FINANCING OF NEW BUSINESS PROJECTS

Year 2021-2022
International Business
Case 1

This is an individual compulsory task

This task is worth 12.5% of your overall grade for this subject.
Submission: Via virtual campus. Submissions will be accepted until Sunday
21st November 2021 at 23:55 CEST.

1. (30%) Mario González has developed a business plan for producing and
selling a new hair balm that prevents hair loss and the product residues have
been judged to be environmentally safe. Following are his projected partial
financial statements for the first three years of operation of the
“HappyScalp” Products Company. Mario, however, is unsure whether to
organize his business as self-employed and pay personal income taxes or
organize it as a regular corporation.

______________________________
HappyScalp Products Company
Projected Partial Income Statements
& Balance Sheets
____________________________
Year 1 Year 2 Year 3
Sales $200,000 $400,000 $1,800,000
Cost of goods sold -100,000 -200,000 -800,000
Gross profit 100,000 200,000 1,000,000
Operating expenses -75,000 -100,000 -200,000
Depreciation -4,000 -8,000 -20,000

Earnings before interest & taxes 21,000 92,000 780,000

Interest -1,000 -2,000 -4,000
Earnings before taxes 20,000 90,000 776,000
Taxes ? ? ?
Net income ? ? ?

Year 1 Year 2 Year 3

Cash and inventories $50,000 $100,000 $500,000
Building and equipment 50,000 100,000 300,000
Total assets $100,000 $200,000 $800,000
A. Use the tax rate schedules presented below to estimate the dollar amount of
taxes that would have to be paid in each year by the HappyScalp Products
Company if the venture was initially formed as a corporation. Also calculate
the after-tax net income for each year.

Marginal
Personal
Taxable Income Tax Rate
Over But not over
0 12450 19.0%
12450 20200 24.0%
20200 35200 30.0%
35200 60000 37.0%
60000 300000 45.0%
30000 47.0%

Corporate Tax rate: 25%

B. Use the tax rate schedules presented in the chapter to estimate the dollar
amount of taxes that would have to be paid in each year if the
“HappyScalp” Products Company paid personal income taxes. Also
calculate the after-tax net income for each year.

C. Calculate the return on assets (ROA) model and its net profit margin and
asset intensity ratios.

D. In order to grow sales, HappyScalp Products will need to invest in assets to

support sales growth. How might the venture’s assets be financed?

E. Would you recommend that the “HappyScalp” Products Company be

initially formed as a personal business or as a corporation? Why? Should
Mario consider changing the form of business organization for the
HappyScalp Products Company as the firm grows over time?

2. (30%) Petra Technology Corporation increased its sales from $375,000 in

2019 to $450,000 in year 2020 as is shown in the firm’s income statements
presented below. Sara López, chief executive officer (CEO) and founder of
the firm expressed concern that the cash account and the firm’s marketable
securities declined substantially between 2019 and 2020. Petra’s complete
 balance sheets are also shown below. Ms. López is seeking your assistance
in the preparation of a statement of cash flows for Petra Technology.

PETRA TECHNOLOGY CORPORATION

Annual Income Statements (in $)

2019 2020
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 st (in $)

2019 2020
Cash $ 39 $ 16
Accounts receivable 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
Accounts 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
Retained earnings 185 235
Total liabilities and equity $345 $465

A. Prepare a statement of cash flows for 2020 for the Petra Technology
Corporation.

B. Provide a brief description of what happened in terms of cash flows (both

inflows and outflows) for Petra between years 2019 and 2020.
C. Use your calculations from Part A for cash flows from operating and
investing activities to indicate the extent to which Petra was building or
burning cash in 2020.

D. Convert the 2020 annual cash build or cash burn to a monthly rate. If cash
flow activities relating to operations and investing for 2020 continue into
2021, indicate: (1) how long it will be before Petra runs out of cash (if Petra
is burning cash), or (2) the expected 2021 year-end cash account balance if
Petra is building cash. Assume no changes in cash flows from financing
activities in 2021 for calculation purposes.

3. (20%) Sara López wants to conduct operating breakeven analyses of the

Petra Technology Corporation for year 2020. Income statement information
is shown in Problem 2. For year 2020, 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 year 2020 also are expected to be
fixed costs. Calculate Petra’s EBDAT breakeven in terms of survival
revenues for year 2020.

4. (20%) Sara López has reason to believe that year 2021 will be a replication
of year 2020 except that cost of goods sold are expected to be 65 percent of
the estimated $450,000 in revenues. Other income statement relationships
are expected to remain the same in year 2021 as they were in year 2020.
Calculate the EBDAT breakeven point for 2021 for Petra in terms of
survival revenues.