Cash Conversion Cycle] Two years of financial statement data for the Munich Export Corporation are shown below. MUNICH EXPORTS CORPORATION Balance Sheet 2015 2016 Cash $50,000 $50,000 Accounts Receivables 200,000 300,000 Inventories 450,000 570,000 Total Current Assets 700,000 920,000 Fixed Assets, Net 300,000 380,000 Total Assets $1,000,000 $1,300,000 Accounts Payable 130,000 $180,000 Accruals 50,000 70,000 Bank Loan 90,000 90,000 Total Current Liabilities 270,000 340,000 Long-Term Debt 400,000 550,000 Common Stock ($.05 par) 50,000 50,000 Additional Paid-in-Capital 200,000 200,000 Retained Earnings 80,000 160,000 Total Liab. & Equity $1,000,000 $1,300,000 Income Statement 2015 2016 Net Sales $1,300,000 $1,600,000 Cost of Goods Sold 780,000 960,000 Gross Profit 520,000 640,000 Marketing 130,000 160,000 General & Administrative 150,000 150,000 Depreciation 40,000 55,000 EBIT 200,000 275,000 Interest 45,000 55,000 Earnings Before Taxes 155,000 220,000 Income Taxes (40% rate) 62,000 88,000 Net Income $93,000 $132,000 A. Calculate the inventory-to-sale, sale-to-cash, and purchase-to-payment conversion periods for Munich Exports for 2016. B. Calculate the length of Munich Exports’ cash conversion cycle for 2016.
> The Pharma Biotech Corporation spent several years working on developing a DHA product that can be used to provide a “fatty acid” supplement to a whole variety of food products. DHA stands for docsahexaenoic acid, an omega-3 fatty acid found naturally i
> The Alpha One Software Corporation was organized to develop software products that would provide Internet-based firms with information about their customers. As a result of initial success, the venture’s premier product allows firms with subscriber base
> Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2013. Sales during the first full year (2014) of operation reached $1.3 million. Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, profits after inc
> Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2013. Sales during the first full year (2014) of operation reached $1.3 million. Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, profits after inc
> The Salza Technology Corporation successfully increased its “top line” sales from $375,000 in 2015 to $450,000 in 2016. Net income also increased as did the venture’s total assets. You have been asked to compare the financial performance between the tw
> Assuming that the earnings before interest and taxes are only $320,000 while CAPEX is $110,000. Assume the other information remains the same.
> Find the enterprise valuation cash flow expected for the current year given the following information: Capital expenditures (CAPEX) = $150,000 Depreciation and amortization expenses = $40,000 Earnings before interest and taxes = $400,000 Effective income
> Calculate the conversion price formula (CPF) and market price formula (MPF) prices for an offering involving an existing conversion price of $1, a hypothesized market price of $2, and a new offering price of $.95 for 1,000 shares with 2,000 shares outsta
> The CCC (triple C) Venture has issued convertible preferred stock to its venture investors. Each share of preferred stock is convertible into .80 shares of common stock and pays an annual cash dividend of $.25. A. If each share of preferred stock has a
> What is an interest rate? What is default risk?
> The Datametrix Corporation has been in operation for one full year (2016). Financial statements are shown below. Sales are expected to grow at a 30 percent annual rate for each of the next three years (2017, 2018, and 2019) before settling down to a lo
> Why is the market value of currently issued debt subtracted from the enterprise value (in a debt-and-equity-only firm) to arrive at the value of equity? Why are future debt issues ignored by the process?
> A venture has a $500,000 bank loan outstanding, a long-term debt obligation of $900,000, accounts payable of $200,000, and accounts receivable of $350,000. A. If the venture’s equity value is $2,450,000, what would be the associated enterprise value? B.
> Why is the (1-tax rate) in the WACC? How does the government pay the tax rebate on interest – through a flow or in the rate?
> A share of a venture’s preferred stock is convertible into 1.5 shares of its common stock. The dividend on the preferred stock is $.50 per share. A. If the firm’s common stock is currently trading at $9.75, what is the conversion value of a share of the
> 1,000,000 initial founders’ shares (instead of the original 2,000,000 shares). What changes?
