Operating Costs :This model assumes that each piece of furniture will have an average selling price...

 

  

 

  

 

 
 
 
 
 

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Operating Costs :This model assumes that each piece of furniture will have an average selling price of €2,000. This selling price includes the 100% mark-up offered to retailers. Manufacturing Cost Gross Profit Wholesale selling price Mark-up for retailer Retail selling price €400 €600 A good gross profit % mark-up is 40-50% on sales. A 10% premium for contemporary furniture pieces is expected. €1000 €1000 80-100% €2000 Table 1: Cost and Pricing Structure for European Sale and Manufacture. This is considered to be the average cost and pricing structure for the standard contemporary furniture pieces. Capital Structure Nicholas Shadow will hold the majority of the shareholding 60%, with the remaining 40% to be allocated equally to the other two parties (Andreas Pelekanos 20% and Antonio Romeo 20%). Nicholas Shadow will pay the full nominal value of his shareholding in cash (shares of €1.00 each) and Antonio Romeo 15%. The remaining shares (5% of Antonio Romeo's shareholding and 20% of Andreas Pelekano's shareholding) will not be paid in cash but they will be issued on the basis of an in kind contribution to the company of Antonio and Andreas respectively. The intention is to combine shareholding (equity) and debt capital (long term borrowing) for financing the long term capital of the business. The debt capital will be obtained through the issue of a 10 year 4 12% convertible corporate bond (to be converted at maturity into ordinary share capital at the price of €2.50 per share). Recognising the high risk involved in a new business set up, the plan is to initialize the operation through a gearing (leverage) ratio of 50%. Profit Statement Budgets All Figures in Euros Sales Less Production Cost of Sales Materials Labour and Contractors Gross Profit Less Overheads Administrative costs Business Establishment Costs Depreciation Selling and Distribution Net Profit *for some specific and very specialized operations Balance Sheet Budgets All Figures in Euros Current Assets Inventory (Stocks) Debtors Fixed Assets R&D Designer Label Plant and Equipment Current Liabilities Bank Overdraft/Cash Bal.) Long-Term Liabilities & Equity Long-Term Liabilities & Equity 2024 Most Likely 1,800,000 720,000 360,000 1,080,000 720,000 150,000 100,000 100, 380,000 -10,000 2024 Most Likely 120,000 400,000 500,000 400,000 1,420,000 180,000 1,250,000 2024 Worst Case 1,350,000 150,000 150,000 100,000 335,000 -330,000 2024 607,500 787,500 1,520,000 337,500 337,500 760,000 945,000 1,125,000 2,280,000 405,000 1,125,000 1,520,000 Worst Case 105,000 300,000 2024 Best Case Most Likely 2,250,000 -115,000 150,000 75,000 150, 425,000 325,000 2024 Best Case 125,000 500,000 2025 650,000 1,250,000 1,250,000 Worst Case 3,800,000 1,950,000 150,000 150,000 580,000 640,000 1,000,000 1,500,000 400,000 600,000 500,000 805,000 2,225,000 2,640,000 2025 Most Likely 240,000 400,000 760,000 2025 1,250,000 150,000 877,500 1,347,500 487,500 577,500 1,365,000 1,965,000 585,000 1,925,000 2025 Worst Case 2025 140,000 200,000 Best Case 3,850,000 100,000 395,000 -60,000 1,040,000 -220,000 150,000 150,000 585,000 2025 Best Case 200,000 400,000 2,500,000 300,000 450,000 640,000 3,550,000 935,000 1,250,000 1,250,000 Retained Earnings/(losses) -10,000 -330,000 325,000 630,000 -390,000 1,365,000 1,420,000 805,000 2,225,000 2,640,000 640,000 3,550,000 Table 2: Andreas Pelecanos (Contemporary Epiplo, Design) label Budgeted Financial Statements for the two Assumptions and Notes: 1. All sales are contracted for, before production - thus all production is to forward orders. 1. All sales are contracted for, before production - thus all production is to forward orders. 2. The business faces no seasonality. Therefore all sales are considered to flow normally during the year. Year 2024 2025 Table 3: Budgeted Orders. Most Likely 2,000 4,000 4. All sales are on credit. 