# Project #66272 - Entrepreneurs Finance

Entrepreneur Finance Chapters 4 to 6

Chapter 4

• [Stockholders’ equity] The owners of a new venture have decided to organize as a corporation. The initial equity investment is valued at \$100,000 reflecting contributions of the entrepreneur and her family and friends. One hundred thousand shares of stock were initially issued.

• What dollar amount would initially be recorded in the common stock account?

Common stock (initial investment)

• If a par value on the common stock was set at \$.01 per share, show how the initial equity investment would be recorded.

Common stock (\$.01 par value)

Total stockholders’ equity

• Now assume that 20,000 additional shares of stock are sold to an angel investor at \$5 per share six months after the initial incorporation. Show how your answer in Part A would change if the common stock did not have a par value. Also show how your answer in Part B would change given a par value of \$.01 per share.

Assumption (no par value):

Common stock initial investment

Common stock additional investment

Total stockholders’ equity

Assumption (with par value):

Common stock (\$.01 par value)

Total stockholders’ equity

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• At the end of the first year of operation, the venture recorded an operating loss of \$80,000. Show the dollar amounts in the common stock account, the additional paid-in-capital account, and the retained earnings account at the end of one year. Also indicate the cumulative amount in stockholders’ equity at the end of one year.

Common stock (\$.01 par value)

Retained Earnings

Total stockholders’ equity

• [Internal Operating Schedules] Assume you are starting a new business involving the manufacture and sale of a new product. Raw materials costs are \$40 per product. Direct labor costs are expected to be \$30 per product. You expect to sell each product for \$110. You plan to produce 100 products next month and expect to sell 90 products.

• Prepare cost of production, cost of goods sold, and inventories schedules for next (the first) month.

Cost of Production Schedule:

Cost Per Unit Month 1 Month 2

Production (units) 100 110

Production costs:

Raw materials \$

Direct labor \$

Total costs \$

Cost of Goods Sold Schedule:

Month 1 Month 2

Sales (units) 90 115

Costs @\$XX per unit

Inventories Schedule:

Month 1 Month 2

Beginning finished goods \$0 \$

Production:

Raw materials \$ \$

Direct labor

Total (beginning + additions) \$ \$

Less: Cost of goods sold \$ \$

Ending finished goods \$ \$

• During the second month, you plan to produce 110 products but expect sales in the month to be 115 products. Prepare cost of production, cost of goods sold, and inventories schedules for the second month.

Note: The solution for Part B is to be updated to Part A for Month 2.

• [Internal Operating Schedules] Assume you have developed and tested a prototype electronic product and are about to start your new business. You purchase pre-programmed computer chips at \$70 per unit. Other component costs include: plastic casings at \$15 per unit and assembly hardware at \$5 per unit. Direct labor costs are \$15 per hour and three units can be produced per hour. You intend to sell each unit at a 50 percent mark-up over the total costs of producing each unit. The plan is to produce 500 product units per month in January, February, and March. Sales are expected to be: 200 units in January, 400 units in February, and 800 units in March.

• Calculate the dollar amount of sales revenue expected in each month (i.e., January, February, and March) and for the first quarter of the year.

Computer chips \$70

Plastic casings \$

Assembly hardware \$

Direct labor (per unit) \$

Total costs \$

Mark-up = \$

Dollar Sales:

January: XXX units x \$ = \$

February: XXX units x \$ = \$

March: XXX units x \$ = \$

First Quarter \$

• Prepare a cost of production schedule for January, February, and March. (complete the chart below)

Cost of Production Schedule:

Cost

Per Unit January February March

Production (units) 500 500 500

Production costs

Computer chips \$ \$ \$

Plastic casings

Assembly hardware

Direct labor

Total costs \$ \$ \$ \$

• Prepare a cost of goods sold schedule for each of the three months and for the first quarter of the year. Using your cost of goods sold estimates and the sales revenues expected in Part A, calculate the gross earnings for January, February, and March, as well as for the first quarter of the year.

Cost of Goods Sold Schedule:

January February March Total

Sales (units) 200 400 800 1,400

Costs @ \$XX/unit \$ \$ \$ \$

Gross Earnings Estimate:

Sales (dollars) \$ \$ \$ \$

Less: cost of goods sold

Gross earnings \$ \$ \$ \$

• Prepare an inventories schedule for January, February, and March.

