innovative company

Topics: Corporate finance, Stock, Preferred stock Pages: 2 (579 words) Published: October 24, 2013
Innovative Engineering Company was founded by two partners: Meredith Gale and Shelley Yeaton, shortly after they graduated from engineering school. Within five years the partners had built a thriving business, primarily through the development of a product line of measuring instruments based on the laser principle. Success brought with it the need for new permanent capital. After careful calculation, the partners placed the amount of this need at $1.2 million. This would replace a term loan that was about to mature and provide for plant expansion and related working capital. At first, they sought a wealthy investor, or group of investors, who would provide the $1.2 million in return for an interest in the partnership. They soon discovered, however, that although some investors were interested in participating in new ventures, none of them was willing to participate as partner in an industrial company because of the risks to their personal fortunes that were inherent in such an arrangement. Gale and Yeaton therefore planned to incorporate the Innovative Engineering Company, in which they would own all the stock. After further investigation, they learned that Arbor Capital Corporation, a venture capital firm, might be interested in providing permanent financing. In thinking about what they might propose to Arbor, their first idea was that Arbor would be asked for $1.2 million, of which $1.1 million would be a long-term loan. For the other $100,000, Arbor would receive 10 percent of the Innovative common stock as a "sweetener." If Arbor would pay $100,000 for 10 percent of the stock, this would mean that the 90 percent that would be owned by Gale and Yeaton would have a value of $900,000. Although this was considerably higher than Innovative’s net assets, they thought this amount was appropriate in view of the profitability of the product line they had successfully developed. A little calculation convinced them, however, that this idea (hereafter, proposal A) was...
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