Class Participation Report Session-3

Sneh Smriti | L22015

Case: Burton Sensors Inc.: Capital Structure and Financing

My Contribution

1. Difference between Exchange listed Share, OTC Market, and Grey Market?
Answer. Exchange listed share: Trade across traders using a common platform. The platform is
regulated. OTC Market: Not on exchange. Trade happens on a local network. The 2 platforms are
not interlinked. Prices are not fair. Less regulated. Grey Market: Shares traded before they get
listed on the stock exchange. The unofficial market for financial securities.

2. Why do we write down goodwill? Can goodwill be carried when a firm is acquired?
Answer. Goodwill does not reduce overtime. No depreciation. No depletion. No amortization.
Yes, goodwill is carried when a firm is acquired.

Major Class Learnings.

1. Long pending receivables are making the firm take more debts. recovering collateral can be
very difficult for banks. Encroaching the seized collateral and its legal transfer takes time
which can lead to losses for the bank.
2. Long-term asset investment is more beneficial.
3. Short-term assets are very low recoverable.
4. Bank is concerned with Burton’s situation of total liabilities equalling 5x net worth and huge
short-term bank loans. This can tend to an impending bankruptcy in case of default. Such
impending bankruptcy can have a negative impact on the lenders to the firm (E.g.: the bank).
Further, the inventory can lose its value in such a situation.
5. Burton is acquiring Electro-Engineering Inc. based on my analysis of the Net present value of
the acquisition using the DCF valuation of EE Inc. and Burton’s need to grow in the industry.
6. All three scenarios presented in the case were being considered because of the CAPITAL
ADEQUACY issues and to meet the 3 bank covenants. Further, he explained that EE Inc. was
willing to take Burton's equity shares at $4.75 because then they could get a valuation of 10x
EBITDA rather than a much more conservative figure.
7. Both EBITDA*10 and 4.75 are overvalued. EE Inc. would be willing to a take portion of its
acquisition fee in Burton shares at $4.75 which is way above its market price. But they are
willing to do this because Burton will also be valuing them at 10x EBITDA rather than a
possible lower figure of 5-6x EBITDA. Thus, both firms gain from this exercise.
8. Lenders can keep a cap on the dividends taken by the shareholders.

Further study after class.

1. Read about capital adequacy and bank ratio covenants.