Inventories Schedule:

January February March

Beginning finished goods \$ \$ \$

Production

Materials \$ \$ \$

Direct labor

Total (beg. + additions)

Less: cost of goods sold

Ending finished goods \$ \$ \$

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• [Survival Revenues Breakeven] During its first year of operations, the SubRay Corporation produced the following income statement results:

Net Sales \$300,000

Cost of Goods Sold -180,000

Gross Profit 120,000

General & Administrative -60,000

Marketing expenses -60,000

Depreciation -20,000

EBIT -20,000

Interest expenses -10,000

Earnings before taxes -30,000

Income taxes -0

Net earnings (loss) \$-30,000

Costs of goods sold are expected to vary with sales and be a constant percentage of sales. The general and administrative employees have been hired and are expected to remain a fixed cost. Marketing expenses are also expected to remain fixed since the current sales staff members are expected to remain on fixed salaries and no new hires are planned. The effective tax rate is expected to be 30 percent for a profitable firm.

• Estimate the survival or EBDAT breakeven amount in terms of survival revenues necessary for the SubRay Corporation to breakeven next year.

Survival revenues (SR), when EBDAT = 0, are calculated as:

VCRR = (VC/R) = \$ = .XX

CFC = general and administrative + marketing + interest expense =

SR =

• Assume that the product selling price is \$50 per unit. Calculate the EBDAT breakeven point in terms of the number of units that will have to be sold next year.

Survival revenues (SR) for a zero EBDAT from Part A = \$

How many units

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• [Statement of Cash Flows and Cash Burn or Build] Cindy and Robert (Rob) Castillo founded the Castillo Products Company in 2008. The company manufactures components for personal decision assistant (PDA) products and for other hand-held electronic products. Year 2009 proved to be a test of the Castillo Products Company’s ability to survive. However, sales increased rapidly in 2010 and the firm reported a net income after taxes of \$75,000. Depreciation expenses were \$40,000 in 2010. Following are the Castillo Products Company’s balance sheets for 2009 and 2010.

CASTILLO PRODUCTS COMPANY

2009 2010

Cash \$50,000 \$20,000

Accounts Receivables 200,000 280,000

Inventories 400,000 500,000

Total Current Assets 650,000 800,000

Gross Fixed Assets 450,000 540,000

Accumulated Depreciation -100,000 -140,000

Net Fixed Assets 350,000 400,000

Total Assets \$1,000,000 \$1,200,000

Accounts Payable \$130,000 \$160,000

Accruals 50,000 70,000

Bank Loan 90,000 100,000

Total Current Liabilities 270,000 330,000

Long-Term Debt 300,000 400,000

Common Stock (\$.01 par) 150,000 150,000

Additional Paid-in-Capital 200,000 200,000

Retained Earnings 80,000 120,000

Total Liabilities & Equity \$1,000,000 \$1,200,000

• Calculate Castillo’s cash flow from operating activities for 2010.

• Calculate Castillo’s cash flow from investing activities for 2010.

• Calculate Castillo’s cash flow from financing activities for 2010.

 CASTILLO PRODUCTS COMPANY Note: Because Retained Earnings increased by only \$40,000 and Net Income was \$75,000, Cash Dividends paid must have been \$35,000. Parts A-D: Statement of Cash Flows (\$ Thousands) 2010 Cash from Operating Activities: Net income Depreciation Increase in accounts receivable Increase in inventories Increase in accounts payable Increase in accrued liabilities Net from Operating Activities Cash from Investing Activities: Increase in gross fixed assets Net from Investing Activities Cash from Financing Activities: Increase in bank loan Increase in long-term debt Cash dividends paid Net from Financing Activities Total net cash increase (decrease) Cash at beginning of period Total net cash increase (decrease) Cash at end of period

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Chapter 5

3. [Financial Statements and Ratios] Bike-With-Us Corporation, a specialty bicycle parts replacement venture, was started last year by two former professional bicycle riders who had substantial competitive racing experience including competing in the Tour de France. The two entrepreneurs borrowed \$50,000 from members of their families and each put up \$30,000 in equity capital. Retail space was rented and \$60,000 was spent for fixtures and store equipment. Following are the abbreviated income statement and balance sheet information for the Bike-With-Us Corporation after one complete year of operation.

