Andrew Gates and Larry Page just graduated from UC with a master’s degree in Information Technology.
finance
Description
BUSINESS ORGANIZATIONS
Andrew Gates and Larry Page
just graduated from UC with a master’s degree in Information Technology. They
want to set up their own server building company to help make networking of
businesses run smoothly in their municipality. The servers will play a key role
in telephony, internet and intranet connections in corporate organizations and
other institutions in the Hilton area. They know from independent investment
research that IT businesses are striving and very profitable in the State of
South Carolina where they want to locate the business. Andrew and Larry
know that before they can invest their time and other resources in the project,
they must obtain financing, which means that they must raise money to pay for
the investment cost and other operating expenses. Because the company might not
be listed in any capital market right away, they might not be able to raise
equity funding publicly. Therefore, they are considering raising long term
capital from various sources including angel investors, venture capital
market, bank/finance companies’ long-term loans, crowdfunding, and initial public offerings (IPOs). They learnt in corporate finance course they took two
years ago the advantages and disadvantages of different forms of business organizations
(mainly sole proprietorship, partnership, limited liability, and corporation).
They are worried about the legal concept of limited liability and
how it will affect their personal fortunes in the future in case the business
fails. They are not very sure which form of business organization to set up to
protect their personal liability and access huge funding. Therefore, they are
considering a partnership, a limited liability, or a corporation. A
cash budget they prepared shows that $5 million seed money would be needed to
hire programmers, buy computers, rent an office space, promote and market the
business as well as to meet other business development expenditures. They have
agreed to share profits and losses equally if they decide to form a limited
partnership. The general partner will, however, be paid a fixed salary of
$5,000 per month before taxes and other payroll deductions.
In order to make good and right
decision, Andrew and Larry have approached you to help them understand
the advantages and disadvantages of
the various forms of business organizations and possible sources of funding for the business.
Questions
a.
Give 2 advantages and 2
disadvantages of each of the following forms of business organization to Andrew
and Larry:
·
o
partnership,
o
limited liability, and
o
corporation
a.
Ultimately, what form of
business organization would you recommend Andrew and Larry to consider. Why?
b. Based on your recommendation above, explain to Andrew and Larry if
the following sources of raising long-term capital are appropriate for them:
·
o
angel investors (angels)
o
crowdfunding
o
venture capital
o
initial public offering, and
o
long-term debt
2. FINANCIAL STATEMENT ANALYSIS AND FINANCIAL MODELS
Andrew and Larry want to use
financial planning models to prepare a projected (or pro forma) financial
statement to determine the profitability and financial health of the business
for the next year. Use the proforma financial statement below to answer the
following questions:
|
PRO FORMA INCOME STATEMENT |
($millions) |
|
Total operating revenues |
78 |
|
Less Expenses |
57 |
|
Less Depreciation |
9 |
|
Earnings before interest and
taxes |
12 |
|
Less Interest |
2 |
|
Net income before taxes |
10 |
|
Less taxes @ 10% |
1 |
|
Net income |
9 |
|
|
|
|
PRO FORMA BALANCE SHEET |
|
|
Assets: |
|
|
Cash |
9 |
|
Other current assets |
18 |
|
Net Fixed Assets |
40 |
|
Total Assets |
67 |
|
|
|
|
Liabilities and Equities: |
|
|
Accounts payable |
12 |
|
long-term debt |
18 |
|
Stockholders' Equity |
37 |
|
Total Liabilities &
Equities |
67 |
|
|
|
a. What is the estimated profit of the business for next year?
b. Calculate the
following profitability
ratios and explain to Andrew and Larry
whether the business looks profitable:
i. Profit margin
ii. Return on Assets
iii. Return on Equity
Also explain and calculate the:
iv.
Operating cash flow
c. Assuming you project a 25%
increase in operating
revenue (sales) per year what
will be the anticipated operating revenue in two years?
d. If net income is projected
to increase by 10% per year, what will be the profit margin in next two years?
e. What will be the
estimated earnings
per share (EPS) next year if
1,000,000 shares are issued? (note: EPS = net income / total shares
outstanding).
