Please answer the question of the yellow cell, and write out the steps if you can.

Chez Guevara Java for the Revolution You have developed a chain of 20 cyber cafs with a gross margin of 80%. You maintain a cash near college campuses like Indiana, Duke, Berke balance of 4% of sales for working capital purposes. ley and Harvard. Your business concept is to serve Accounts receivable and accounts payable are im- java to the budding revolutionaries, the caviar com- material. munists and limousine liberals that live in these The income tax rate is 35%. You have a line vanguards of social change. Smoking is of course of credit at a bank that allows you to borrow up prohibited indoors, but outside your cafs the gen- to $3 million at an interest rate of 8%. You paid tle sweetness of clove cigarettes and patchouli scents a special dividend on Dec 31, 2015, but the bank the air. Marxist slogans are incorporated into the will not allow you to pay dividends if your line of names of chic, soy-based, mocha drinks. Com- credit is drawn down. puter terminals allow young manifesto writers to The most recent balance sheet and income state find and comment upon the latest conspiracy the- ments are included at the end of the case. Use them ories. Gluten-free brownies are served. All coffees to answer the following questions: are fair-trade, their flavors untainted by globalism, that hideous scourge so often hoisted on the backs of the innocents by greedy, money-grubbing, war- Questions mongering agents of that hegemonic evil, corporate Draw up a set of proforma financial statements (in- America. In spite of the fact that money is the root of all come statement, balance sheet and cash flow state- evil, you are highly profitable. You are expanding ment) for each of the years 2016 through 2020. the chain. 1. How large was the dividend you paid on Dec. You plan to add another 5 cafs each year for 31, 2015? the next 4 years so that there will be 40 cafs in all. You lease the space for each caf for $30,000 2. Estimate the amount of financing you will per year and you spend $200,000 to build each caf need to meet your expansion plans assuming to your specifications. Construction for 2016 is on all of your projections are accurate. Assume schedule and you will have 25 cafs fully built by that this financing will take the form of a the end of the fiscal year. line of credit: e.g., you only need to borrow When a caf opens, the $200,000 expenditure as much as you need to balance the books is depreciated for tax purposes at 12.5% per year each year. straight line and at 10% per year straight line for book purposes. In addition, each caf has invento- 3. After you have built the pro formas, please ries of $50,000. You estimate that every caf you do the following: open adds $3,000 per year to your SG&A expense. Assume a growth rate of 3% and a dis- It takes 12 months to build out each caf during count rate of 15%. (Don't worry about which you incur lease expenses and the additional where these numbers come from.) Cal- SG&A expenses) but earn no revenue at that site. culate the NPV of the revolutionary en- You expect that, once a caf opens its doors, rev- deavor. enues flow at an annual rate of $100,000 per caf, Fall, 2021 1 Chez Guevara You should assume that the numbers of cafs fully operational, completed but not operating, and the annual revenues for each year are: Operational Assumptions Year Total New Revenue 2016 20 5 2.0 2017 25 5 2.5 2018 30 5 3.0 2019 35 5 3.5 2020 40 0 4.0 Recall that it takes 12 months to build each caf and it produces no revenues during the year it is constructed, although rental ($30,000 per caf) and incremental SG&A ($3,000 per caf) start when construction starts. Depreciation (book and tax) does not start until the caf produces revenues. For