C. Ultimately, what action would you recommend the company undertake? Why?

Based on the information provided, the McGee Cake Company is experiencing rapid growth and
increasing demand for its cakes. However, the company is facing cash flow and capacity problems
due to the fast growth. In this situation, I would recommend the following actions for the company:

1. Increase production capacity

Since the demand for cakes is growing and the company is currently producing as many cakes as
possible with its existing assets, it is crucial to invest in expanding production capacity. This could
involve acquiring additional baking equipment, increasing the workforce, or even considering
outsourcing some production to meet the demand.

2. Improve cash flow management

The company needs to address its cash flow problems to ensure it has sufficient funds to support its
growth. This could involve implementing more efficient inventory management practices, negotiating
better payment terms with suppliers, and closely monitoring accounts receivable to ensure timely
payments from customers.

3. Evaluate the proposal from the national supermarket chain

The offer from the national supermarket chain to distribute the company's cakes in their stores could
significantly increase the company's exposure and sales. However, it is important to carefully analyze
the terms of the proposal, including pricing, volume commitments, and potential impact on the
brand image. Assessing the financial viability and potential risks associated with this opportunity will
help make an informed decision.

4. Consider the proposal from the national restaurant chain

The proposal to sell McGee cakes in the national restaurant chain's establishments without a brand
name can provide a new avenue for growth and market penetration. The company should evaluate
the potential volume of sales, pricing, and profitability of this arrangement. It's essential to carefully
weigh the benefits of increased sales volume against the potential impact on brand recognition and
positioning.

5. Transition to a formal business structure

As the company continues to grow and face more complex challenges, it would be advisable to
transition from a sole proprietorship to a more structured business entity, such as a limited liability
company (LLC) or a corporation. This will provide the owners with personal liability protection and
enable easier access to external financing if needed in the future.
5. Cash flow to creditors for 2021:

Cash flow to creditors represents the net amount of cash flow from the company to its creditors,
which includes both interest payments and principal repayments on debt.

Cash flow to creditors = Interest expense - Net new borrowing

Given:

Interest expense in 2021: $21,576

Notes payable (short-term debt) at the end of 2020: $35,654

Notes payable (short-term debt) at the end of 2021: $38,929

Long-term debt at the end of 2020: $192,827

Long-term debt at the end of 2021: $210,408

Net new borrowing = (Notes payable at the end of 2021 + Long-term debt at the end of 2021) -
(Notes payable at the end of 2020 + Long-term debt at the end of 2020) = ($38,929 + $210,408) -
($35,654 + $192,827) = $249,337 - $228,481 = $20,856

Cash flow to creditors = Interest expense - Net new borrowing = $21,576 - $20,856 = $720

Therefore, the cash flow to creditors for 2021 is $720.

6. Cash flow to stockholders for 2021:

Cash flow to stockholders represents the net amount of cash flow from the company to its
stockholders, which includes dividends paid to the investors.

Cash flow to stockholders = Dividends

Given:

Net income before taxes for 2021: Sales - Cost of goods sold - Depreciation - Interest expense -
Selling and admin = $733,469 - $387,290 - $97,871 - $21,576 - $78,732 = $147,000

Taxable income = Net income before taxes * (1 - Tax rate) = $147,000 * (1 - 0.21) = $116,130

Net income after taxes = Taxable income - Tax expense = $116,130 - ($116,130 * 0.21) = $116,130 -
$24,288.30 = $91,841.70

Dividends = Net income after taxes * Dividend payout ratio = $91,841.70 * 0.4 = $36,736.68

Therefore, the cash flow to stockholders for 2021 is $36,736.68.