million </li></ul><ul><li>Two current options: </li></ul><ul><ul><li>Bank Loan </li></ul></ul><ul><ul><li>Investor Convertible Bond </li></ul></ul>
    3. 3. <ul><li>Loan </li></ul><ul><li>10- year </li></ul><ul><li>20% Interest </li></ul><ul><li>Bond </li></ul><ul><li>10-year </li></ul><ul><li>10% interest </li></ul><ul><li>Convertible </li></ul>
    4. 4. Outline <ul><li>Explanation of Term Sheet </li></ul><ul><li>Consequences of Term Sheet </li></ul><ul><ul><li>Scenario 1 </li></ul></ul><ul><ul><li>Scenario 2 </li></ul></ul><ul><li>Analysis of Financing Options </li></ul>
    5. 5. Explanation of Term Sheet
    6. 6. <ul><li>Debt converted into common stock at the creditor’s option. </li></ul>Convertible Bond Stock Bond
    7. 7. Accounting Guidance <ul><li>APB 14 </li></ul><ul><li>FAS 133 </li></ul><ul><li>FAS 84 </li></ul><ul><li>EITF 98-5 </li></ul><ul><li>EITF 00-27 </li></ul>
    8. 8. <ul><li>1/1/X1 </li></ul><ul><li>Dr. Cash $15M </li></ul><ul><li>Cr. Bonds Payable $15M </li></ul>The Balance Sheet Journal Entry for the issuance of the bond
    9. 9. <ul><li>12/31/X1,X2…10 </li></ul><ul><li>Dr. Bond Interest Expense $1.5M </li></ul><ul><li>Cr. Cash $1.5M </li></ul><ul><li>If interest accrued: </li></ul><ul><li>Dr. Bond Interest Expense $1.5M </li></ul><ul><li>Cr. Bond Interest Payable $1.5M </li></ul>Journal Entries to record payment on interest
    10. 10. Consequences of Term Sheet Scenario 1
    11. 11. Assumptions <ul><li>No discount or premium to be amortized </li></ul><ul><li>No debt issuance costs </li></ul><ul><li>Paid interest each year </li></ul>
    12. 12. Conversion After 5 Years <ul><li>*Assuming $1 Par Value </li></ul>1/1/X6 Dr. Bonds Payable $15M Cr. Common Stock $ 1.5M Cr. APIC $13.5M
    13. 13. Effect on EPS <ul><li>Prior to Conversion </li></ul><ul><li>Net Income $10,000,000 </li></ul><ul><li>Outstanding Shares 2M </li></ul><ul><li>EPS $5.00 </li></ul><ul><li>After Conversion </li></ul><ul><li>Net Income $10,000,000 </li></ul><ul><li>Outstanding Shares 2M + 1.5M </li></ul><ul><li>EPS $2.86 </li></ul>
    14. 14. Sample Footnote Disclosure 0.62 $   0.48 $   0.64 $ Diluted net income per share                   0.7 $   0.55 $   0.72 $ Basic net income per share                   69,412     76,516     85,919   Shares used in computation of diluted net income per share                   2,548     6,163     6,163   Add: Dilutive effect of convertible debt 5,639     6,254     5,017   Add: Dilutive effect of employee stock options                   61,225     64,099     74,739   Shares used in computation of basic net income per share                   —     —     (108   Less: Weighted average common shares subject to repurchase 61,225     64,099     74,847   Gross weighted average common shares outstanding                 Shares (denominator for basic and diluted): 43,321 $   36,602 $   55,369 $ Adjusted net income (numerator for diluted)                   438     1,421     1,415   Add: Interest expense on convertible notes, net of tax 42,883 $   35,181 $   53,954 $ Net income (numerator for basic)                   2004   2005   2006   Year Ended December 31,  
    15. 15. Consequences of Term Sheet: Scenario 2
    16. 16. Beneficial Conversion Feature Effective Conversion Price $10 < Fair Value of the Stock (@ commitment date) $12 Convertible debt instrument includes a beneficial conversion feature for which a value must be assigned.
    17. 17. Valuation of Beneficial Conversion Feature <ul><li>Fair Value of Stock $12 </li></ul><ul><li>Conversion Price ($10) </li></ul><ul><li>Intrinsic Value $2 </li></ul><ul><li># of shares x 1.5M </li></ul><ul><li>Total Intrinsic Value = $3M </li></ul>
    18. 18. Journal Entries for Beneficial Conversion <ul><li>1/1/X1 </li></ul><ul><li>Dr. Cash $15M </li></ul><ul><li>Dr. Bond Discount $3M </li></ul><ul><li>Cr. Bond Payable $15M </li></ul><ul><li>Cr. APIC $3M </li></ul>
    19. 19. Interest Expense and Bond Discount Amortization <ul><li>Debt discount…should be amortized as a component of interest expense. </li></ul><ul><ul><li>$3M/10yrs = $300K/yr </li></ul></ul>*Note: Should use the Effective Interest Rate Method to calculate amortization per EITF 00-27, pars. 19-20
    20. 20. Journal Entries for Beneficial Conversion <ul><li>12/31/X1,X2…X7 </li></ul><ul><li>Dr. Interest Expense $1.5M </li></ul><ul><li>Cr. Interest Payable $1.5M </li></ul><ul><li>Dr. Interest Expense $300K </li></ul><ul><li>Cr. Bond Discount Amort. $300K </li></ul>
    21. 21. <ul><li>All unamortized bond discount  Interest Expense </li></ul><ul><ul><li>$3M/10yrs = $300K/yr </li></ul></ul><ul><ul><li>$3M – (7yrs x $300K/yr) = $900K </li></ul></ul><ul><li>Increase equity upon conversion of debt by an amount equal to the carrying value of the debt </li></ul><ul><ul><li>Bonds Payable = $15M </li></ul></ul>Accounting for Unamortized Bond Discount upon Conversion
    22. 22. Journal Entries for Beneficial Conversion (After IPO) <ul><li>IPO: 1/1/X8 </li></ul><ul><li>Dr. Interest Expense $900K </li></ul><ul><li>Cr. Bond Discount Amort. $900K </li></ul><ul><li>Dr. Bond Payable $15M </li></ul><ul><li>Cr. APIC $15M </li></ul>
    23. 23. Analysis of Financing Options InfoMemo
    24. 24. Alternative Financing Instruments <ul><li>Common Stock </li></ul><ul><li>Bridge Loan </li></ul><ul><li>Preferred Stock </li></ul>
    25. 25. Investment Assumptions <ul><li>Company lasts for at least 10 years </li></ul><ul><li>Investor has 50/50 probability of converting to stock </li></ul>
    26. 26. Key Good Bad
    27. 27. <ul><li>Equity Dilution </li></ul><ul><li>Cost </li></ul><ul><li>Loss of Control </li></ul><ul><li>Investor-Company Interests Aligned </li></ul>What InfoMemo Cares About
    28. 28. What InfoMemo Cares About Cost Lost Control Aligned Interests Common Bridge Convertible Preferred Loan Good Bad Dilution
    29. 29. <ul><li>Potential ROI </li></ul><ul><li>Taxes </li></ul><ul><li>Risk </li></ul>What the Investor Cares About
    30. 30. What the Investor Cares About ROI Risk Taxes Common Bridge Convertible Preferred Loan Good Bad
    31. 31. The Convertible Bond Dilution Cost Lost Control Aligned Interests ROI Risk Taxes
    32. 32. Recommendation <ul><li>Currently, Convertible Bond best option </li></ul><ul><li>Solicit More Investors </li></ul>
    33. 33. Questions? InfoMemo

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