simplicity, assume that interest charge in year t is based on the balance of the bank loan at the end year t - 1. (I.e., if the bank loan for 2015 is $100, then the interest payment in 2016 is $8.) Balance Sheet Year Ended Dec. 31, 2015 2014 2015 Cash 80 80 Inventories 1.000 1,000 Current Assets 1.080 1,080 PP&E 4,000 4,000 Acc. Depr. 800 1,200 Net PP&E 3,200 2.800 Total Assets 4,280 3,880 Income Statement Year Ended Dec. 31, 2015 Revenues 2.000 COGS 400 Gross Margin 1,600 SG&A 75 Rentals 600 Depreciation 400 Interest 0 Profit Before Tax 525 Tax 184 Profit After Tax 341 Bank Loan 0 0 Deferred Taxes 70 105 Total Liabilities 70 105 Contributed Capital 2,240 2,240 Retained Earnings 1,970 1,535 Owner's Equity 4,210 3,775 OE & TL 4.280 3,880 D E B 35% 15% 3% 12.5% 10% 80% 4% . 1 Tax Rate 2 Discount Rate 3 Growth 4 Depr.(Tax) 5 Depr.(Book) 6 Gross Margin 7 Cash/Sales 8 9 Revenues 10 Lease 11 SG&A 12 CAPX 13 Inventories 14 15 Operating Assumptions 16 17 Cafes 18 New 19 Annual Rev. (K) 100 K/caf 30 K/caf 3 K/caf 200 K/caf 50 K/caf 2016 20 5 2000 2017 25 5 2500 2018 30 5 3000 2019 35 5 3500 2020 40 0 4000 D B 2014 80 1,000 1,080 4,000 800 3,200 4,280 2015 80 1,000 1,080 4,000 1,200 2,800 3,880 A 1 2 Cash 3 Inventories 4 Current Assets 5 PPE 6 Accumulated Depreciation 7 Net PPE 8 Total Assets 9 10 Bank Loan 11 Deferred Taxes 12 Total Liabilities 13 Contributed Capital 14 Retained Earnings 15 Owner's Equity 16 17 Owner's Equity and Total Liabiliti 18 19 20 Revenues 21 COGS 22 Gross Margin 23 SG&A 24 Rentals 25 Depreciation 26 Interest 27 Profit Before Tax 28 Tax 29 Profit After Tax 0 70 70 2,240 1,970 4,210 0 105 105 2,240 1,535 3,775 4,280 3,880 2015 2,000 400 1,600 75 600 400 0 525 184 341 30 B C D E H. 20 20 20 25 25 30 30 35 35 40 40 40 2016 2017 2018 2019 2020 2015 2,000 400 1,600 75 600 400 0 525 184 341 2016 2017 2018 2019 2020 . 1 Revenue Cafes 2 Cost Cafes 3 4 I/S 5 Revenues 6 COGS 7 Gross Margin 8 SG&A 9 Rentals 10 Depreciation 11 Interest 12 Profit Before Tax 13 Tax 14 Profit After Tax 15 16 17 B/S 18 Cash 19 Inventories 20 Current Assets 21 PPE 22 Accumulated Depreciation 23 Net PPE 24 Total Assets 25 26 Bank Loan 27 Deferred Taxes 28 Total Liabilities 29 Contributed Capital 30 Retained Earnings 31 Owner's Equity 32 33 Owner's Equity and Total Liabilities 34 35 36 37 Deferred Taxes 38 PPE 39 Accumulated Depreciation 40 Book Depreciation 41 Tax Depreciation 42 Difference in Depreciation 13 Delta Deferred Tax 14 Def Tax 2014 80 1,000 1,080 4,000 800 3,200 4,280 2015 80 1,000 1,080 4,000 1,200 2,800 3,880 0 70 70 2,240 1,970 4,210 0 105 105 2,240 2,311 4,551 4,280 4,656 2016 2017 2018 2019 2020 2014 4,000 800 2015 4,000 1,200 400 500 100 35 105 70 2015 2016 2017 2018 2019 2020 0 0 46 17 Statement of Cash Flows 18 19 Profit after Tax 50 +Depreciation 51 52 -Increase in WC (w/o cash) 53 - Increase in Inventories 54 +Change in Deferred Taxes 55 Cash From Operations 56 57 -CAPEX 58 Cash From Investing 59 50 Special Dividend 51 Bank Loan 52 Cash From Financing 53 54 Overage (Ops - Inv. - delta Cash) 55 56 Beginning Cash 57 Change in Cash 58 Ending Cash 59 Answer to question 1 Answer to question 2 0 0 0 0 0 0 0 0 0 0 0 0 OOO OOO 0 0 A E F G H 2017 2018 2019 2020 341 B C D 1 VS 2 2015 2016 3 Revenues 2,000 4 COGS 400 5 Gross Margin 1,600 6 SG&A 75 7 Rentals 600 8 Depreciation 400 9 Interest 0 10 Profit Before Tax 525 11 Tax 184 12 Profit After Tax 13 14 Free Cash Flows (TO ALL STAKEHOLDERS) 15 16 Profit after Tax 17 +Depreciation 18 +After Tax Interest 19 -Increase in Working Capital 20 - Increase in Inventories 21 - Increase in Cash 22 +Change in Deferred Taxes 23 24 Total Increase in WC 25 26 -CAPEX 27 28 Free Cash Flow 29 PV(FCF) 30 31 Growth Rate 3% 32 Discount Rate 33 34 Steady State Cash Flow 35 Terminal Value 36 PV(Terminal Value) 37 38 NPV