The John M Case company is solely owned by Mr. Case and finances operations and capital budgets through internal revenues and accumulated goods. Mr. Johnson is seeking to finance the acquisition of the company. Venture capital firms would require a 20-25% annual return on a $9.5 million investment, which represents a deficit, while banks would consider lending if the loan value is backed by assets and the interest rate is above market. The company's cash flows were discounted to calculate a net present value of $11.5 million, exceeding the $20 million asking price. Management can maintain 51% control of common stock by finding a venture capital investor willing to accept a lower initial return. Mr. Johnson should structure the financing through a

1. Case Statement
The John M Case company's cost structure is 100 percent equity, with Mr. Case as
the sole owner. The capital budget comprises residual revenues from internal operations
less Mr. Case's desired annual income (dividends). Furthermore, the seasonal
accumulation of goods and receivables is supported internally (despite having a $2
million line of credit with a large bank). In this case, Mr. Johnson needs to figure out
how to finance the acquisition.
Analysis
Venture capital and the bank view:
From the venture capital perspective, an investment of $9.5 million under the
current terms would generate 10% per year in interest and convertible loan notes. This
means a deficit of 14% per year on the amount invested; the board would consider an
investment worth 20-25% return.
The bank, as a lender, would also analyze the company's profitability as well as the
condition of the loan's return. The company is currently expanding, with over $3.9
million in annual profit increases and more than 10% of total revenue. If the value of
the assets backing the loan is at least half the loan amount and the interest rate is higher
than the market rate, banks will most likely consider investing.
Company's valuation:
The company's cash flows can be discounted and valued based on future cash flow
estimates and then compared to quoted prices. Total capital and equity can be computed
using the debt/total capital ratio. Knowing these figures simplifies the WACC
computation. Venture capital firm's fund is predicted to return 20-25 percent, with a 9
percent annual debt safety ratio implying a 16 percent expected return on equity
collateral. The cost of debt is calculated by taking the weighted average of the three
debt instruments and their respective rates of return. The WACC changes from year to
year as the cost structure changes, with less debt and more equity being used each year.
The present value of each expected cash flow is computed by discounting it by its
associated WACC, while the final value is derived using a minimum projected growth
rate of 5% without changing the business model. A net present value of nearly $11.5
million is obtained by adding the cash flows and the ultimate value and deducting the
$20 million asking price. If the company had to be sold to pay off its debts right away,
it would owe about $10.3 million, leaving $1.2 million for project earnings.
Maintain 51% holding of common stock:
If the shareholding is 22.7 percent or less, management should be able to hold 51
percent of the common shares if they can find a venture capitalist ready to take the

2. initial return. This figure is calculated by multiplying the entire equity by 0.49 and then
dividing by their $9.5 million investment. This 13.7 percent return, when combined
with the 9 percent return on the securities offering, equals a total return of 22.7 percent,
which is the highest that management can afford to guarantee the outstanding shares.
Yet, there are no shares available for sale outside of the company. Reduce the venture
capital firm's initial yield or remove debt as quickly as feasible, which is the only way
to prepare for a public offering.
How to finance:
Obviously, finding a venture capital offer at the lowest possible interest rate is in
the management's best interests. Because the issue is to maintain control of the vote,
i.e., to keep a specified share of the shares, it may even be able to make a return trade-
off with the financing business. The annual premium rises as the quantity of warrants
decreases. According to a brief sensitivity analysis of the cost of equity, it can increase
to 26% (or 35% of the company's overall cost) before the project becomes negative.
These values can be set at levels representing management's financial aims and
preferences, depending on their profitability and public offering choices.
Furthermore, management may now choose whether to maintain seasonal internal
financing accumulation or begin using their credit line to develop leverage and conserve
some operating revenue for increased cash flow. This will be determined by the interest
rates offered by their banks and the proportion of overlap they intend to fund each year.
Mr. Johnson should invest in the company by increasing the loan rate and convertible
stock options to emphasize the control and get it financed.