3. Inventory (stock) comprises of finished furniture pieces that have not been delivered to buyers. There is no stock of raw materials or work in progress. Year 2024 2025 Table4: Collections from Debtors. Worst Case 1,500 2,000 5. Collections from debtors are based on an improving relationship with retailers. No allowance for bad debts has been made. Collected 50% 75% Best Case 2,500 4,000 7. Depreciation is applied at 20% straight line. Uncollected 50% 25% 6. Capital funds to sales should eventually stabilize at about 10% of sales by the time the business is properly established. An increased investment in plant and equipment will be needed at the 2,500 furniture production level. 8. Market Testa a well known European market research and promotion company based in Italy has been contracted to promote the Andreas Pelekanos (Contemporary Epiplo Design) label. Market Testa has provided a comprehensive promotion plan with the costs involved as shown in table 5. The expenditure will provide for two major exhibition shows, media training, tv and radio interviews, advertorials in glossy magazine and several big parties for the critical media writers. The whole thrust of the PR campaign is to create a furniture designer label that is associated with its designer - it is retailer independent. It is assumed that in the worst case scenario there will be no expenditure on the promotion of the Andreas Skarparis (Contemporari Epipio Design) label. label.5 Year 2024 Most Likely Expenditure Best Case Expenditure 500,000 1,000,000 2025 Table 5: Costing for Creating the Andreas Pelekanos (Contemporary Epiplo Design) 1,000,000 1,500,000 9. Estimated establishment costs are expected to cover the accounting and legal advice during the establishment of the business entity, costs associated with securing suitable leased premises and the initial round of staff recruitment. 10. The cost structure that will apply to this new business is estimated at: Cost structure per garment (in €) Wholesale Selling Price Materials Labour and subcontracting Prime Cost Gross Profit Table 6: Estimated Cost Structure. Most Likely 1000 400 200 600 400 11. Administrative costs including rent are estimated at €150,000 per year. 13. All costs incurred are assumed to be paid immediately. Questions to the Case Instructions: Worst case 1000 450 250 700 300 Best Case 12. Selling and distribution costs are a mix of fixed €200,000 per annum and €100 per piece of furniture sold. 1000 350 150 500 500 Emphasis should be given on the clear presentation of sufficient arguments. The role of calculations presented is to support your arguments. However any calculations presented need to be clear and accompanied by any possible assumptions that you may additionally make. Question 1: Calculate six financial ratios that you consider as being the most appropriate for the case give your advise to the board of the company for the years 2024 and 2025 and for the 3 cases of each year (Most Likely, Worst case, Best Case) by using the above informations. (Your answer should include the reasoning for using the particular group of financial ratios that you will suggest). Question 2: Calculate the WACC and prepare an income statement for year. 2024 and 2025 For the purpose of calculating the WACC you may assume a 12.5% corporation tax. The dividend policy is proposed to stand at the 30% of Earnings (79% of Earnings will be transferred to the relevant reserve account). All figures are stated exclusive of direct and/or indirect (sales) taxes. Question 3: Given the two proposed years which option would you suggest for the business to adopt? Your answers must be accompanied by adequate supporting data including profitability and scenarios analysis based on the cost- profit-volume approach with specific references to margins of safety. Question 4: A third would be to create two separate companies. One company to take over the wholesale (manufacturing) part of the business and the other company to take over the retail part of the business. How would you assess this additional option and which are in your opinion the main advantages and disadvantages? Question 5: The working capital deficit of both options is proposed to be financed by using an overdraft facility. Evaluate the proposed overdraft facility level and advise Sophia on whether this is adequate on the basis of her estimates. Question 6: How would you assess the performance of the business should the worse case scenario prevails. On this basis would you suggest that the company may need to make second thoughts and not follow any of the two options? Operating Costs :This