Answer question 3 39 40 41 15% 0.00 0.00 Chez Guevara Java for the Revolution You have developed a chain of 20 cyber cafs with a gross margin of 80%. You maintain a cash near college campuses like Indiana, Duke, Berke balance of 4% of sales for working capital purposes. ley and Harvard. Your business concept is to serve Accounts receivable and accounts payable are im- java to the budding revolutionaries, the caviar com- material. munists and limousine liberals that live in these The income tax rate is 35%. You have a line vanguards of social change. Smoking is of course of credit at a bank that allows you to borrow up prohibited indoors, but outside your cafs the gen- to $3 million at an interest rate of 8%. You paid tle sweetness of clove cigarettes and patchouli scents a special dividend on Dec 31, 2015, but the bank the air. Marxist slogans are incorporated into the will not allow you to pay dividends if your line of names of chic, soy-based, mocha drinks. Com- credit is drawn down. puter terminals allow young manifesto writers to The most recent balance sheet and income state find and comment upon the latest conspiracy the- ments are included at the end of the case. Use them ories. Gluten-free brownies are served. All coffees to answer the following questions: are fair-trade, their flavors untainted by globalism, that hideous scourge so often hoisted on the backs of the innocents by greedy, money-grubbing, war- Questions mongering agents of that hegemonic evil, corporate Draw up a set of proforma financial statements (in- America. In spite of the fact that money is the root of all come statement, balance sheet and cash flow state- evil, you are highly profitable. You are expanding ment) for each of the years 2016 through 2020. the chain. 1. How large was the dividend you paid on Dec. You plan to add another 5 cafs each year for 31, 2015? the next 4 years so that there will be 40 cafs in all. You lease the space for each caf for $30,000 2. Estimate the amount of financing you will per year and you spend $200,000 to build each caf need to meet your expansion plans assuming to your specifications. Construction for 2016 is on all of your projections are accurate. Assume schedule and you will have 25 cafs fully built by that this financing will take the form of a the end of the fiscal year. line of credit: e.g., you only need to borrow When a caf opens, the $200,000 expenditure as much as you need to balance the books is depreciated for tax purposes at 12.5% per year each year. straight line and at 10% per year straight line for book purposes. In addition, each caf has invento- 3. After you have built the pro formas, please ries of $50,000. You estimate that every caf you do the following: open adds $3,000 per year to your SG&A expense. Assume a growth rate of 3% and a dis- It takes 12 months to build out each caf during count rate of 15%. (Don't worry about which you incur lease expenses and the additional where these numbers come from.) Cal- SG&A expenses) but earn no revenue at that site. culate the NPV of the revolutionary en- You expect that, once a caf opens its doors, rev- deavor. enues flow at an annual rate of $100,000 per caf, Fall, 2021 1 Chez Guevara You should assume that the numbers of cafs fully operational, completed but not operating, and the annual revenues for each year are: Operational Assumptions Year Total New Revenue 2016 20 5 2.0 2017 25 5 2.5 2018 30 5 3.0 2019 35 5 3.5 2020 40 0 4.0 Recall that it takes 12 months to build each caf and it produces no revenues during the year it is constructed, although rental ($30,000 per caf) and incremental SG&A ($3,000 per caf) start when construction starts. Depreciation (book and tax) does not start until the caf produces revenues. For simplicity, assume that interest charge