> Suppose a venture fund wishes to base its required return (used in discounting future terminal values) on its historical experience and suggests merely averaging the rates on the last three concluded deals. These deals realized total returns of –67% at
> Ratchets.com anticipates that it will need $15,000,000 in venture capital to achieve a terminal value of $300,000,000 in five years. A. Assuming it is a seed stage firm with no existing investors, what annualized return is embedded in their anticipatio
> A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of year 5 when the net income is estimated at $1,600,000. A publicly-traded competitor or “comparable firm” h
> Vail Venture Investors, LLC has recently acquired a 40 percent equity ownership in Black Hawk Products, Inc. in exchange for a $5 million investment. Vail Venture Investors is interested in estimating an expected compound rate of return on its investmen
> What is the difference between private equity investors and publicly traded stock investors?
> Vail Venture Investors, LLC is trying to decide how much percent equity ownership in Black Hawk Products, Inc. it will need in exchange for a $5 million investment. Vail Venture Investors has a target compound rate of return of 25 percent on venture inv
> Return to the discussion of the FrothySlope venture at the beginning of the chapter. Formulate an answer for each of the five questions that are posed under the heading “What Is a Venture Worth? (1) What are the benefits and disadvantages of his approac
> Following are financial statements (historical and forecasted) for the Global Products Corporation. GLOBAL PRODUCTS CORPORATION Forecast 2016 2017 Cash $50,000 $60,000 Accounts Receivables 200,000 290,
> Refer to the FrothySlope microbrewery example. A. How does the $500,000 piece of the terminal value relate to the future value of the $100,000? That is, the brewpub investor was looking for a 40% return. The five-year-out future value of $100,000 growi
> Ben Toucan, owner of the Aspen Restaurant, wants to determine the present value of his investment. The Aspen Restaurant is currently in the development stage but hopes to “begin” operations early next year. After-tax cash flows during the next five years
> Assume the forecasted cash flows for the TecOne Corporation venture also hold for the LowTec venture. However, investors in LowTec have an expected rate of return of 30 percent on their investment until Year 6 when the rate of return is expected to drop
> The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as: Year Cash Flow 1 -$50,000 2 -$20,000 3 $100,000 4 $400,000 5 $800,000 A. Assume annual cash flo
> Assume you sell for $100,000 a 10 percent ownership stake in a future payment one year from now of $1.5 million. A. What are you saying about the implied return for the 10 percent owner? B. What is the present value of the entire $1.5 million, using the
> Following are two years of income statements and balance sheets for the Munich Exports Corporation. Munich Exports Corporation 2015 2016 Cash $ 50,000 $ 50,000 Accounts receivable 200,000 300,000 Inv
> The Minoso Corporation anticipates a 20 percent increase in sales for 2017 over its 2016 level. Minoso is currently operating at full capacity and thus expects to increase its investment in both current and fixed assets in order to support the increase
> Describe the differences between senior debt and subordinated debt.
> Petal Providers Corporation, described in Problem 1, is interested in estimating its additional financing needs to support a rapid increase in sales next year. Last year revenues were $1 million, the net profit was $50,000, the investment in assets was
> Petal Providers Corporation, described in Problem 1, 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
> 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 p
> Three Rules (504, 505, and 506) under Regulation D relate to the (a) amount of offerings and (b) number of investors. Match Rules 504, 505, and/or 506 with each of the following: A. $5 million offering limit (in a 12-month period) B. $1 million offering
> The CareAssist Company, a web-based provider of information for the elderly, is planning to sell $4 million in securities. Management is trying to decide which, if any, securities laws must be complied with. For each of the following situations, descri
> The NetCare Company, which operates living assistance facilities, is planning to issue or sell shares of stock to “accredited investors.” Briefly explain whether each of the following individuals would qualify as an “accredited investor” under the SEC’s
> Assume that BKAngel’s initial investments in the three ventures had been Venture 1 = $500,000, Venture 2 = $300,000, and Venture 3 $200,000 with each investment having achieved the same cash flows and ending values shown in Problem 5. A. Calculate the p
> Three venture investments previously made by BKAngel, a venture investor, achieved the following outcomes for the year just completed: Venture Initial Cash Ending Opportunity Value Flow Value Ven1 $300,000 $75,000 $600,000 Ven2 $400,000
> A potential venture investment has the following possible outcomes: Performance Probability of Rate of Outcome Occurrence Return Home Run (Success) .15 500.0% Breakeven .35 15.0 Strikeout (Failure) .50 -100.0 A. What is the expec
> A venture investor, BKAngel, is considering investing in a software venture opportunity. However, the rate of return to be realized next year is likely to vary with the economic climate that actually occurs. Following are three possible economic outcomes
> What is meant by the term structure of interest rates? What is a yield curve?
