Tipton Ice Cream

The Tipton Ice Cream Company is expecting strong growth in the coming year (1996) and the Tipton family needs to consider borrowing funds for a $5M expansion project for a new plant and equipment. Brenda Hood, the CFO is hoping to convince the family to borrow the funds and expand the company to keep up forecasted demands. This will be difficult since the Tipton’s believe strongly against borrowing. Hood has decided to prepare some financial forecasting statements to present to the Tipton family.

1) See “Equity 1996” on Exhibit 1.

2) See “Equity 1996” on Exhibit 2.

3) Cost of Goods estimate is obtained by: Beginning inventory + purchases (estimate from book) – ending inventory (from balance sheet. $11,500K + $101,487K -$19,231K=$93,756K

4) Tipton Ice Cream will need to borrow $11,442K. See “Bonds” under “Debt 1996” on exhibit 2.

6) See “Debt 1996” on Exhibit 1.

7) Tipton Ice Cream will need to sell 1,089,714 shares at $11.50 ($10.50 after brokerage fees) to obtain the needed funds (needed funds/$10.50). The Tipton family currently owns 1,200,000 shares at a par value of $10 per share and others own 800,000. This means non-Tipton stockholders will possess 1,889,714 shares out of 3,089,714 total shares, or 61.2% and the Tipton family owning only 38.8%.

8) (a) Dividends per share if financed by equity: 1.49

Earnings per share if financed by equity: 2.99

(b) Dividends per share if financed by borrowing: 2.07

Earnings per share if financed by borrowing: 4.42

See Exhibit 3.

Since issuing new stock to fund the project would put the Tipton family at a disadvantage by making them minority owners, it is not recommended to go this route. The debt ratio, current ratio and quick ratio all remain the same if the Tiptons issue stocks or bonds. I recommend issuing bonds for several reasons. In issuing bonds their return on equity is only slightly lower at 19%, versus 20% if stocks are issued. Also, in issuing...