School of Economics & Finance

Wellington School of Business and Government

FINA309
Entrepreneurial Finance
Test One

June 2018 Test

Name: Sanjeshni Singh Ruru Student ID 300452364

INSTRUCTIONS: Start by writing your name and ID above.

Time allowed: 90 minutes, including 10 minutes of upload time.

This is an open book & open notes test including Excel. Partial credit
will be given, so it is in your best interest to attempt all questions.

Total marks available: 100 marks. (This test is 40% of the total marks
for the Course). There are five questions. Each question is worth 20
marks.

Complete the test in MS Word, freehand, and/or Excel. Make sure

and frequently save your work.

Any upload after 3:35 PM will be marked late and a 5 mark penalty
assessed. The penalty will increment by 5 marks every 5 minutes
thereafter.

Schedule
 Connect to Zoom at 1:40 PM
 Download test by 1:45 PM
 Complete test by 3:15 PM
 Upload test to Blackboard by 3:30 PM

By proceeding you are in agreement and consent to comply with the

following. Recognizing the trust that the University and the Academic
Staff teaching this course have placed in me in this current situation, I
affirm that:
 I have logged onto Blackboard using my credentials;
 I will complete all steps of Test 1 on my own;
 I will not use any unauthorized materials while completing
this test;
 I will not give anyone else access to this assessment; and
 I understand that doing any of the above will likely constitute
academic misconduct at level 2 or 3, to be investigated
according to the Student Conduct Statute, with consequences
for my studies as per the statute.

Page 1
QUESTION ONE [20 MARKS]

Ash Dixon (AD) enterprises forecasts 2021 sales of $350,000. The selling price per unit is
$60. COGS is 65% of sales. G&A (General and Administrative) expenses are $65,000
and Marketing expenses are $55,000. Both G&A and Marketing expenses are fixed and
don’t vary with units sold. Interest expense if $10,000. Answer the following:

a) What is the survival revenue? (hint: the amount of revenue where EBDAT=0)

We have that:
CFC ( Expense s G∧ A + Expense s Marketing + E Interest )
SR= = =¿
( 1−VCRR ) 1−VCRR
$ 65,000+ $ 55,000+ $ 10,000 $ 130,000
¿ = =$ 371,428.57 .
1−0.65 0.35

Answer: $371,428.57.

b) What is the EBDAT BE in terms of the number of units sold?

S R $ 371,428.57
EBDAT = = =6,190.48 .
P $ 60
Answer: 6,190.48.
c)

Page 2
QUESTION TWO [20 MARKS]

Trent Boult founded Bolt Fasteners in 2017 and had the following financial statements.

Income Statement 2018 2019

Net Sales $1,300,000 $1,625,000
Cost of Goods Sold 780,000 975,000
Gross Profit 520,000 650,000
Marketing 130,000 162,500
General & Administrative 150,000 150,000
Depreciation 40,000 50,000
EBIT 200,000 287,500
Interest 45,000 56,250
Earnings Before Taxes 155,000 231,250
Income Taxes 62,000 92,500
Net Income (Loss) 93,000 138,750

Balance Sheet 2018 2019

Cash $50,000 $62,500
Accounts Receivables 200,000 250,000
Inventories 450,000 562,500
Total Current Assets 700,000 875,000
Net Fixed Assets 300,000 375,000
Total Assets 1,000,000 1,250,000

Accounts Payable 130,000 162,500

Accruals 50,000 62,500
Bank Loan 90,000 90,000
Total Current Liabilities 270,000 315,000
Long-Term Debt 400,000 525,000
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 820,000 1,025,000

Construct a cash flow statement and answer the following for 2019:

a) What is the cash from Operating Activities for 2019?

NC FOperating =Net Income+ Depreciation+ Increase∈ Accrued Liabilities+ ¿
+ Increase ∈ Account Payable−Increase ∈ Account Receivable−¿
−Increase ∈Inventories=¿
¿ $ 138,750+$ 50,000+ ( $ 62,500−$ 50,000 )+ ( $ 162,500−$ 130,000 )−¿
−( $ 250,000−$ 200,000 )− ( $ 562,500−$ 450,000 )=¿
¿ $ 138,750+$ 50,000+ $ 12,500+ $ 32,500−$ 50,000−$ 112,500=¿
¿ $ 71,250.

Answer: the Cash Flow from operating activities is $71,250.

Page 3
 b) What is the cash from Investing Activities for 2019?

NC F Investing=−Investment ∈Fixe d Assets=−( $ 375,000−$ 300,000 )=¿

¿−$ 75,000.
Answer: the cash flow from investing activities is -$75,000.

c) What is the cash from Financing Activities for 2019?

NC F Financing =Increase∈Bank Loan+ Increase ∈Common Stock−¿

−Cash Dividend Paid =( $ 90,000−$ 90,000 ) + ( $ 50,000−$ 50,000 ) −¿
−$ 0=$ 0+ $ 0−$ 0=$ 0
Answer: the cash flow from financing activities is $0.

d) What is the net cash burn during 2019?

Cash Burn=−( NC FOperating + NC F Investing )=−( $ 71,250−$ 75,000 )=¿
¿ $ 3,750

Answer: Net cash Burn is $3,750.

e) If 2020 is a repeat of 2019, how many months until the firm runs out of cash?