> Voice River, Inc. is interested in estimating its weighted average cost of capital (WACC) now that it is in its rapid growth stage. Voice River has a $500,000, 10 percent interest, short-term bank loan, a $1.5 million, 12 percent long-term debt issue, a
> Voice River, Inc. has successfully moved through its early life cycle stages and now is well into its rapid growth stage. However by traditional standards this provider of media-on-demand is still considered to be a relatively small venture. The intere
> Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital: Financing Dollar Interest Cost of Source Amount Rate Capital Short-Term Loan $200,000 12% Long-Term Loan $200,000 14% Equity Capital
> Use the following information to estimate the rate of return expected by the VentureBanc Investors: Rate Return Component Component Liquidity Premium 5% Risk-free Rate 6 Advisory Premium 9 Market Risk Premium 7.5 Hubris Projection Premium
> Voice River, Inc. provides media-on-demand services via the Internet. Management has been studying current interest rates. A lender is willing to make a two-year loan to Voice River at a 12 percent annual interest rate. The U.S. government is currentl
> Castillo Products Company improved its operations from a net loss in 2015 to a net profit in 2016. While the founders, Cindy and Rob Castillo, are happy about these developments, they are concerned with trying to understand how long the firm takes to co
> Artero Corporation is a traditional toy products retailer that recently also started an Internet-based subsidiary that sells toys online. A markup is added on goods the company purchases from manufacturers for resale. Swen Artero, the company president
> Because of an unexpected order, the PDC Company’s sales are forecasted to be $160,000 for September 2017.
> Because of an unexpected order, the PDC Company’s sales are forecasted to be $160,000 for September 2017.
> How is a venture’s WACC likely to change as it moves through a successful life cycle?
> A. Prepare PDC’s sales schedule, purchases schedule, and the wages schedule for August 2017. B. Prepare a cash budget for August 2017 for the PDC Company and describe how the forecast affects the end-of-month cash balance.
> Assuming minimum cash on hand requirements are $10,000 a month through May, increase to $15,000 in June and July, increase further to $20,000 in August and September, and return to the $10,000 per month level beginning in October.
> The Itsar Products Company has made the following monthly estimates of cash receipts and cash disbursements when preparing cash budgets for the next twelve months. Itsar Products has beginning cash on hand of $10,000 and wants to maintain this minimum c
> Safety-First, Inc. makes portable ladders that can be used to exit second floor levels of homes in the event of fire. Each ladder consists of fire resistant rope and high strength plastic steps. A lightweight fire resistant cape with a smoke filter is
> A. Calculate the operating profit margins and the NOPAT margins in 2015 and 2016 for Safety-First, Inc. What changes occurred? B. Calculate the operating return on assets (or the venture’s basic earning power) using year-end balance sheet information for
> Refer to the financial statement data provided below for Safety-First, Inc. SAFETY-FIRST, INC. Income Statements (in $ Thousands) 2015 2016 Net sales 3,750 4,500 Cost of goods sold 2,250 2,700 Gross
> A. Calculate the net profit margin in 2015 and 2016 and the sales-to-total-assets ratio using yearend data for each of the two years. B. Use your calculations from Part A to determine the rate of return on assets in each of the two years for the Castillo
> The Castillo Products Company was started in 2014. The company manufactures components for personal decision assistant (PDA) products and for other hand-held electronic products. A difficult operating year 2015 was followed by a profitable 2016. Howeve
> Following are two years of income statements and balance sheets for the Munich Exports Corporation. MUNICH EXPORTS CORPORATION Balance Sheet 2015 2016 Cash $50,000 $50,000 Accounts Receivables
> A. Calculate the operating return on assets. B. Determine the effective interest rate paid on the long-term debt. C. Calculate the NOPAT margin. How does this compare with the results for the net profit margin? Did the owners benefit from the use of in
> What is meant by the weighted average cost of capital or WACC?