model assumes that each piece of furniture will have an average selling price of €2,000. This selling price includes the 100% mark-up offered to retailers. Manufacturing Cost Gross Profit Wholesale selling price Mark-up for retailer Retail selling price €400 €600 A good gross profit % mark-up is 40-50% on sales. A 10% premium for contemporary furniture pieces is expected. €1000 €1000 80-100% €2000 Table 1: Cost and Pricing Structure for European Sale and Manufacture. This is considered to be the average cost and pricing structure for the standard contemporary furniture pieces. Capital Structure Nicholas Shadow will hold the majority of the shareholding 60%, with the remaining 40% to be allocated equally to the other two parties (Andreas Pelekanos 20% and Antonio Romeo 20%). Nicholas Shadow will pay the full nominal value of his shareholding in cash (shares of €1.00 each) and Antonio Romeo 15%. The remaining shares (5% of Antonio Romeo's shareholding and 20% of Andreas Pelekano's shareholding) will not be paid in cash but they will be issued on the basis of an in kind contribution to the company of Antonio and Andreas respectively. The intention is to combine shareholding (equity) and debt capital (long term borrowing) for financing the long term capital of the business. The debt capital will be obtained through the issue of a 10 year 4 12% convertible corporate bond (to be converted at maturity into ordinary share capital at the price of €2.50 per share). Recognising the high risk involved in a new business set up, the plan is to initialize the operation through a gearing (leverage) ratio of 50%. Profit Statement Budgets All Figures in Euros Sales Less Production Cost of Sales Materials Labour and Contractors Gross Profit Less Overheads Administrative costs Business Establishment Costs Depreciation Selling and Distribution Net Profit *for some specific and very specialized operations Balance Sheet Budgets All Figures in Euros Current Assets Inventory (Stocks) Debtors Fixed Assets R&D Designer Label Plant and Equipment Current Liabilities Bank Overdraft/Cash Bal.) Long-Term Liabilities & Equity Long-Term Liabilities & Equity 2024 Most Likely 1,800,000 720,000 360,000 1,080,000 720,000 150,000 100,000 100, 380,000 -10,000 2024 Most Likely 120,000 400,000 500,000 400,000 1,420,000 180,000 1,250,000 2024 Worst Case 1,350,000 150,000 150,000 100,000 335,000 -330,000 2024 607,500 787,500 1,520,000 337,500 337,500 760,000 945,000 1,125,000 2,280,000 405,000 1,125,000 1,520,000 Worst Case 105,000 300,000 2024 Best Case Most Likely 2,250,000 -115,000 150,000 75,000 150, 425,000 325,000 2024 Best Case 125,000 500,000 2025 650,000 1,250,000 1,250,000 Worst Case 3,800,000 1,950,000 150,000 150,000 580,000 640,000 1,000,000 1,500,000 400,000 600,000 500,000 805,000 2,225,000 2,640,000 2025 Most Likely 240,000 400,000 760,000 2025 1,250,000 150,000 877,500 1,347,500 487,500 577,500 1,365,000 1,965,000 585,000 1,925,000 2025 Worst Case 2025 140,000 200,000 Best Case 3,850,000 100,000 395,000 -60,000 1,040,000 -220,000 150,000 150,000 585,000 2025 Best Case 200,000 400,000 2,500,000 300,000 450,000 640,000 3,550,000 935,000 1,250,000 1,250,000 Retained Earnings/(losses) -10,000 -330,000 325,000 630,000 -390,000 1,365,000 1,420,000 805,000 2,225,000 2,640,000 640,000 3,550,000 Table 2: Andreas Pelecanos (Contemporary Epiplo, Design) label Budgeted Financial Statements for the two Assumptions and Notes: 1. All sales are contracted for, before production - thus all production is to forward orders. 1. All sales are contracted for, before production - thus all production is to forward orders. 2. The business faces no seasonality. Therefore all sales are considered to flow normally during the year. Year 2024 2025 Table 3: Budgeted Orders. Most Likely 2,000 4,000 4. All sales are on credit. 3. Inventory (stock) comprises of finished furniture pieces that have not been delivered to buyers. There is no stock of raw materials or work in progress. Year 2024 2025 Table4: Collections from Debtors. Worst Case 1,500 2,000 5. Collections from debtors are based on an improving relationship with retailers. No allowance for bad debts has been made. Collected 50% 75% Best Case 2,500 4,000 7. Depreciation is applied at 20% straight line. Uncollected 50% 25% 6. Capital funds to sales should eventually stabilize at about 10% of sales by the time the business is properly established. An increased investment in plant and equipment will be needed at the 2,500 furniture production level. 