in year t is based on the balance of the bank loan at the end year t - 1. (I.e., if the bank loan for 2015 is $100, then the interest payment in 2016 is $8.) Balance Sheet Year Ended Dec. 31, 2015 2014 2015 Cash 80 80 Inventories 1.000 1,000 Current Assets 1.080 1,080 PP&E 4,000 4,000 Acc. Depr. 800 1,200 Net PP&E 3,200 2.800 Total Assets 4,280 3,880 Income Statement Year Ended Dec. 31, 2015 Revenues 2.000 COGS 400 Gross Margin 1,600 SG&A 75 Rentals 600 Depreciation 400 Interest 0 Profit Before Tax 525 Tax 184 Profit After Tax 341 Bank Loan 0 0 Deferred Taxes 70 105 Total Liabilities 70 105 Contributed Capital 2,240 2,240 Retained Earnings 1,970 1,535 Owner's Equity 4,210 3,775 OE & TL 4.280 3,880 D E B 35% 15% 3% 12.5% 10% 80% 4% . 1 Tax Rate 2 Discount Rate 3 Growth 4 Depr.(Tax) 5 Depr.(Book) 6 Gross Margin 7 Cash/Sales 8 9 Revenues 10 Lease 11 SG&A 12 CAPX 13 Inventories 14 15 Operating Assumptions 16 17 Cafes 18 New 19 Annual Rev. (K) 100 K/caf 30 K/caf 3 K/caf 200 K/caf 50 K/caf 2016 20 5 2000 2017 25 5 2500 2018 30 5 3000 2019 35 5 3500 2020 40 0 4000 D B 2014 80 1,000 1,080 4,000 800 3,200 4,280 2015 80 1,000 1,080 4,000 1,200 2,800 3,880 A 1 2 Cash 3 Inventories 4 Current Assets 5 PPE 6 Accumulated Depreciation 7 Net PPE 8 Total Assets 9 10 Bank Loan 11 Deferred Taxes 12 Total Liabilities 13 Contributed Capital 14 Retained Earnings 15 Owner's Equity 16 17 Owner's Equity and Total Liabiliti 18 19 20 Revenues 21 COGS 22 Gross Margin 23 SG&A 24 Rentals 25 Depreciation 26 Interest 27 Profit Before Tax 28 Tax 29 Profit After Tax 0 70 70 2,240 1,970 4,210 0 105 105 2,240 1,535 3,775 4,280 3,880 2015 2,000 400 1,600 75 600 400 0 525 184 341 30 B C D E H. 20 20 20 25 25 30 30 35 35 40 40 40 2016 2017 2018 2019 2020 2015 2,000 400 1,600 75 600 400 0 525 184 341 2016 2017 2018 2019 2020 . 1 Revenue Cafes 2 Cost Cafes 3 4 I/S 5 Revenues 6 COGS 7 Gross Margin 8 SG&A 9 Rentals 10 Depreciation 11 Interest 12 Profit Before Tax 13 Tax 14 Profit After Tax 15 16 17 B/S 18 Cash 19 Inventories 20 Current Assets 21 PPE 22 Accumulated Depreciation 23 Net PPE 24 Total Assets 25 26 Bank Loan 27 Deferred Taxes 28 Total Liabilities 29 Contributed Capital 30 Retained Earnings 31 Owner's Equity 32 33 Owner's Equity and Total Liabilities 34 35 36 37 Deferred Taxes 38 PPE 39 Accumulated Depreciation 40 Book Depreciation 41 Tax Depreciation 42 Difference in Depreciation 13 Delta Deferred Tax 14 Def Tax 2014 80 1,000 1,080 4,000 800 3,200 4,280 2015 80 1,000 1,080 4,000 1,200 2,800 3,880 0 70 70 2,240 1,970 4,210 0 105 105 2,240 2,311 4,551 4,280 4,656 2016 2017 2018 2019 2020 2014 4,000 800 2015 4,000 1,200 400 500 100 35 105 70 2015 2016 2017 2018 2019 2020 0 0 46 17 Statement of Cash Flows 18 19 Profit after Tax 50 +Depreciation 51 52 -Increase in WC (w/o cash) 53 - Increase in Inventories 54 +Change in Deferred Taxes 55 Cash From Operations 56 57 -CAPEX 58 Cash From Investing 59 50 Special Dividend 51 Bank Loan 52 Cash From Financing 53 54 Overage (Ops - Inv. - delta Cash) 55 56 Beginning Cash 57 Change in Cash 58 Ending Cash 59 Answer to question 1 Answer to question 2 0 0 0 0 0 0 0 0 0 0 0 0 OOO OOO 0 0 A E F G H 2017 2018 2019 2020 341 B C D 1 VS 2 2015 2016 3 Revenues 2,000 4 COGS 400 5 Gross Margin 1,600 6 SG&A 75 7 Rentals 600 8 Depreciation 400 9 Interest 0 10 Profit Before Tax 525 11 Tax 184 12 Profit After Tax 13 14 Free Cash Flows (TO ALL STAKEHOLDERS) 15 16 Profit after Tax 17 +Depreciation 18 +After Tax Interest 19 -Increase in Working Capital 20 - Increase in Inventories 21 - Increase in Cash 22 +Change in Deferred Taxes 23 24 Total Increase in WC 25 26 -CAPEX 27 28 Free Cash Flow 29 PV(FCF) 30 31 Growth Rate 3% 32 Discount Rate 33 34 Steady State Cash Flow 35 Terminal Value 36 PV(Terminal Value) 37 38 NPV Answer question 3 39 40 41 15% 0.00 0.00