> 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 b
> A. Using average balance sheet account data, calculate the (a) current ratio, (b) quick ratio, (c) total-debt-to-total-assets ratio, and (d) the interest coverage ratio for 2016. B. Repeat the ratio calculations requested in Part A separately for 201
> The Castillo Products Company was started in 2014. The company manufactures components for personal decision assistant (PDA) products and for other handheld electronic products. A difficult operating year, 2015, was followed by a profitable 2016. The fou
> Describe the terms (a) “control premium” and (b) “illiquidity discount” when discussing possible external or outside buyers of a venture.
> What is an employee stock option plan (ESOP)? How is an ESOP used to buy out a venture?
> What is a systematic liquidation of a venture? What are some of the advantages and disadvantages of a systematic liquidation?
> Describe how the relative value method is used to value a firm’s equity.
> What are unicorns? How might their exit values be impacted when they go public?
> Comment on Tesla’s trip from incorporating in 2003 to its IPO in 2010. What impact do you think the IPO had on competitors in the electric car market?
> Describe some of the preparations that a venture can undertake that may increase the possibility of IPO success.
> What discount rates are typically used for development- stage, startup-stage, survival-stage, and early-growth-stage ventures?
> Indicate some of the differences between the NASDAQ’s National Market System and SmallCap listing requirements.
> Briefly describe how securities are traded on an organized stock exchange such as the New York Stock Exchange.
> Describe the terms “tombstone ad” and “red herring disclaimer.”
> What is investment banking? What is an underwriting spread?
> Describe an initial public offering (IPO). What are the differences between a primary offering and a secondary offering?
> Why are options to buy additional shares of stock used in venture financing? What are warrants?
> What are convertible notes? Why are convertible notes issued, and who typically issues them?
> How does convertible debt differ from convertible preferred stock?
> Which is more favorable to the founders, the Market Price Formula (MPF) or the Conversion Price Formula (CPF)?
> What are the basic design features for financial securities used in venture investing?
> How do we estimate the cost of equity capital for private ventures? In developing your answer describe the major components that are considered when estimating the rates of return required by venture investors.
> What would you need if you wanted to conduct an enterprise valuation for a hypothetical Round D for Fuel3D? Discuss the relationship between Fuel3D and MakerBot. How might it affect the terminal value used in the enterprise valuation?
> What is preferred stock? What is participating preferred stock, and what is meant by paid in kind (PIK) preferred stock?
> Why is the weighted average cost of capital (WACC) used as the discount rate in the enterprise method?
> Is the sale of an out-of-the-money warrant a future sale of equity at a favorable price?
> Why is it important that convertible securities also be callable (redeemable)?
> Why is price protection an issue when convertibles or warrants are used?
> How are put and call options similar? How are they different?
> What is the EB-5 immigrant visas program?
> What is meant by venture banks? How do they differ from traditional commercial banks?
> Name three of the common loan restrictions and explain their relation to new venturing financing. What are some additional common loan restrictions?
> What is a liquidity risk premium? What is a maturity risk premium?
> Describe the two major types of crowdfunding.
> Describe the alternative financing Solix arranged for the launch of its biofuels production facility. Comment on your impressions of what attracted the investors.
> Describe examples of customer funding used to reduce financing needs.
