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Targeted Capital Base Plan

Targeted Capital Base Plan. Bob Cropp Interim Director University of Wisconsin Center for Cooperatives March 30, 2006. A Pure Capital Base Plan. The co-op would decide what percentage of total assets should be member equity.

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Targeted Capital Base Plan

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  1. Targeted Capital Base Plan Bob Cropp Interim Director University of Wisconsin Center for Cooperatives March 30, 2006

  2. A Pure Capital Base Plan • The co-op would decide what percentage of total assets should be member equity. • Then each member contributes their share of equity up-front based on what percent of the total cooperative business volume is their business.

  3. Member A: Accounts for 5% of the co-op business volume Up-front equity $1,000,000 X 5% = $50,000 Member B: Accounts for 2% of the co-op business volume Up-front equity $1,000,000 X 2% = $20,000 Example Capital Base Plan: Total assets $2,000,000; equity = 60% Also, the guideline for board in redeeming equity.

  4. Base capital plan not widely used. • The new generation (value-added) co-ops are practicing base capital plans. - Purchase marketing rights (shares) in proportion to planned business with co-op. - Example, $2.00 per bushel for planned bushels corn marketed through the ethanol plant. - These are enforceable delivery rights - Shares appreciate/depreciate and are transferable

  5. Targeted Base Capital Plan: • Not widely used • More applicable for marketing than supply co-ops • An equity target is set for each member; for example, $2.00 for each hundredweight of milk to be marketed. • Two options; 1) pay $2.00 up-front, or 2) accumulate equity with allocated retained patronage • If under-invested,receive 20% of patronage refund in cash and 80% retained as allocated equity. • If fully-invested, received 100% of patronage refund in cash

  6. Member A: Markets 14,000 Cwts. $2 X 14,000 = $28,000 Accumulated equity = $12,000 Balance = $16,000 Co-op net margin = $0.30 $0.30 X 14,000 = $4,200 20% cash = $840 Retained allocated = $3,360 Member B: Markets 12,000 Cwts. $2 X 12,000 = $24,000 Accumulated equity = $24,000 Balance = $0.00 Co-op net margin = $0.30 $0.30 X 12,000 = $3,600 100% cash = $3,600 Retained allocated = $0.00 Example, targeted capital base plan

  7. Summary points: • Targeted base capital plan won’t be much different than standard equity revolvement unless profits generated allow for reaching equity target in a reasonable time period.---Can’t redeem equity faster than it accumulates. • Fully or over-invested members may be interested in selling their excess equity at a discount to under-invested members.

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