BIKE-WITH-US CORPORATION

Sales \$325,000

Operating Costs 285,000

Depreciation 10,000

Interest 5,000

Taxes 6,000

Cash \$1,000

Receivables 30,000

Inventories 50,000

Fixed Assets, Net 50,000

Payables 11,000

Accruals 10,000

Long-Term Loan 50,000

Common Equity 60,000

A. Prepare an income statement and a balance sheet for the Bike-With-Us Corporation using only the information provided above.

Income Statement

Sales

Less: Opr. Costs

EBITDA

Less: Depreciation

EBIT

Less: Interest

EBT

Less: Taxes

Net Income

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Balance Sheet

Cash

Receivables

Inventories

Total Cur. Assets

Fixed Assets, Net

Total Assets

Payables

Accruals

Total Cur. Liab.

Long-Term Loan

Stockholders’ Equity

Total Liab. & Eq.

B. Calculate the current ratio, quick ratio, and NWC-to-total-assets ratio.

Current Ratio = Current Assets/Current Liabilities =

Quick Ratio = (CA - Inventories)/CL =

NWC to Total Assets Ratio = (CA - CL)/Assets =

C. Calculate the total-debt-to-total-assets ratio, debt-to-equity ratio, and interest coverage

Total Debt to Total Assets Ratio = Debt/Assets =

Debt to Equity Ratio = Debt/Equity = \$

Interest Coverage Ratio = EBITDA/Interest =

D. Calculate the net profit margin, sales-to-total-assets ratio, and the return on total assets.

Net Profit Margin = Net Profit/Revenues =

Sales to Total Assets Ratio = Sales/Assets =

Return on Total Assets = Net Profit/Assets =

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4. [Financial Ratios] Use the financial statements data for the Bike-With-Us Corporation provided in Problem 3 to make the following calculations.

A. Calculate the operating return on assets.

Operating return on assets = EBIT/Assets =

B. Determine the effective interest rate paid on the long-term debt.

Effective interest rate = Interest/Long-term debt

Chapter 6

• [Sales Growth Rates, Sales, and Profits] Petal Providers Corporation opens and operates "mega" floral stores in the U.S. The idea behind the super store concept is to model the U.S. floral industry after its European counterparts whose flower markets generally have larger selections at lower prices. Revenues were \$1 million with net profit of \$50,000 last year when the first "mega" Petal Providers floral outlet was opened. If the economy grows rapidly next year, Petal Providers expects its sales to growth by 50 percent. However, if the economy exhibits average growth, Petal Providers expects a sales growth of 30 percent. For a slow economic growth scenario, sales are expected to grow next year at a 10 percent rate. Management estimates the probability of each scenario occurring to be: rapid growth (.30); average growth (.50), and slow growth (.20). Petal Providers net profit margins are also expected to vary with the level of economic activity next year. If slow grow occurs, the net profit margin is expected to be 5 percent. Net profit margins of 7 percent and 10 percent are expected for average and rapid growth scenarios, respectively.

• Estimate the average sales growth rate for Petal Providers for next year.

Average sales growth rate = Rapid growth rate x Rapid probability

+ Average growth rate x Average probability

+ Slow growth rate x Slow probability

=

• Estimate the dollar amount of sales expected next year under each scenario, as well as the expected value sales amount.

Sales with rapid growth =

Sales with average growth =

Sales with slow growth =

Expected value sales =

• Estimate the dollar amount of net profit expected next year under each scenario, as well as the expected value net profit amount.

Net profit with rapid growth =

Net profit with average growth =

Net profit with slow growth =

Expected value net margin =

Expected value net profit =

• [Sustainable Sales Growth Rates] Petal Providers Corporation described in Problem 5 above is interested in estimating its sustainable sales growth rate. Last year revenues were \$1 million, the net profit was \$50,000, the investment in assets was \$750,000, payables and accruals were \$100,000, and equity at the end of the year was \$450,000 (i.e., beginning of year equity of \$400,000 plus retained profits of \$50,000). The venture did not pay out any dividends and does not expect to pay dividends for the foreseeable future.

• Estimate the sustainable sales growth rate for Petal Providers based on the information provided in this problem.

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g = (Net Income/Common equity beginning) x Retention rate

=

Expanded model solution:

 Subject Mathematics Due By (Pacific Time) 04/14/2015 12:00 am
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