Burton Sensors, Inc.'s case study deals with a company that produces temperature sensors as an original equipment manufacturer (OEM). The company was facing financial issues and was seeking equity financing to maintain its profitability. It has three alternatives to resolve the challenge. The first is to buy thermowell machines. The second is to issue common stock to a private investor at a lower price in the hope of minimizing financial distress. And, the third option is to buy out another manufacturer of the same temperature sensors.
William E. Fruhan and Wei Wang
Harvard Business Review (918539-PDF-ENG)
June 27, 2018
Case questions answered:
Case study questions answered in the first solution:
- Should Marshall continue to pursue a high-growth strategy? How can that strategy be financed?
- Should Marshall purchase the thermowell machines? (Note: Just so we are all using the same equity risk premium for our calculations, please use 5.8% as the equity risk premium in your calculations).
- Should Marshall accept the offer of the private investors and issue new equity? How would that deal affect Burton Sensor’s existing shareholders? How would such an issuance impact Burton’s balance sheet?
- Should Marshall acquire Electro-Engineering Inc. (EE)? In your opinion, what is the most important consideration in making your determination?
- How, if at all, would the acquisition of EE impact your analysis and recommendation regarding the thermowell machine investment?
Case study questions answered in the second solution:
- Should Burton Sensors, Inc. purchase new Thermowell Machines? Show your analysis in the attached Excel spreadsheet. Calculate the Net Present Value, Benefit-Cost Ratio, and Internal Rate of return to substantiate your answer. Please assume Burton Inc.’s β as 1.71 for your discount rate calculations.
- How did the company end up in financial distress? Is the situation temporary?
- Does the company need to raise financing immediately?
- Should the company slow down its growth?
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Burton Sensors, Inc. Case Answers
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Introduction – Burton Sensors, Inc.
This project report summarizes the financial evaluation of the acquisition by Burton Sensors, Inc., as well as its strategy and investment. Because of the company’s rapid growth, it has reached its debt capacity, which needs to be addressed by seeking equity financing to sustain its growth.
The analysis below explains whether Burton Sensors needs to purchase the thermowell machines, issue common equity at a lower price, or acquire another sensor manufacturer.
High Growth Strategy
Marshall should continue to pursue a high-growth strategy. From Exhibit 2, we can see that Burton Sensor’s net income and earnings per share are both growing at an increasing rate. This indicates that the company has enough money to pursue future financing.
The increase in Burton’s EPS is a good sign for the company, which means the company’s current strategy is profitable. The higher the EPS, the more profit Burton can make. Thus, pursuing a high-growth strategy would allow Burton to remain profitable.
Moreover, we can see that from Exhibit 1. Marshall may achieve her own target leverage ratio by pursuing a high growth strategy, which, in this case, the total interest-bearing debt to equity ratio is 1 to 1.
Table 1
As Burton Sensor is mainly financed by equity, we can see that its debt-to-equity ratio fluctuated over the years from the table above. This also means that Burton has enough earnings to cover its expenses.
From here, we can say that Marshall may finance the company through retained earnings, in which she does not need to issue any dividends since her family and employees own most of Burton’s shares.
We may also see an increase in Burton’s equity if Marshall chooses to finance through retained earnings. Another way to finance Burton is by taking a bank loan.
However, we can see from the case that there are two restrictions to doing it.
One is that the outstanding bank loan should not exceed 75% of the accounts receivables and inventory of Burton Sensors.
The other restriction is that the total…
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