ASSESSMENT 2

Individual Business Case 3rdOct, 24:00 PM

LMS Submission Link 30% of final marks

Excel Spreadsheet plus MS word document. The excel spreadsheet should contain your financial statement projections and valuations from Task 1 to Task 10. Only task 11, 12 and 13 require detailed discussions in the MS word document. While you only need to submit one excel spreadsheet document,please make sure to have a separate sheet for each of the tasks from task 1 to task 10:

Objectives:

The objective of this assessment is to project the financial statements and value the venture based on your analysis of the generic business case and data provided.

Marks:

The assignment allocated across

Task 1

Task 2

Task 3

Task 4

Task 5

Task 6

Task 7

Task 8

Task 9

Task 10

Task 11

Task 12

Task 13

will be marked out of 100 and then rebased to 30%. The marks for this assignment will be the thirteen tasks as follows:

Estimate Revenue and Accounts Receivable Estimate COGS, Inventories, Purchases and Accounts Payable Estimate Wage Expense, Accrued Liability and S & A Expenses Project an Income Statement Project a Balance Sheet Project a Cash Flow Statement Estimate Sustainable Growth Rate Estimate Required Return Estimate Terminal Value EstimateVenture'sValue Estimate Equity Share Discuss financial viability of the new business venture Justify Assumptions or Estimate value using Venture Capital Method

5 marks 5 marks 5 marks 15 marks 15 marks 15 marks 5 marks 5 marks 5 marks 10 marks 5 marks 5 marks 5 marks

INNOVATIVE|RESPONSIBLE|ENGAGED

1

FIN3002, Financing InnovationsTask 1:

Estimate revenues from year 1 to year 5 based on the following assumptions:

Current Market Volume Units: 72,000,000

Current Unit Price: $6.00

Annual Estimated Volume Growth Rate: 3%

Targeted Market Share:

oFirst Year 0.5%oSecond Year 2%oThird Year 4%oFourth Year 4%oFifth Year 4%

Accounts Receivable is estimated to be 10% of Sales.

Prior to the First Year there were no Sales.

Task 2:

Estimate the COGS, Inventories, Purchases and Accounts Payable from year 1 to year 4

Unit Sales Price is a 60% mark up on the Unit Cost of Goods Sold

You plan to hold Inventories equal to 30% of your estimate for nextyear'sSales

You pay for 92% of Purchases in the year in which they were purchased and the remainder in the

following year.

Inventory at the beginning of the First Year is $1,000,000.

Task 3:

Estimate Wage Expense, Accrued Liabilities and Selling and Administrative Expenses from year 1 to year 4 based on the following assumptions:

Wage Expense equals to 8% of current year Sales

You pay wages monthly in arrears, meaning that you will only pay for eleven of the twelve months

wages in the year in which they have been earned and will pay the remaining one month of wages

earned in the last month of the current year in the following year.

Selling and Administrative Expenses, including rent is estimated to be 10% of sales and is paid in the

year in which it occurs

Task 4:

Estimate a projected four-year Income Statement, based on the above assumptions and the following additional assumptions:

Depreciation is estimated as being equal to 10% of Gross Fixed Assets at the end of the prior year.

Interest Expense on Debt is at a rate of 15% per annum and is estimated based on the Debt Balance

and Additional Funds Needed (if any) estimated at the end of the prior year.

Tax is estimated as being expensed at 30% of Earnings before Tax. Assume that any tax benefits are

NOT carried forward to reduce future tax payable.

Assume NO dividends are declared.

INNOVATIVE|RESPONSIBLE|ENGAGED

2

FIN3002, Financing Innovations

Task 5:

Estimate a projected four-year Balance Sheet, based on the above assumptions and the following additional assumptions:

The Balance Sheet at the end of the year prior to First Year was comprised as follows: Cash $50,000; Inventories $1,000,000; Gross Fixed Assets $4,000,000; Debt $2,000,000 and Owners Equity $3,050,000. You should assume all other prior period Balance Sheet values were zero.

Required cash is estimated to be 1% of Sales.

The business requires capital expenditure of $500,000 a year in each of the first two years.

Assume the founder invests additional $2,000,000 in the first year.

Task 6:

Estimate a projected four-year Cash Flow Statement, based on the above assumptions.

Task 7:

Estimate the sustainable growth rate as at the end of the fourth year, based on the following assumptions:

The sustainable Profit Margin is estimated to be equal to that estimated for the fourth year, based on the fourth year Net Income and Sales.

The sustainable Asset Turnover is estimated to be equal to that estimated for the fourth year, based on average Total Assets in year 3 and 4 and Sales in year 4.

Assume a target Leverage Ratio as being equal to 120%.

Assume a target Retention Ratio as being equal to 40%.

Task 8:

Estimate the required return based on CAPM, based on the following assumptions:

Assume the Risk Free Rate equals 1.5%

Assume Beta equals 2.0

Assume a Market Risk Premium of 6.0%

Task 9:

Estimate the Terminal Value of the new venture as at the end of the fourth year, based on the following assumptions:

Equity Valuation Cash Flow = Net Income + Depreciation-Change in Net Operating Working Capital (exclude surplus cash)-Change in Gross Fixed Assets + Net Debt Issues

Assume the Equity Valuation Cash Flow grows at the sustainable growth rate estimated in Task 7 from year 5 onwards.

Use the required return estimate from Task 8.Task 10:

Estimate the Present Value of the venture.

Task 11:

Estimate the share of equity ownership the owner would need to offer an external investor to invest $2,000,000 based on the valuation of the new venture you have completed above.

INNOVATIVE|RESPONSIBLE|ENGAGED

3

FIN3002, Financing Innovations

If you have valued your own new business venture proposal, the amount of external investment required may differ and so you should base your answer to this question on the amount your venture requires.

Task 12:

Discuss whether the new business venture is financially justified to the entrepreneur and/or the external investor.

Task 13:

Assume the external investor employs the Venture Capital Valuation Method to determine the Present Value of the venture. He estimates that the PE ratio for comparable firm at the exit four years from now is 15 times. He requires a compound annual rate of return of 50% to compensate for the time, risk, and probability that the venture might not succeed as expected. Determine the present value of the venture using this method. Discuss why an investor would employ this method and its limitations.

Answer rating: 100% (QA)

Here are my responses to the business case assessment tasks Excel sheet with projections for Tasks 110 is attached separately Task 1 See attached exce... View the full answer