Page 456 - Business Principles and Management

C HAPTER 16 A SSESSMENT

CASE IN POINT

CASE 16-1: Is Debt the Best Way?
The Kyle Camping Company is located between a major state park and a
national park in New York State’s Adirondack Mountains. The business
sells camping equipment and supplies from May through September to
vacationers as well as to local people who enjoy mountain camping and
fishing. Kyle Owens, the sole proprietor, started the business five years
ago after graduating from college. Kyle is an avid outdoorsman and the
business allows him to work with people and products he enjoys. Kyle
was very busy for the first several years, with little personal time to enjoy
the outdoors. However, the business has experienced success that has
allowed him to add two full-time and five part-time employees. Over the
last two years, sales have doubled and profits have increased by 25 percent.
He has been able to pay back a loan from his parents that he used to start
the business and has saved $75,000 from the business’s profits.
Kyle now wishes to expand into a year-round business to take advan-
tage of the winter hunting and ice fishing. In addition, he believes he can
serve the many local boat owners. To do that he would need to expand
the size of his store, add a dock on the lake behind the store, and expand
his inventory. He also wants to create an Internet site through which he
can sell his merchandise and provide area information that could attract
more tourists and visitors to his business.
Kyle is interested only in debt financing because he wants to remain the
sole owner and manager of his business. He is willing to consider equity
financing only as a last resort. A small community 5 miles away has a
commercial bank with which he has had good relations since starting his
business five years ago. His credit rating is acceptable but not great; it is
marred by several late loan payments during the first two years of business.
Kyle does have good relationships with several of his suppliers, who have
approved trade credit on some of his purchases.
Kyle has calculated that he will need to find $75,000 to add a dock
and additional inventory this year and $30,000 additional capital next
year to carry out all of his plans. He does have a concern that sales dur-
ing the winter season may be slow at the beginning, making it difficult
for him to make loan payments during those months.

THINK CRITICALLY
1. If you were the local bank’s loan officer, what financial and nonfi-
nancial information would you request from Kyle in order to make
a good decision? Based on the information available in the case,
would you recommend financing Kyle’s needs through loans?
Why or why not?
2. Other than a loan from the local bank, what other types of debt
financing might Kyle consider, given his financial situation and
his plans?
3. Why might Kyle wish to consider equity financing rather than debt
financing? What are two types of equity financing he could use?
What would be advantages and disadvantages of each?

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