8. Market Testa a well known European market research and promotion company based in Italy has been contracted to promote the Andreas Pelekanos (Contemporary Epiplo Design) label. Market Testa has provided a comprehensive promotion plan with the costs involved as shown in table 5. The expenditure will provide for two major exhibition shows, media training, tv and radio interviews, advertorials in glossy magazine and several big parties for the critical media writers. The whole thrust of the PR campaign is to create a furniture designer label that is associated with its designer - it is retailer independent. It is assumed that in the worst case scenario there will be no expenditure on the promotion of the Andreas Skarparis (Contemporari Epipio Design) label. label.5 Year 2024 Most Likely Expenditure Best Case Expenditure 500,000 1,000,000 2025 Table 5: Costing for Creating the Andreas Pelekanos (Contemporary Epiplo Design) 1,000,000 1,500,000 9. Estimated establishment costs are expected to cover the accounting and legal advice during the establishment of the business entity, costs associated with securing suitable leased premises and the initial round of staff recruitment. 10. The cost structure that will apply to this new business is estimated at: Cost structure per garment (in €) Wholesale Selling Price Materials Labour and subcontracting Prime Cost Gross Profit Table 6: Estimated Cost Structure. Most Likely 1000 400 200 600 400 11. Administrative costs including rent are estimated at €150,000 per year. 13. All costs incurred are assumed to be paid immediately. Questions to the Case Instructions: Worst case 1000 450 250 700 300 Best Case 12. Selling and distribution costs are a mix of fixed €200,000 per annum and €100 per piece of furniture sold. 1000 350 150 500 500 Emphasis should be given on the clear presentation of sufficient arguments. The role of calculations presented is to support your arguments. However any calculations presented need to be clear and accompanied by any possible assumptions that you may additionally make. Question 1: Calculate six financial ratios that you consider as being the most appropriate for the case give your advise to the board of the company for the years 2024 and 2025 and for the 3 cases of each year (Most Likely, Worst case, Best Case) by using the above informations. (Your answer should include the reasoning for using the particular group of financial ratios that you will suggest). Question 2: Calculate the WACC and prepare an income statement for year. 2024 and 2025 For the purpose of calculating the WACC you may assume a 12.5% corporation tax. The dividend policy is proposed to stand at the 30% of Earnings (79% of Earnings will be transferred to the relevant reserve account). All figures are stated exclusive of direct and/or indirect (sales) taxes. Question 3: Given the two proposed years which option would you suggest for the business to adopt? Your answers must be accompanied by adequate supporting data including profitability and scenarios analysis based on the cost- profit-volume approach with specific references to margins of safety. Question 4: A third would be to create two separate companies. One company to take over the wholesale (manufacturing) part of the business and the other company to take over the retail part of the business. How would you assess this additional option and which are in your opinion the main advantages and disadvantages? Question 5: The working capital deficit of both options is proposed to be financed by using an overdraft facility. Evaluate the proposed overdraft facility level and advise Sophia on whether this is adequate on the basis of her estimates. Question 6: How would you assess the performance of the business should the worse case scenario prevails. On this basis would you suggest that the company may need to make second thoughts and not follow any of the two options?

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Question 1 Calculate six financial ratios that you consider as being the most appropriate for the case and give your advice to the board of the compan... View the full answer