FINE 3025 Entrepreneurial Finance (Section 1/2)

Assignment 1 (100 pts)

Due: Oct 13, 2020, 9:30 am (Tuesday class)
Oct 16, 2020, 9:30 am (Friday class)

1. (50 pts) Technology Corporation increased its sales from $375,000 in 2012 to $ 450,000
in2013 as shown in the firm’s income statements presented below. LaAnn Sands, CEO
and founder of the firm, expressed concern that the cash account and the firm’s cash
declined substantially between 2012 and 2013. Salza’s complete balance sheets are also
shown. Ms. Sands is seeking your assistance in the preparation of a statement of cash
flows for Salza Technology.

SALZA TECHNOLOGY CORPORATION ANNUAL INCOME STATEMENT (IN $

THOUSANDS)

2012 2013
Net sales $375 $450
Less: Cost of goods sold -225 -270
Gross profit 150 180
Less: Operating expenses -46 -46
Less: Depreciation -25 -30
Less: Interest -4 -4
Income before taxes 75 100
Less: Income taxes -20 -30
Net income $ 55 $ 70
Cash dividends $17 $20

BALANCE SHEETS AS OF DECEMBER 31 (IN $ THOUSANDS)

2012 2013
Cash $ 39 $ 16
Accounts receivables 50 80
Inventories 151 204
Total current assets 240 300
Gross fixed assets 200 290
Less: accumulated depreciation -95 -125
Net fixed assets 105 165
Total assets $ 345 $ 465

Account payable $ 30 $ 45
Bank loan 20 27
Accrued liabilities 10 23
Total current liabilities 60 95
Long-term debt 15 15

Common stock 85 120

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 Retained earnings 185 235
Total liabilities and equity $ 345 $ 465

A. (20 pts) Prepare a statement of cash flows for 2013 for Salza Technology
Corporation.
B. (15 pts) LaAnn Sands wants to conduct revenue breakeven analyses of Salza
Technology Corporation for 2013. For 2013, the firm’s cost of goods sold is
considered to be variable costs, and operating expenses are considered to be fixed
cash costs. Depreciation expenses in 2013 are expected to be fixed costs. Interest
expenses in 2013 are expected to be fixed costs. Calculate Salza’s EBDAT breakeven
in terms of survival revenues for 2013.
C. (15 pts) LeAnn Sands has reason to believe that 2014 will be a replication of 2013
except that cost of goods sold is expected to be 65 percent of the estimated $ 450,000
in revenues. Other income statement relationships are expected to remain the same in
2014 as they were in 2013. Calculate the EBDAT breakeven point for 2014 for Salza
in terms of survival revenues.

2. (50 pts) In 2013, Jen Liu and Larry Mestas founded Jan and Larry’s Frozen Yogurt
Company, which was based on the idea of applying the microbrew or microbatch strategy
to the production and sale of frozen yogurt. Jen and Larry began producing small
quantities of unique flavors and blends in limited editions. Revenues were $ 600,000 in
2013 and were estimated to be $ 1.2 million in 2014.

Each small cup of yogurt sold for $ 3, and the cost of producing the frozen yogurt
averaged $ 1.5 per cup. Administrative expenses, including Jen and Larry’s salary and
expenses for an accountant and two other administrative staff, were estimated at $
180,000 in 2014. Marketing expenses, largely in the form of behind-the-counter workers,
in-store posters, and advertising in local newspapers, were projected to be $ 200,000 in
2014.

An investment in bricks and mortar was necessary to make and sell the yogurt. Initial
specialty equipment and the renovation of an old warehouse building in lower downtown
occurred at the beginning of 2013. Additional equipment needed to make the amount of
yogurt forecasted to be sold in 2014 was purchased at the beginning of 2014. As a result,
deprecation expenses were expected to be $ 50,000 in 2014. Interest expenses were
estimated at $ 15,000 in 2014. The average tax rate expected to be 25 percent of taxable
income.

A. (15 pts) Prepare the projected income statement of 2014.

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B. (10 pts) Jen and Larry believe that under a worse-case scenario, yogurt revenues
would at the 2013 level of $ 600,000 even after plans and expenditures were put in
place to increase revenues in 2014. What would happen to the venture’s EBDAT?
C. (5 pts) Jen and Larry also believe that, under optimistic conditions, yogurt revenues
could reach $ 1.5 million in 2014. Show what would happen to the venture’s EBDAT
if this were to happen.
D. (10 pts) Calculate the EBDAT breakeven point for 2014 in terms of survival revenue
for Jen and Larry’s Frozen Yogurt Company. How many cups of yogurt would have
to be sold to reach EBDAT breakeven?
E. (10 pts) Calculate the NOPAT breakeven point for 2014 in terms of survival revenue
for Jen and Larry’s Company.