Business Objectives
FNCE 390
RECAP QUESTIONS
1 The primary goal of finance is to maximize shareholder wealth.
Yes No
2 The best measure of achieving this goal is market share price because the investo
considers the following:
- risk inherent in the firm (nature of operations and how financed)
- time pattern of operating activity cash flows
- time pattern of investing activities to support cash flows
- time pattern of financing requirements and composition
- perception of future based on historical performance
- economic and political factors
Yes No
3 Present value model is the basis of financial evaluation as it takes into account expected
future performance. Expected future performance implies risk - actual performance may vary…
Discounts rates, assigned by financial markets, address risk to determine present value.
Yes No
4 Maximizing shareholder wealth through maximizing market share price does not give rise to
potential conflicts with:
Management objectives
Social responsibility
Ethical behaviou
Yes No
5 The primary difference between a limited company and proprietorship and
partnership is the limitation of liability to the company itself versus owners of
a proprietorship or partnership
Yes No
6 Corporate governance incorporates the objective of wealth maximization along with
social responsibility, ethics and conflicts of interest
Yes No
Working capital
FNCE 390
Working Capital
1 In the perfect world cash receipts from selling activities would be received exactly the
same time as related cash payments for products, services, selling, administrative.
financing, taxes and dividends.
Yes No
2 In a perfect world cu
ent and long term assets would be matched with the same
portion of cu
ent and long term debt and equity sources.
Yes No
3 Financing sources are comprised of short term liabilities, long-term debt, share capital
and retained earnings.
Yes No
4 Working capital is defined as cu
ent assets - cu
ent liabilities reflecting differences
in timing of cash flows relative to 1 above.
Yes No
5 Cash conversion cycle is the amount of time from when an time is purchased and paid
for resale to the time it is sold and payment is received.
Yes No
3 What financing options do you have for the following asset side of a balance sheet:
- Describe as short term debt / long-term debt / equity
Cu
ent assets Financed by
Cash $ 50,000
Accounts receivable 1,200,000
Inventory 3,000,000
Prepaid expenses 150,000
4,400,000
Tangible long lived assets (Net book value)
Land 2,500,000
Buildings 10,000,000
Equipment 9,000,000
21,500,000
Intangible long lived assets
Patents and trademarks 350,000
Customer lists 1,000,000
Goodwill 2,000,000
3,350,000
Total Assets $ 29,250,000
Ratios
FNCE 390
RECAP QUESTIONS
1 Ratio Analysis is best used to identify trends in relation to a benchmark
Yes No
2 There are two elements of leverage in a business - Operating and Financial Leverage
Yes No
Operating Leverage concentrates on maximizing net income through volume increases which
increase contribution margin and reduce the cost per unit of fixed costs.
Yes No
Financial leverage involves the mix of debt and equity to increase return on shareholder equity.
This is because debt is deductible for tax purposes.
Yes No
Operating leverage ignores interest and income taxes
Yes No
3 Operating leverage = Contribution margin / EBIT
Contribution margin = (Revenues - Variable costs) * Units
EBIT = Contribution margin - Fixed Costs
Yes No
4 Financial leverage = EBIT / EBT
EBT = EBIT - Interest
Yes No
5 Turnover ratios are useful in managing working capital as they link balance sheet investment
with related operating income statement accounts.
Yes No
6 Debt and equity as a percent of total assets is useful in assessing opportunities regarding
financial leverage.
Yes No
Instructions
I Introduction
For several years now you have been working with three "boot-strap" business operations involved in
the manufacture of fertilizer and other nutrients. As a "green world" business investor you have recently joined
a boutique venture capital firm. You believe in your mission and have introduced to the venture firm partners
a project you believe has unlimited potential if these three businesses are combined (your fellow school mates).
You have also convinced your school mates that there are many potential benefits by combining the three operations
and gaining access to your firms venture capital funding. Believing you, they have asked you to "make it happen "
and complete the combination. Your documented project plan and implementation steps are outlined below:
The business's will combine effective Fe
uary 1, 2023 into a single incorporated entity. You will create a
Fe
uary 1, 2023 Opening Balance sheet reflecting the closing of the business combination transaction.
The businesses will then transition operations from "as is" to an integrated entity over the next year. The focus will
be around reorganizing operations to improve financial performance and getting everyone aligned with strategy.
You will develop the forecast income statement for the first year of operations using the assumptions provided for the
year ended January 31, 2024 as well as the January 31, 2024 Balance Sheet. The plan is to establish a firm base
believing it takes one year to establish operations before heading down the growth plan you have in mind. Financial
performance for the first year is based on 2023 combined results of the individual businesses with certain adjustments
you expect to see from the formation of the new company.
II Project Plan
A Combination process - Entries for Column H
1 Complete the column "Combined As Is" Balance Sheet by adding the respective balances of the individual entities.
Column H reflects the totals of columns B-D-F
2 Complete the column "Combined As Is" Income Statement by adding the respective balances of the individual entities.
Column H reflects the totals of columns B-D-F
3 Review the "Combined As Is" Ratios (each entity has formulas to work with)
Test check accuracy of ratios in Column H
B Incorporation process - revaluation adjustments reflect in Column J - new Balance column L
1 The incorporation process has been structured such that an incorporated entity created by your firm will acquire
the operations of each entity. As such all assets are revalued to their fair market values at the time of
acquisition. The fair market values are:
Cash All cash balances of original operations paid to founders - Combined cash = $0
Opening Balance Sheet cash = $0
Accounts receivable Accounts receivable revalued 8% higher as no allowance for doubtful accounts
Inventory Inventory is revalued at 10% lower due to obsolete raw materials
Prepaid expenses Transfer $105,000 to Inventory as goods received day of transaction.