$ 62,500
n= =200
$ 3,750
12
Answer: 200 months.

Page 4
QUESTION THREE [20 MARKS]

Peter Burling develops a new sailboat. The company has the following financial
statements. As 2018 values are not provided, only use 2019 values when calculating the
ratios.

Income Statement
2019
Net sales 4,312.50
Cost of goods sold 2,587.50
Gross profit 1,725.00
Operating expenses 770.50
Interest 34.50
Income before taxes 920.00
Income taxes 276.00
Net income 644.00

Balance Sheet
2019
Required Cash 215.63
Surplus Cash 95.88
Cash 311.50
Accounts receivable 575.00
Inventories 1,667.50
Total current assets 2,554.00
Gross fixed assets 2,800.00
Less accumulated
-1,250.00
depreciation
Net fixed assets 1,550.00
Total assets 4,104.00

2019
Accounts payable 345.00
Bank loan 150.00
Accrued liabilities 115.00
Total current liabilities 610.00
Long-term debt 150.00
Common stock 850.00
Retained earnings 2,494.00
Total liabilities and equity 4,104.00

Page 5
Using 2019 values, answer the following:
a) What is the inventory to sale conversion period?

Average Inventory
Inventory−¿−saleConversion Period 2019= =¿
COGS
365
$ 1,667.5
¿ =235.22days
$ 2,587.5
365
Answer: 235.22 days.

b) What is the sale to cash conversion period?

Average Receivable
Sale−¿−cash Conversion Period 2019 = =¿
Net Sales
365
$ 575
¿ =48.67 days
$ 4,312.5
365

Answer: 48.67 days.

c) What is the purchase to payment conversion periods?

Purchase−¿−Paymen t Conversion Period 2019=¿

Average Payables+ Average Accrued Liabilities
¿ =¿
COGS
365
$ 345+ $ 115
¿ =64.89 days
$ 2,587.5
365

Answer: 64.89 days.

d) What is the cash conversion cycle?

Cash ConversionCycle 2019=¿

¿ Inventory−¿−sale Conversion Perio d 2019 +¿
+ Sale−¿−CashConversion Perio d 2019 −¿
−Purchase−¿−Payment Conversion Perio d 2019 =¿
¿ 235.22+48.67−64.89=219 days .

Answer: 219 days.

Page 6
QUESTION FOUR (20 MARKS)

Lisa Carrington’s canoe training centre had the following 2019 results:
 Sales = $7,900
 Costs = $6,100
 Assets = $17,400
 Debt = $8,400
 Equity = $9,000
Forecasted sales for 2020 are $9,500. There are no taxes. Assets and costs are
proportional to sales. Debt and Equity are not. The retention rate is 100%. What is the
AFN (additional funds needed) in 2020 to support forecasted sales of $9,500? (Hint:
Construct the 2020 balance sheet and find the AFN required to make the balance sheet
balance.

Sales=$ 9,500
TA 0 AP 0 + AL 0 ¿
AFN = ∙ ∆ NS− ∙ ∆ NS−NS1 ∙ 0 ∙ RR 0=¿
NS 0 NS 0 NS0
$ 17,400 $ 600 1800
¿ ∙ ( $ 9,500−$ 7,900 )− ∗1600−9500 ∙ ∙ 1=¿
$ 7,900 $ 7900 7900
¿ $ 1,237.98
Answer: $1,237.98

Page 7
QUESTION FIVE (20 MARKS)

Peter Beck Ventures (PBV) invests in a new rocket venture using a 50% rate of return. The
expected cash flows for the rocket venture by year are:

Year CF
1 -75
2 -50
3 75
4 190
5 400

Answer the following.

a) Assume the Year 6 cash flows are $400 and is expected to be $400 in perpetuity.
What value does PBV assign to the venture?

Cash Inflows $ 400

Terminal Value= = =$ 800
Rate of return−Grawth Rate 0.5

Answer: $800

b) Assume the year 6 cash flows are $424 then grow at 6% per year in perpetuity.
What value does PBV assign to the venture?

Cash Inflows $ 424 $ 424

Terminal Value= = = =$ 963.64
Rate of return−Grawth Rate 0.5−0.06 0.44
Answer: $963.64.

c) The assumptions in part b hold; however, PBV discounts cash flows beginning at
year 6 at 25% rate of return. What valued does PBV assign to new rocket project?
(hint: The ROR is still 50% for cash flows from years 1 through 5.)
−75 50 75 190 400+963.64
PV = − + + + =$ 471.06
1.25 1.25 1.25 1.254
2 3
1.25
5

Answer: $471.06

d) The assumptions in part c hold (i.e. assume $424 t=6 cash flows, an 6% growth rate
in perpetuity from year 6, and 25% rate of return in perpetuity.) Graham Henry
invests $300 in the project. If PVC has funded the project (i.e. Graham’s
investment is not required to meet the CF forecast). What is Graham’s ownership
percentage?
Page 8
 Investment $ 300
Ownership% = = =0.6369=63.69 %
PV $ 471.06
Answer: 63.69%

Page 9