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    Assignment 1 - 2021 - 2022

    Uploaded by

    Assya El Moukadem
    This document provides a case study involving an individual named Mario González who has developed a business plan to produce and sell a new hair balm product. It includes projected financial statements for the first three years of the business operating as either a self-employed sole proprietorship or corporation. The document asks questions about determining taxes, cash flows, return on assets, and breakeven points for the hair balm business and another company called Petra Technology Corporation. Submission of answers is due by November 21, 2021.

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    Assignment 1 - 2021 - 2022

    Uploaded by

    Assya El Moukadem
    218 views4 pages
    This document provides a case study involving an individual named Mario González who has developed a business plan to produce and sell a new hair balm product. It includes projected financial statements for the first three years of the business operating as either a self-employed sole proprietorship or corporation. The document asks questions about determining taxes, cash flows, return on assets, and breakeven points for the hair balm business and another company called Petra Technology Corporation. Submission of answers is due by November 21, 2021.

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    Assignment 1_2021_2022

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    This document provides a case study involving an individual named Mario González who has developed a business plan to produce and sell a new hair balm product. It includes projected financial statements for the first three years of the business operating as either a self-employed sole proprietorship or corporation. The document asks questions about determining taxes, cash flows, return on assets, and breakeven points for the hair balm business and another company called Petra Technology Corporation. Submission of answers is due by November 21, 2021.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    218 views4 pages

    Assignment 1 - 2021 - 2022

    Uploaded by

    Assya El Moukadem
    This document provides a case study involving an individual named Mario González who has developed a business plan to produce and sell a new hair balm product. It includes projected financial statements for the first three years of the business operating as either a self-employed sole proprietorship or corporation. The document asks questions about determining taxes, cash flows, return on assets, and breakeven points for the hair balm business and another company called Petra Technology Corporation. Submission of answers is due by November 21, 2021.

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    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.

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