Defe
ed revenue Reduce by 20% to reflect work completed - record change to venture capital
short term loan as is considered a purchase adjustment
Land combined revised market value per appraisal 2,200,000
Building combined revised market value of 2,450,000
Equipment increase combined market value to 975,000
Vehicles revised market value 380,000
Accumulated depreciation Adjusted all historical balances to a zero balance as assets are revalued
and reflect a new starting value
Goodwill and intangibles Add $420,000 for goodwill
Accounts payable Due diligence discovered an additional $400,000 in payables
Income taxes payable None as start-up
Defe
ed tax liability Add $385,000 for tax effect of transaction as defe
ed tax liability
Term loan No change
Mortgage No change
Cu
ent portion of debt No change
Due to relatives Convert 30% of balance to share capital - repay 70% using venture capital
short term loan
Proprietorship capital Convert full balances to share capital
Partnership capital Convert full balances to share capital
Share capital Proprietor + Partnership capital + 30% of due from relatives converted
Retained Earnings None as the start-up of new legal entity
Venture capital loan Balancing figure of all other balance sheet balances and adjustments
C XXXXXXXXXXOperations - Operational Changes - reflect in XXXXXXXXXXadjustments column (Column P)
1 Revenues will increase by $9,300,000
2 Gross profit will be 32% based on XXXXXXXXXXpro forma ending revenues
3 Selling costs will increase by 10% of incremental sales
4 Administrating costs will increase by 9% of incremental cost of sales
5 Amortization will increase by $259,000 per annum (in addition to historical)
6 Interest expense will increase based on venture capital short term loan balance at 9% interest rate
7 Income taxes will be 26% of combined incomes as now an incorporated entity - split as
follows - 30% defe
ed - 70% cu
ent - adjust balance sheet accounts for these amounts
8 Adjust final accounts receivable balances to reflect a 45 day collection cycle - difference to cash (use 360 days)
9 Adjust final inventory balances to reflect 72 days on hand - difference to cash (use 360 days)
10 Adjust final accounts payable balances to reflect a turnover ratio of 45 days - difference to cash (use 360 days)
11 Acquired new formulation equipment for $255,000 and financed 100% with a new term loan at end of year.
Term loan is repayable over five years and life of equipment will be 10 years.
D Balance Sheet Steps - balancing everything
1 Columns B through to L will balance at the Balance Sheet level - ignore income statement effects.
2 Columns N & P must reflect the income statement changes and will balance by recording the balance amount in cash
If you leave cash blank - the figure reflected in line 57 * -1 should work. Once cash adjusted - line 57 = 0
3 Column R will balance if 1 and 2 above are balanced
E Build the Year 1 cash flow statement to support the change in cash for Year 1
Poplar Template
POPLAR LTD. Owner: XXXXXXXXXXMargaret Lentil Partners: Helen Grass (45%) + Candace Pot (55%) Shareholder: XXXXXXXXXXCharles Green Balance Sheet Opening As Is = Combined + Corporate Tax Effect Operational Changes Including Corporate Tax Forecast Results
Start-up Balance Sheets CanGrow XXXXXXXXXXproprietorship) Bluebis (partnership) BigYield Inc. Combined Revaluation POPLAR LTD. First Year XXXXXXXXXXFeb XXXXXXXXXXJan XXXXXXXXXX Adjustments POPLAR LTD.
January XXXXXXXXXX Fe
uary 1 Fe
uary 1
2023 2023 2023 As Is Adjustments Opening Operations XXXXXXXXXX Jan XXXXXXXXXX
Assets
Cu
ent assets
Cash $ 95,000 $ 125,000 $ 65,000 $ 285,000 $ (285,000) $ - 0 $ 2,499,750.40 (5,233,059.60) $ (2,733,309) Balancing Figure
Accounts receivable 1,450,000 1,400,000 1,025,000 3,875,000 310,000 4,185,000 871,250 5,056,250
Inventory 945,000 1,350,000 985,000 3,280,000 (223,000) 3,057,000 2,444,200 5,501,200 How you got ?? $ 2,499,750.40
Prepaid expenses 85,000 100,000 55,000 240,000 135,000 375,000 375,000 How you got?? (5,233,059.60)
2,575,000 2,975,000 2,130,000 7,680,000 (63,000) 7,617,000 2,499,750 (1,917,610) 8,199,141 Plaese show calculations
Property, plant and equipment
Land 700,000 700,000 675,000 2,075,000 125,000 2,200,000 2,200,000
Buildings 240,000 650,000 495,000 1,385,000 1,065,000 2,450,000 2,450,000
Equipment 135,000 600,000 120,000 855,000 120,000 975,000 255,000 1,230,000
Vehicles 75,000 220,000 100,000 395,000 (15,000) 380,000 380,000
1,150,000 2,170,000 1,390,000 4,710,000 1,295,000 6,005,000 - 0 255,000 6,260,000
Less: Accumulated amortization
Accumulated amortization - Buildings (60,000) (145,000) (100,000) (305,000) 305,000 - 0 (196,386) (166,767) (363,154)
Accumulated amortization - Equipment (30,000) (90,000) (195,000) (315,000) 315,000 - 0 (78,154) (66,367) (144,521)
Accumulated amortization - Vehicles (90,000) (120,000) (40,000) (250,000) 250,000 - 0 (30,460) (25,866) (56,326)
(180,000) (355,000) (335,000) (870,000) 870,000 - 0 (305,000) (259,000) (564,001)
970,000 1,815,000 1,055,000 3,840,000 2,165,000 6,005,000 (305,000) (4,000) 5,695,999
Goodwill and other intangibles - 0 - 0 - 0 - 0 420,000 420,000 420,000
$ 3,545,000 $ 4,790,000 $ 3,185,000 $